Outlining the most impactful assumptions and challenges under CECL: an auditor’s view

Benjamin Havird

Allowance for loan and lease losses (ALLL) has been a lightning rod for companies, their auditors and regulators alike, particularly since the global financial crisis of 2007–09 and the recovery that followed despite US generally accepted accounting principles (GAAP) and banking regulations have remained relatively unchanged for several decades. However, the financial crisis clearly highlighted the “too little, too late” concerns, with the incurred loss framework driving a call for change.

The backward-looking nature of the incurred loss framework, or more specifically its inability to incorporate forward-looking views, was metaphorically similar to driving down a road using only your rearview mirror. In the same way, trying to distinguish between “incurred” losses and “future” possible (or even probable) losses was often difficult in practice. There was a general consensus that change was needed to reflect a view of losses that was at least forward-looking. To that end, efforts to reform financial instrument accounting arguably began in 2002 with the Norwalk Agreement (FASB and IASB, 2002) between the International Accounting Standards Board (IASB) and the Financial Accounting