Stephen A. Rollins Jr., CPA
Vice President & Director

Current Expected Credit Loss or “CECL” has been a major topic for financial institutions, but it will also impact businesses and nonprofits. CECL is effective for businesses and nonprofits with years beginning after December 15, 2022 (calendar year 2023 or fiscal year 2024).

The primary change with CECL is moving from an incurred loss model to an expected loss model in financial reporting. This means you can’t solely rely on historical information to determine credit losses but must also factor in current economic conditions and reasonable and supportable forecasts about future conditions.

CECL applies to most financial assets that are measured at amortized cost, with some common examples being:

• Trade receivables or other contract assets from revenue recognition
• Notes receivable
• Net investment in leases recognized by a lessor in a sales type or financing lease receivable
• Held-to-maturity investment securities

Certain assets are excluded from the scope of CECL, with some common examples being:

• Assets already valued at fair value, such as equity investments or available-for-sale securities (other than potentially measuring impairment)
• Contributions or pledges receivable for nonprofit organizations

Another change that is important to note is that under CECL, you have to estimate the lifetime credit loss at the time the asset is initially recognized. Currently, you likely would not consider a potential credit loss until there was a triggering event, but under CECL, even if there is a remote possibility of a credit loss, you must record that loss at asset recognition.

The life of the asset will also be a critical factor. For example, if your trade receivables are generally collected within 90 days, that window of time is much more reasonable to apply a forecast to than, say, a 10 to 15 year note receivable.

What should you do to get ready for CECL?

To start:

• Identify any assets that could fall within the scope of CECL
• Once assets are identified, start gathering data and increasing your documentation to support your historical data, as well as any assumptions and estimates used in your consideration of current and future conditions.
• After documenting your considerations, determine which methods allowed under CECL your Company should use to estimate credit losses such as an aging schedule analysis, discounted cash flow, or loss-rate method, just to name a few.

This is a great time to talk with your GT Reilly advisor regarding any questions you may have about implementing CECL in your business or nonprofit organization.