Collaborating author: Tim Biddle
CECL has been billed as the most profound accounting change to ever hit the financial services industry. CECL impacts virtually every regulated and non-regulated Financial Institution (FI) in the US and many non FI’s as well (collectively, “Adopters”). CECL’s operational impact will touch nearly every functional area of an Adopter – finance, accounting, credit, IT, investor relations and possibly others. With compliance guidance intentionally left open-ended, Adopters will need to choose their path to compliance.
Many Adopters are struggling with how to begin the compliance process.
Do they revamp an in-house model or go with a 3rd party solution? If they choose a 3rd party model, is it best to start with a model and fill in data gaps, or should they pick a model based on their existing data? Who needs to be involved with the implementation? What needs to change beyond just a model and some disclosures? These questions may lead to circular discussions and prolong inertia while the clock continues to tick.
No single, tried and true CECL implementation plan exists.
Each Adopter needs to choose a modeling solution that works best for them, which means determining whether their data components (governance, management, availability, security, etc.), operational accounting processes, change management issues, among other areas, are sufficient to achieve compliance. Critically, not every Adopter needs to spend the same amount of effort in the same areas, and many may need external assistance in certain areas and not in others.
A CECL readiness assessment is a good place to start.
Figuring out the steps to CECL compliance and translating them into an achievable project plan is daunting, so a CECL readiness assessment is a good place to start. A readiness assessment addresses all the key areas and issues that a management team should be thinking about as they move toward a CECL implementation plan. Responses will reveal not only where an Adopter falls in the spectrum of overall readiness, but also help to pinpoint areas of potential operational weakness. Areas for further discussion and management attention become clear and can be fleshed out early so they are properly included in an implementation plan.
CECL adoption will involve numerous systemic changes.
In this regard, Adopters could consider CECL as a catalyst for change, not only for reserve estimation processes, but also for broader improvements in data, modeling or operational accounting processes. The phase-in period prior to the CECL compliance deadline could be looked upon as a chance to build stronger data functionality, shore up operational accounting processes or improve modeling expertise in general, as well as for CECL compliance purposes. Thus, completing a readiness assessment for CECL might also point to other issues or risks that could be addressed or mitigated in a priority-based approach to CECL compliance.