A banking industry perspective on key CECL decisions

Mike A Shearer

Accounting Standards Update No. 2016–13, Financial Instruments — Credit Losses (Topic 326), referred to herein as current expected credit losses (CECL), or the “Standard”, while prescriptive in some regards is generally considered a principle-based standard. As such, there are a number of decisions and elections that must be made. The objective of this chapter is not to outline every decision, but rather to focus on the more impactful decisions, and then provide an industry perspective on both factors and to consider a range of observed industry practices from its initial adoption in 2020. Specifically, this chapter will focus on:

    • the reasonable and supportable (R&S) forecast period;

    • reversion considerations;

    • use of a single or multiple scenarios;

    • discounted cashflow (DCF) or non-DCF based approaches;

    • paydown curves on unconditionally cancellable instruments;

    • off-balance sheet exposure; and

    • reasonable expectation of a troubled debt restructure (TDR).

REASONABLE AND SUPPORTABLE FORECAST

One of the most impactful decisions on the estimate of the allowance for credit loss (ACL) is the selection of an R&S

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