The CECL Survey 2019 found entities made progress on implementation, but have they made enough?
As the effective date nears for the new standards for current expected credit losses (CECL), our CECL Survey 2019 shows improvement over last year’s results. Entities have made significant progress on implementation, and many respondents made key decisions regarding compliance over the last year. However, progress has been insufficient with many entities lacking specific CECL impact insights or analysis at a granular level, and many have yet to complete parallel runs.
How expected impact has changed from 2018
Last year’s survey found a third of entities believed CECL would have no effect or would increase the allowance for credit losses by up to 30 percent. This year, only 12 percent of entities believe CECL will have no impact upon their allowance for credit losses. Likewise, a third (up from 2 percent in 2018) estimate that CECL will result in a 30 percent to 59 percent increase over today’s allowance for credit losses, and the average expected impact of CECL on adoption rose from 19 percent in 2018 to 29 percent this year.
Significantly, the report revealed that many entities could not disclose the CECL expected impacts at a portfolio or product-type level as late as June 2019. Since many entities indicated in our 2018 survey that they expected to spend all of 2019 in a parallel run for CECL, the lack of expected impact reporting shows that a very significant portion of entities are running behind schedule with their CECL project plans.
Despite approximately 42 percent of respondents acknowledging some level of delay in their parallel runs, the survey found no indication that preparers will not be ready by the go-live dates. Most respondents are optimistic that they will complete implementation in time to do one or more CECL parallel runs (or dress rehearsals) and potentially even have SAB 74 disclosures (SEC Staff Accounting Bulletin 74) with a point estimate or range by Q3 2019. However, the benefits of a long parallel run and its educational purpose may have been lost to many.
The Financial Accounting Standards Board has proposed delaying the adoption of CECL to 2023 (for calendar year-end reporters) for small reporting companies, private companies, and the public business entities that are not SEC filers, and nonprofit entities. However, this is no time to slow down or lose momentum, and for those entities not facing a delay, our survey found many need to significantly accelerate their efforts to be ready for adoption in 2020.
The transition from the Allowance for Loan and Lease Losses under the current incurred loss model to an allowance for credit losses under CECL presents a number of challenges, especially in accounting, modeling, and forecasting. As larger SEC filers head into the final stage of CECL implementation, read our CECL Survey 2019 to get in-depth analysis on building and refining processes and controls for compliance.