KPMG offers a suite of services and tools to guide you through your CECL accounting change.
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.
CECL’s requirements include the following significant changes to current U.S. GAAP around impairment accounting:
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.
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.
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.
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:
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.
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:
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.
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:
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.
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:
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.