Accounting and Auditing Resource Center
Accounting and Auditing: Current Expected Credit Losses (CECL)
The federal financial institution regulatory agencies are issuing Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses to assist institutions and examiners. This new standard, published by the Financial Accounting Standards Board (FASB) in June 2016, introduces the current expected credit losses methodology (CECL) for estimating allowances for credit losses. The Frequently Asked Questions (FAQs) focus on the application of CECL and related supervisory expectations. The issuance of the FAQs is part of the agencies' efforts to support institutions as they prepare to implement CECL. The agencies plan to update the FAQs periodically.
The Financial Accounting Standards Board (FASB) issued a new accounting standard, Accounting Standards Update (ASU) No. 2016-13, Topic 326, Financial Instruments – Credit Losses, on June 16, 2016. The new accounting standard introduces the current expected credit losses methodology (CECL) for estimating allowances for credit losses.
The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) (hereafter, the agencies) issued a Joint Statement on June 17, 2016, summarizing key elements of the new accounting standard and providing initial supervisory views with respect to measurement methods, use of vendors, portfolio segmentation, data needs, qualitative adjustments, and allowance processes.
The agencies have developed these frequently asked questions (FAQ) to assist institutions and examiners. The agencies plan to publish additional FAQs and/or update existing FAQs periodically.”1
The new accounting standard applies to all banks, savings associations, credit unions, and financial institution holding companies (hereafter, institutions), regardless of size, that file regulatory reports for which the reporting requirements conform to U.S. generally accepted accounting principles (GAAP).
Further, ASU 2016-13 applies to all financial instruments carried at amortized cost (including loans held for investment (HFI), net investment in leases, and held-to-maturity (HTM) debt securities, as well as trade and reinsurance receivables and receivables that relate to repurchase agreements and securities lending agreements) and off-balance-sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credit, and financial guarantees. The new accounting standard does not apply to trading assets, loans held for sale, financial assets for which the fair value option has been elected, or loans and receivables between entities under common control.
While there are differences between CECL and current U.S. GAAP, the agencies expect the new accounting standard will be scalable to institutions of all sizes. However, inputs to allowance estimation methods will need to change to properly implement CECL.
The new accounting standard also makes targeted improvements to the accounting for credit losses on available-for-sale (AFS) debt securities, including lending arrangements that meet the definition of debt securities under U.S. GAAP and are classified as AFS.
Until the new standard becomes effective, institutions must continue to follow current U.S. GAAP on impairment and the allowance for loan and lease losses (ALLL) along with the related supervisory guidance on the ALLL.
- Joint Statement on the New Accounting Standard
- Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
 The focus of the FAQs is on the application of CECL and related supervisory expectations.