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Since our last FI newsletter, our nation elected a new president, the FASB adopted a radically new credit loss standard at the urging of the regulators, and both the Cubs and Astros won the World Series. Had someone asked me to forecast those events, I would have been mostly wrong.  But I did predict one of those things would happen.

Despite much industry protest, the FASB’s new credit loss standard was finalized in July 2016.   There was too much regulatory momentum and public sentiment for that not to happen.

Historically, FASB doctrine prohibited the use of forecasts in historical financial statements.  Makes sense.  Yet, CECL requires forecasts.   CECL requires an estimate of credit losses based on amounts expected to be collected over the life of the loan, replacing the ASC 450/FAS 5 estimate of credit losses based a loss event.  So how did the CPA profession let this happen?  We know the bank regulators advocated, if not outright demanded, this change.  But why was the FASB compelled to change long-standing, historical cost doctrine?

Here’s what I know, CPA’s must do something different to stay relevant.   Otherwise, we are going to be block-chained and bit-coined right out of business.  Bank investors and bank regulators will not stomach bank failures due to inadequate reserves.  Is CECL better than ASC 450/FAS 5 at estimating losses?  If you believe that financial institutions know their credit portfolios, and if you believe that the past is not necessarily an indicator of the future (see Cubs or Great Recession), then you are open to the possibility that CECL is a better approach.

It’s time to come to grips with CECL.  Life will move on, I promise. Here is my only real message – you can do it.

Vendors are crawling out of the woodwork to help banks implement CECL.  Regulators have assured community banks that hiring a vendor to solve the CECL project is NOT REQUIRED.   Several financial institutions have requested our assistance with CECL, which we are happy to do.  We have an approach, but I will warn you it is simple.

Remember, CPAs may not be the best at forecasting, since it is not in our blood. But we do know a good deal about applying new audit standards in a practical and effective manner.  Do not assume non-accounting firms will steer you to the most efficient solution, and do not assume your audit firm has all the answers.

Our best advice is to read the standard and the regulatory guidance, such as the Federal Reserve’s frequently asked questions.  There is a formula, and it is this:

That’s it.  You know the amortized cost already, so you are 1/3 there.  You get to come up with the amount expected to be collected.  The regulators are not dictating any complex model and they expect community banks can do this on their own.

OK, it’s not that simple, but if the Cubs and Astros can win the World Series anything can happen.

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