An overview of CECL: setting the context

Graham Dyer

BACKGROUND

In June 2016, the Financial Accounting Standards Board (FASB) issued the Accounting Standards Update (ASU) 2016–13, “Financial Instruments — Credit Losses” (Topic 326), and introduced the current expected credit loss (CECL) model into the US generally accepted accounting principles (US GAAP). The issuance of ASU 2016–13 was the culmination of a nearly decade-long project by the FASB to migrate the accounting for credit losses on financial instruments from the longstanding “incurred loss” model to an “expected credit loss” (ECL) model. For entities such as banks, credit unions, finance companies and insurance companies, whose primary activities include originating or investing in financing receivables, the CECL model represented one of the most impactful changes to accounting standards in recent memory. However, before describing the CECL model, it is helpful to understand the issues the FASB was trying to address when it undertook the development of the CECL model.

The FASB’s project to refine accounting for credit losses was born from recommendations by the Financial Crisis Advisory Group (FCAG). The FCAG was a committee formed jointly by the FASB and its