The Countdown to CECL
The Countdown to CECL

The Countdown to CECL

As deadlines near, executives need to address critical decisions in respect to planned parallel runs for a successful implementation.

The clock is winding down on Current Expected Credit Loss (CECL) implementation. Guidelines are set to go into effect for public business entities that are SEC filers on Dec. 15, 2019 and all other public business entities on Dec. 15, 2020. Between deciding when to start planned parallel runs, which models to use or build, and how long the forecast period should be—executives have many decisions to make quickly to complete CECL models by the end of the year.

KPMG surveyed more than 100 financial institutions to assess the state of CECL implementation. While the survey showed companies made progress toward implementation, many struggle with key challenges in accounting, model and data segments. 

To complete the necessary testing in time, senior management and implementation teams need to address the following areas as soon as possible:

Accounting. Implementation of past regulatory compliance suffered from decision-making paralysis, which led to pressured deadlines that threatened success. With many accounting issues still unresolved—defining the life of an asset, identifying unfunded credit commitments that are unconditionally cancelable, and determining the length of the reasonable and supportable forecasting period—prioritizing certain decisions is imperative to deciding when parallel runs should start. 

Modeling. While some companies intend to leverage models from Dodd-Frank Act Stress Test (DFAST), Comprehensive Capital Analysis Review (CCAR) or Allowance for Loan and Lease Losses (ALLL), more than a third of all companies are planning to build models from scratch for CECL implementation. Furthermore, 44 percent of institutions are still evaluating modeling approaches for all portfolios, signaling that they may be behind schedule. Though some modeling decisions need to be made before the start of parallel runs, others can be influenced by early results and thus, should not delay commencement.

Forecasting future conditions. Though more than 64 percent of companies are still evaluating or unsure about the length for the reasonable and supportable forecast period, they will need to decide soon as the length of the forecast period affects the complexity of the economic models and their sensitivity to changes in forecasted economic conditions. Also, companies should engage with peers and regulators to understand how to approach discrete issues, such as loan loss determination techniques.

IT infrastructure. While 60 percent of executives at financial institutions with assets over $200 billion expect CECL implementation will take the same amount of time as ALLL reporting, some finance and accounting personnel believe the estimates will most likely be more volatile and take extra time to understand. At institutions with heavy reporting obligations, CECL may challenge reporting timelines, and smaller institutions may underestimate the human and financial resources needed to comply.

Data. A significant part of CECL implementation includes data gathering and compilation, and though 64 percent of financial institutions have begun data gathering or data quality improvement projects, almost half indicated some form of data quality issues. Since CECL guidelines explore historical loss experience, companies with limited historical data will need to supplement data with relevant external datasets, which will take additional time, planning and resources.

Governance/internal audit. Perhaps the greatest challenge to CECL implementation is leadership, which must oversee regulatory and financial reporting, and enable all resources to meet the tight implementation timelines. To help facilitate this demand, 43 percent of companies have implementation teams co-led by credit, risk and accounting. Eighty-six percent of companies have created a CECL governance committee represented by risk, accounting, credit, IT, internal audit, modeling and product control, and most banks are seeking alignment with CCAR and DFAST reporting in hopes of lowering costs.

Speculation following the passing of CECL claimed financial institutions would reexamine certain products, which would lead to changes in pricing, lending strategy, credit risk management, and other considerations. However, our survey revealed contrary results.

Find out how CECL will impact businesses and how companies expect CECL implementations to affect their portfolio in “2018 Accounting change CECL survey.” 

Also, stay informed about the state of implementation when KPMG conducts our 2019 CECL survey in the coming months.