The adoption by public companies of the Current Expected Credit Loss (CECL) accounting model ASC 326-20 has coincided with one of the most challenging economic environments seen in generations. After the first quarter of reporting, the ELFA’s July 22 webinar “CECL: A New Accounting Standard and a Challenging Credit Environment” provided a snapshot of what’s being observed from public companies’ implementation of the standard, and insights into the adoption process that will be helpful for the many equipment finance companies that have yet to adopt the standard.
John Bober, Managing Member, IXL Lease Advisory Services, LLC and Chair of ELFA’s Financial Accounting Committee, moderated the session presented by Drew Banach, Senior Manager, Strategy and Transactions, EY LLP; Kyle Elken, Controller, DLL U.S.; and Joseph Soviero, Managing Director, Financial Accounting Advisory Services, EY LLP. The topics discussed included a CECL refresher, disclosure research, COVID-19 considerations and hot topics for lessors.
As equipment finance companies navigate the adoption of the new CECL accounting standard, below are highlights addressed during the webinar.
The 2008 financial crisis revealed weaknesses in the previous accounting model for loan and lease losses. As a result, both the FASB and IASB undertook projects to revise accounting for credit losses which address the recognition, measurement, presentation and disclosure for most financial assets and certain other instruments. The three new or updated models for estimating credit losses are CECL (ASC 326-20), available-for-sale debt security impairment model (ASC 326-30), and model for certain beneficial interests classified as held-to-maturity or AFS that are not of high credit quality (ASC 325-40).
CECL has core concepts to apply toward recognizing credit losses. The CECL model has lessors and lenders reflect losses that are expected over the remaining contractual life of an asset even if that risk is remote. This is different than the prior model, which required recognition of incurred losses. Companies need to consider all available relevant information, including past events, current conditions and reasonable and supportable forecasts about the future.
CECL guidance requires a reasonable and supportable forecast of future economic conditions. The forecast is to be based on management’s forecast, not a market-consensus view. Therefore, it is important for entities to provide disclosures that allow users to understand management’s view of future economic conditions. This is even more important when management’s view differs from the consensus and when economic conditions are rapidly shifting, as they were in Q1 2020.
The CARES Act allows some financial institutions to defer the adoption of the new standard. The relief applies to insured depository institutions, bank holding companies, credit unions and their affiliates. These entities do not have to apply the new credit losses standard from March 27, 2020 until the earlier of the dates that the national emergency related to COVID-19 ends, or Dec. 31, 2020. The relief does not apply to any other types of companies and is not available for corporations or lessors that do not meet the banking/depository institution definition.
Bober noted that the FASB’s ultimate purpose of CECL was to accelerate and increase the amount companies would book for loan and lease losses. Understanding observations from public companies’ disclosures of their CECL adoption, accounting insights and recent developments can offer equipment finance companies guidance on their own implementations.
A recording of the webinar and webinar slides are available here.