Exploring Current Expected Credit Loss Solutions & Their Impact on Standards
The development of Current Expected Credit Loss (CECL) solutions is underway to address the requirements of a new accounting standard set forth by the Financial Accounting Standards Board (FASB). This standard aims to facilitate the rapid calculation of estimated future credit losses throughout the lifespan of various financial instruments such as loans, debt securities, trade receivables, and purchased credit deteriorated (PCD) assets. Previously, financial institutions (FIs) relied on traditional methods that primarily focused on incurred losses, marking loans as impaired only when they were deemed unrecoverable. These losses were then accounted for as expenses within the allowance for loan and lease losses (ALLL). Additionally, the determination of bad debts by FIs was often based on previous year's losses, with the same amount earmarked for potential credit impairment in the subsequent year. However, the updated guidance from FASB mandates a shift towards incorporating pre...