Identifying Issues – Historic Comparisons Between Reporting Periods

CECL implementation

In June 2016, the FASB issued the Current Expected Credit Losses (CECL) accounting standard. CECL focuses on estimating expected losses over the life of the loan. Many financial institutions have already implemented CECL and are well into the process of fine-tuning the standard. Those that have adopted the standard can now focus on their historical data and aligning it for auditing purposes. For those that have just adopted the standard, much can be learned from the experiences and mistakes of pioneering institutions.

CECL data and historic comparisons

Historical loan data may be difficult to obtain. CECL also takes into account reasonable forecasted economic conditions and current economic conditions. Under CECL, historical loss experience cannot be calculated using the annual loss rate. As a best practice, banks and credit unions can use this data and compare it between reporting periods. The benefits include:

1. When there is any discrepancy between data belonging to two different reporting periods, banks need to dig deep and investigate the cause of this anomaly.
2. When institutions adopt the practice of comparing their CECL results, they can move to using the data to solidify their organization's accounting framework.
3. Even if economic conditions are stable, CECL results can swing between reporting periods. When this happens, institutions need to investigate the source promptly.
4. Focusing on historic comparisons ensures readiness for any challenging auditing questions — doing the audit work before the auditor arrives.

Rectifying CECL result deviations between reporting periods

When economic conditions are favorable and most macroeconomic factors are constant, any swings in CECL results should alert the risk management team. They can investigate by:

1. Checking market data and the performance of stock exchanges and financial instruments they deal in.
2. Digging deeper into loan portfolios and, if required, into the historic data of a loan itself to understand how it is being affected by unexpected losses, interest rates, credit risk, profitability, and liquidity.
3. In the event of any CECL data deviations, opening their loan books and checking size, principal and interest amounts, and balance sheet details.
4. Investigating how market data fluctuations may be affecting the credit profile of a loan pool.
5. Making it a practice to compare CECL results between two quarters and identifying issues that may arise.

Documenting data is the backbone of every institution's audit reporting effort. The five areas where auditors are expected to focus are:

1. Models and methods used
2. Qualitative adjustments
3. Data
4. Controls / Governance
5. Assumptions

Frameworks built on these best practices can help institutions avoid audit-related shocks and pass those audits without glitches. Making historic comparisons between reporting periods has often been neglected by financial institutions — CECL and the associated auditing requirements ensure that these valuable results and data are no longer overlooked.

CECL Express can help…

CECL Express is a turnkey solution that fully satisfies all elements of the new CECL accounting standard. The system provides all non-loan data, including:

• Yield curves and Fed data
• Linked reports on losses from the FFIEC and NCUA
• PD and LGD curves
• Macroeconomic data

Banks and credit unions need to only provide the underlying loan details for the system to provide fully auditable ECL results for multiple calculation methods, including:

• Vintage
• Roll Rate
• Discounted Cashflow
• WARM
• PD/LGD

CECL Express provides more than valid ECL results. The system computes results for all methods and all loan pools, allowing the bank to optimize its CECL configuration and avoid the worst impacts of the new standard.