Service

CECL modeling and accounting

KPMG offers a suite of services and tools to guide you through your CECL accounting change.

  • CECL
  • Assessment
  • Design
  • Implementation
  • Sustain

CECL


What is CECL modeling and accounting?

The Financial Accounting Standards Board (FASB) has released new guidance that may impact your allowance and impairment processes. The guidance is on current expected credit loss (CECL) measurement and calculation. Financial Instruments – Credit Losses – Measured at Amortized Cost (Subtopic 326-20) represents a significant change to impairment accounting under U.S. Generally Accepted Accounting Principles (GAAP).

KPMG LLP (KPMG) is here to help. KPMG offers a suite of services and tools to guide you through your CECL accounting change. The CECL standard will be a significant change to the methodology and accounting financial institutions use to measure and recognize their credit loss impairment. And while it is nominally an “accounting” change, the anticipated impact on financial institutions’ operations and processes is likely to be far more extensive.

CECL affects all institutions with financial assets measured at amortized cost. This includes U.S.-based banks, foreign banks with U.S. reporting obligations, insurance institutions, and nonfinancial institutions with an active treasury or financing group.

The CECL accounting change to measuring credit losses is a significant shift from an incurred losses model to an expected lifetime credit loss model. It affects the credit risk organization, including credit and financial data capture, including related systems, financial reporting, analysis, and internal control.

Successful CECL implementation has less to do with meeting basic compliance requirements; rather, it has more to do with knowing how to structure your approach and how to apply the new modeling and data requirements to achieve overall business objectives.

KPMG is here to help you across the entire CECL project life cycle, from assessing and designing an approach to achieving compliance, to implementation and sustenance of your CECL solution.

Implementation dates:

  • For public business entities that are Securities and Exchange Commission (SEC) filers, CECL is effective for interim and annual periods beginning after December 15, 2019 (i.e., January 2020).
  • For all other entities, the standard is effective for annual periods beginning after December 15, 2020 (i.e., January 2021).
  • All entities may choose to early adopt starting with fiscal years beginning December 15, 2018.

CECL’s requirements include the following significant changes to current U.S. GAAP around impairment accounting:

  • Lifetime expected credit loss model – CECL will change a significant aspect of the current allowance estimates. The standard shifts the allowance estimate from an incurred to an expected credit loss model.
  • CECL removes the “probable” threshold for estimating the allowance under current U.S. GAAP SFAS 5 (ASC 450-20) requirements. As a result, almost all financial assets measured at amortized cost will have an allowance.
  • Reasonable and supportable forecasts – In addition to past events and current conditions, the credit loss estimate will consider reasonable and supportable forecasts of future conditions.

Why KPMG is the clear choice for CECL projects

We have been helping leading financial institutions with CECL accounting matters over the last few years. In addition, KPMG has been assisting with International Financial Reporting Standards (IFRS) 9 implementations and quantitative impact assessments for international banks and U.S. dual filers.

We have helped discover and transform the requisite data, integrate the necessary systems, align related critical data structures, develop the expected credit loss models, design and implement the underlying risk ratings, and identify the business impacts.

Our professionals are prepared and ready to work shoulder-to-shoulder with you. As part of our value proposition, we offer practical experience, the latest technological tools, cross-functional experience including tax considerations, and our deep industry knowledge to create a sufficient sustainable path towards compliance and to help capitalize on the strategic opportunities CECL affords.

Assessment


Phase 1 - assessment

The Financial Accounting Standards Board’s (FASB) Financial Instruments – Credit Losses – Measured at Amortized Cost (Subtopic 326-20), changes the premise of allowance accounting from an incurred loss to a forward-looking projected loss model in order to determine the current expected credit losses (CECL). The standard introduces the concept of estimating forward-looking lifetime expected credit losses over the expected life of an asset. It requires that an entity’s estimate include historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts that affect the expected collectability of the financial assets’ remaining contractual cash flows.

As part of our Accounting Change Services approach, KPMG offers a suite of assessment services and tools to guide you through the evaluation of your current state capabilities in terms of CECL and planning for your CECL modeling and accounting changes.

Readiness assessment

KPMG can help identify key technical accounting, business, modeling, and system issues and gaps that may exist and assess the impact on people and processes.

In addition, KPMG can provide CECL awareness training to client personnel. KPMG can provide an objective review of identified business models and assess a client’s current provisioning techniques.

We can communicate the changes necessary to close identified gaps based on our understanding of the CECL requirements and the potential implications of these changes to the client’s provisioning levels, data, systems, inputs and assumptions.

KPMG has developed an Accounting Diagnostic Tool that our engagement team can use to assess an entity’s preparedness to respond to the accounting change and pin point challenge areas within an entity’s current infrastructure for a more in depth gap analysis.

Capabilities review

KPMG’s CECL capabilities review can accelerate the CECL conversion process through an assessment of the requirements for existing processes, models, and systems. KPMG’s Capabilities Review leverages KPMG’s credit risk perspective and knowledge of leading practices.
The approach includes three phases:

  1. Document current capabilities,
  2. Identify gaps,
  3. Recommend enhancements

Each phase contains predefined management check points and templates to aid in the development of deliverables.

The CECL methodology that you select and apply to in scope financial assets are subject to independent auditor sign-off and regulatory approval, if applicable.

Design


Phase 2 - CECL design services

Current Expected Credit Loss (CECL) allows a great deal of flexibility in determining which modeling methodology an institution chooses to use. It does not specify how you should calculate the CECL estimate or what the specific data inputs should be. This gives your institution the power to choose a model (or models) that best suits your portfolios and businesses.

Based on our own internal development experience, our subject matter professionals can assist in providing specific CECL insights throughout the system development life cycle. 

As part of our Accounting Change Services approach, KPMG LLP (KPMG) can help guide you through your CECL planning and data evaluation. CECL model methodology selection and comparison, and accounting process design or process change.

The following key activities have been identified for each phase of the integrated CECL design services framework:

  • Business case value delivery
  • Process and enabling technologies
  • Integrated information management
  • Security, risk, and compliance
  • Technology infrastructure support
  • Behavioral change management
  • Program and project management.

Key insight

The first step in designing a CECL model or accounting process is to define the scope of the solution required.

KPMG can create and facilitate agreement on a project charter that reflects stakeholder expectations and encompasses the initial project governance structure, scope, objectives, risks, assumptions, constraints, time lines, resources, and budget estimates.

The exact nature of the implementation will depend on how a client organizes and manages its business. A larger bank may need assistance in the development of a phased path forward that leverages internal system enhancements or they may consider building entirely new solutions—solutions that address multiple product lines and individual business level challenges.

A regional or mid-sized bank will need to perform a similar build-or-buy analysis to determine whether an internal build or an external vendor application is a better “fit” for their organization. In all cases, beyond accounting, banks should not underestimate the potential change that CECL will have on their domestic and international operations.

KPMG will begin by leveraging our established methodology to create a project plan and communication lines for managing the project from its inception through execution to its close and transition.

Implementation


Phase 3 - implementation

Our credit risk, technology and accounting professionals can help you develop a scalable system that performs the calculation of lifetime expected credit losses for CECL and performs the related accounting.

KPMG’s technology implementation methodology provides a framework for meeting the challenges that CECL presents. It is robust enough to provide a detailed guidance at each steps of the process, but flexible enough to be tailored to your organization’s needs. 

The methodology consists of five phases:

  1. Identify stakeholders and plan: The Identify Stakeholders and Plan Phase includes interviewing relevant business process owners, bringing together multiple stakeholders to define the scope of the CECL technology implementation, and coordinating with the technology group to develop a comprehensive plan forward.
  2. Design: The Design Phase of the technology implementation includes the detailed definition of functional and technical design, gathering and defining the initial requirement by product, business unit, and per the accounting standard. 
  3. Build: The Build Phase includes the configuration and development of the CECL solution. The testing process is initiated simultaneously with the Build Phase to allow those two phases to complement each other. Preparations for cutover from legacy systems are also completed during the Build Phase.
  4. Test, upgrade, and enhance: The Test, Upgrade, and Enhance Phase includes the completion of all testing and the delivery of training and pre-implementation cutover activities prior to the final implementation of the system.
  5. Training and support: The Training and Support Phase includes the stabilization and monitoring of the system. The implementation activities are finalized and opportunities for improvement are reviewed and actioned.

Sustain


Phase 4 - sustainability & integration

Integration and Implementation have two different objectives
The natural reaction of a financial institution to this new challenge is likely to identify the need to implement new technologies, policies, and procedures. Implementing a focused CECL solution is undoubtedly part of the answer; however, implementation alone will not be sufficient. Full integration of the CECL solution into the various business units’ operations, and integration between those units, can return to business as usual.

CECL business integration services

Developing and validating the models and implementing the systems that automate both the credit risk and accounting functions are essential tasks, but it’s only half the battle. You also need to integrate these systems into business processes for credit, risk, and accounting operations to help ensure that going forward CECL is just business as usual. Our integration services are based around four key competencies: Program management, business integration, risk management, and technology. We can help with many aspects of the integration, including:

  • Development of a target operating model (TOM) that aligns directly with your organizational strategy and goals
  • Creation of an integration plan for realizing the TOM, including identifying risks and dependencies
  • Program management to help ensure that all phases of the project’s life cycle run optimally
  • Actionable reporting tailored to both senior management and day-to-day operations
  • Product portfolio assessment, including evaluating the process to determine product impacts and appropriate communication with product owners
  • Risk management across financial governance, credit risk, technology, regulatory, and audit
  • Technology evaluation, selection, and integration CECL

CECL model validation services

Prior to the CECL model implementation date, institutions need to think through the governance processes that will be put in place, including the initial validations, in order to help ensure that the new models are functioning appropriately and consistently with their intended use. After implementation, periodic validation, proper oversight, and controls are needed to help ensure that the models continue to meet their original objectives.

KPMG LLP can help you manage this process and mitigate the risk associated with implementing a new risk measurement model, starting with the assessment of a model’s conceptual soundness, as well as more rigorous evaluations of the inputs, processing, and reporting components of the CECL framework.

*Some or all of the services described herein may not be permissible for KPMG audit clients

 

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