CECL Considerations For Non-financial Services: Still On the Hook


We’ve been hearing plenty about Current Expected Credit Loss (CECL) over the past several years, with most discussions and perspectives focusing on its impact to financial services organizations. Non-financial services entities have CECL exposure, as well: through trade accounts receivable, loans receivable, off balance sheet credit exposures, and so forth.

Non-financial services entities may find themselves on the hook for CECL if they have assets held at amortized cost-like accounts and notes receivable, such as lessors with a sales-type or direct finance-type lease, or entities with off balance sheet credit exposures. Most have concluded that CECL will not have a significant impact on their reserving levels, which is likely true, but not enough.  You must perform the analysis and document your rationale and position with proper substantiation - such as historical loss experience. 

In this part of our ongoing series about CECL, we’ll walk through some key considerations for non-financial entities, as well as what may prove to be a challenge.

What needs to happen for non-financial institutions to ensure CECL compliance?

1. Review your balance sheet and financial statement notes to identify potentially in-scope financial assets. Some considerations would be:

  • You will likely have to go a few levels below your balance sheet to look more deeply into other assets, etc.

  • Are you the lessor in any sales-type or direct finance leases?

2. Document financial assets in scope including rationale for in or out of scope.

3. Determine reasonable approach to producing a CECL estimate based on your portfolios and your data. Some modeling considerations are:

  • A variant of a historical loss rate model provides a good starting point, but you still must document how you determined your historical loss rate.
  • Another approach may be to use your accounts receivable aging schedules. A close look at what data you have available and the analytic reports you use will help assess your credit exposures as these schedules and analyses will provide guidance in how to calculate your expected credit loss under CECL.

4. Document your selected modeling approach and how reasonable forward-looking and supportable forecasts are incorporated. Categorizations may be based on asset lifetime, such as:

  • Short-term trade receivables may not require much research.
  • Longer-term in scope assets will require more judgement documentation.

5. Evaluate and potentially draft disclosures for CECL. However, if most in scope assets are short-term trade receivables, you likely won’t need to prepare any of the other credit quality disclosures due to the short-term nature of those receivables.

What makes some of the non-financial services CECL assessments more challenging than others?

1. A conglomerate with multiple entities:

  • It’s hard to share the message, provide training and ensure consistency in judgments across a decentralized organization.
  • CECL does not require the same approach to calculating the expected credit loss across entities or portfolios, but if they are similar, then the key judgments and approach should share some consistency. The various entities may have different data that they capture, which could easily be housed in various systems. A one-size-fits-all approach may not work across a conglomerate of entities.      

2. Communication among impacted groups:

  • The implementation of CECL and coordination between credit risk, underwriting and operations is challenging. These groups are not accustomed to sharing information and reporting externally on information provided by risk management. In order to implement, they must understand one another and work cooperatively together.

3. Less industry discussion and coordination:

  • Making it a challenge to figure out how your peer groups will incorporate CECL, there historically has been less discussion regarding its application to non-financial services entities than there has been for financial services.

For SEC-filers (especially if you are an SEC filer that is required to adopt CECL effective January 1, 2020 for end of calendar year), CECL implementation is right around the corner, so start now.

If you are a non-SEC filer (even if you are a public business entity) or a smaller reporting company that is an SEC filer, FASB has proposed to delay implementation to January 1, 2023, but preparation during this time period will make the CECL implementation process smoother.

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