CECL stands for “Current Expected Credit Losses” that is a new accounting standard recommended by the FASB (Financial Accounting Standards Board). It is required that the CECL changes are implemented before December 15, 2019 for public business entities (such as banks) and December 15, 2022 for all other entities (such as credit unions). Fundamentals of the CECL standards are:
The “incurred loss” measurement is replaced by “expected loss” – a forward looking measurement (forecast) of credit losses
The measurement should incorporate historical data
It has to take “life time losses” and economic environment into consideration
The CECL standards will fundamentally change how banks estimate losses in their allowance for loan and lease losses (ALLL). The CECL also requires significant changes to the data a bank maintains and analyzes. Banking regulators have referred to CECL as “the biggest change ever to bank accounting.”
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