How to answer the CECL question on the March 31, 2019 call report
The below question should be left blank unless early adopting as your institution has likely not early adopted. Answering “No” would indicate that the bank has early adopted and it does not have a transition election.
Purpose of the transition provision
Possible that despite adequate planning to prepare for the implementation of CECL, unexpected economic conditions at the time of adoption could result in higher-than-anticipated increases in the allowance that have not been accounted for. To address these concerns, the option to phase in over a three-year period the day-one adverse effects of CECL on their regulatory capital ratios.
Phase-in period consideration
Commenters asked the agencies to consider a four or even five-year transition period. The agencies considered this recommendation and determined that given the four years banking organizations had to plan for the implementation of CECL, combined with the three-year transition period, this is a sufficient amount of time to adjust and adapt to any immediate adverse effects on regulatory capital ratios resulting from the CECL adoption.
Election of the optional CECL transition provision
A banking organization that experiences a reduction in retained earnings due to CECL adoption as of the beginning of the fiscal year in which the adoption takes place, may elect to phase in the regulatory capital impact over a three-year period. Upon adoption the organization is required to begin applying the CECL transition provision as of that adoption date. This must be elected on the Call Report to use the transition provision by reporting the amounts in the affected line items of the regulatory capital schedule, adjusted for the transition provision, beginning in the regulatory report for the quarter in which it first reports its credit loss allowances measured under CECL.
If the organization does not elect to use the transition provision, it will not be permitted to make an election in subsequent reporting periods and will be required to reflect the full effect in its regulatory capital ratios beginning as of the CECL adoption date.
If the organization that initially elects to use the transition provision, but opts out of the election in a subsequent reporting period, will not be permitted to resume using the transition provision at a later date within the three-year transition period.
How to calculate the transitional provision and the mechanics
The banking organization must calculate the transitional amounts for the following items; retained earnings, temporary difference deferred tax assets (DTA), and credit loss allowances eligible for inclusion in regulatory capital (AACL). The transition provision amount is equal to the difference between its pre-CECL and post-CECL amounts of retained earnings, DTA, and AACL.
How the three-year phase in works
For example, if the ALLL was $800,000 on the 12.31.21 call report and the ALLL increased as a result of CECL implementation to $1,000,000 on the 3.31.22 call report. The $200,000 transition provision would be added back to retained earnings in Year 1, Year 2, and Year 3 of 75%, 50%, and 25%, respectively. The amounts of $150,000, $100,000, and $50,000 would be identified as the transition provision for each corresponding year subsequent to election and as stated above added back to retained earnings.