Contributing Author: Tim Biddle
CECL is one of the three major FASB pronouncements coming down the pike (along with Revenue Recognition and Lease Accounting). CECL’s loss reserve overhaul will bring the most impactful change for financial institutions, both operationally and financially.
In fact, if the operational components of CECL (implementation planning, execution and ongoing administration) are subpar, then the financial impact could be even more significant. For example, a last-minute implementation designed to achieve the minimum required compliance may save costs upfront but could also result in over- or understated reserves or a shaky process leading to more back-end work. Over time, a subpar implementation could lead to earnings volatility, fluctuations in capital, a decline in shareholder value or all three. Like most things, you get what you pay for.
So, you may be asking, “OK, but how do I get from where I am now to where I need to be in three years?” Each institution is likely to approach CECL compliance differently but there are common issues that all institutions will need to address. This blog will help you organize your thoughts around a logical roadmap to CECL compliance.
What is the General Plan?
- Leadership - The first step in a successful CECL implementation is to appoint a steering committee to start the conversation and keep the high-level implementation plan on track. This group must include functional leads for the key areas impacted by CECL (e.g., Finance, Accounting, Credit Risk Management, Underwriting, Data, Compliance, IT, others). Achieving CECL compliance is not merely an accounting exercise – it requires a multi-disciplinary approach to planning and implementation.
- Training - It may seem obvious, but CECL compliance won’t happen unless the key decision makers and other people who know how to get things done in an institution have a deep and holistic understanding of it. Training for functional area leadership, as well as the day-to-day planning and execution of the training, leads to a greater understanding of CECL and its impact to the company.
- Modeling - Now that you know what’s involved and have the attention of functional heads, here’s the first critical decision that must be made: do we use in-house or third party models for reserve calculations? For more on this decision process, please see our blog titled CECL Modeling – In-House or Third Party?
- Planning - As of mid 2017, you have less than 3 years to get CECL in place. Detailed project planning should begin after the modeling decision has been made. Functional area representation is critical. A CECL implementation is extensive, complex and important enough to warrant formalized project, program and change management support. There will be significant dependencies and interaction between functional areas.
The bottom line is that many functional areas of your institution will have a role in a CECL implementation. Binding these roles into a successful, robust and repeatable CECL compliance function will require proper planning, project coordination, documentation and change management expertise. Finally, an earlier implementation kickoff will help to avoid unforeseen issues down the road.