While banks, insurers and specialty finance companies are making progress toward the implementation of the Current Expected Credit Loss (CECL) standard, widespread uncertainty regarding key decisions on accounting, modeling and data inputs has slowed overall implementation efforts, according to a new survey by KPMG LLP. Of the financial services industries surveyed, the vast majority (67 percent) said their company is still in the initial “Assessment” phase.
The full KPMG report can be found here.
The Financial Accounting Standards Board (FASB) introduced the new credit loss model last year to require companies to estimate current expected credit losses. This contrasts the existing model, which is based on incurred losses. For most public companies, CECL becomes mandatory in January of 2020.
The KPMG report: CECL implementations gather steam amid uncertainty, surveyed C-suite executives and vice presidents in accounting, finance and risk, along with controllers and treasurers. The executives polled represent 98 banks, 28 insurers and 17 specialty finance companies from the financial services industry.
“This ambiguity stems from the open-ended nature of the CECL standard,” said KPMG’s Reza van Roosmalen, U.S. Financial Instruments Change Leader. “The banks and insurers have a number of options to consider in this standard and implementing CECL requires companies to put their stake in the ground and build their processes around it.”
While 2020 seems a long way away, van Roosmalen says time is “precariously short” for implementing such a new, far-reaching generally accepted accounting principle (GAAP) standard.
Nearly a quarter (22 percent) of respondents estimate the total cost of the CECL accounting change from assessment through to implementation will be between $1-5 million, and 10 percent say costs will exceed $5 million.
“For many, this means the CECL implementation requires a large, transformational investment in risk and accounting software without a firm grasp of exactly what needs to be built. So in this regard, the openness of the CECL standard is slowing, if not stalling, implementations,” said KPMG’s Michael Ohlweiler, advisory partner for credit risk.
The downstream impacts of CECL on income volatility (70% percent) and regulatory capital (52 percent) are top concerns for all financial institutions and were consistently ranked as having a greater potential impact on risk personnel than by finance or accounting staffers.
KPMG notes that the systemic shift in monitoring and reporting brought on by CECL raises important infrastructure issues for financial services organization. Survey respondents all noted issues relating to data reliability, completeness, or both. Specifically, 54 percent of respondents in banking, insurance and specialty finance expressed some degree of doubt regarding the completeness or reliability of their historical data and 15 percent had not yet evaluated their data.
“Overall, we view CECL as not just an accounting change but a fundamental shift in how financial services’ companies measure and manage credit risk,” said Ohlweiler.
“As such, it is critical that management leading the accounting change understand the differing interpretations of CECL and bring together the many impacted parties that span the enterprise to address the potential challenges.”
For more insight, download KPMG’s free CECL handbook which provides comprehensive guidance on the new credit impairment standard.