Credit Expected Credit Losses - - PDF document

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• IASA Spring Conference

The Auto Club Group - Proprietary and Confidential

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• Credit Expected Credit Losses (CECL)

Expected loss model and its’ approach to recognizing changes in credit losses

• Other recent market developments
• Collateralized Loan Obligations (CLO) and their roles in investment

accounting and financial reporting

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• The Financial Accounting Standards Board (FASB) issued ASU 2016-

13 on June 16, 2016. This is the new impairment standard. Credit Expected Credit Loss (CECL).

• There are multiple pieces that impact entity’s.
• CECL is considered the most impactful banking regulation since Dodd-

Frank and the most significant estimate on our financial statements.

• The core requirement of CECL is to estimate lifetime expected losses

for all loans from inception which differs from OTTI which is based on market value loss.

• An entity’s allowance for credit losses should reflect the risk of loss,

even when that risk is remote. Mandatory adoption by 12/31/20. Option to early adopt in 2019.

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• CECL is applicable to:

Premium receivables HTM debt securities Loans and loan commitments Financial guarantees New investments in leases Repurchase agreement receivables Reinsurance receivables

• CECL is not applicable to:

Fair value option financial assets Equity instruments and equity investments Related party loans Derivatives

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Current Accounting Future Accounting Incurred Loss Model Expected Loss Model

• Considers current information and

events

• Estimates the risk of loss even

when the risk is remote

• “Probable” recognition threshold
• Losses estimated over the

remaining contractual life

• Considers past events, current

conditions and reasonable and supportable forecasts

• No recognition threshold

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Current Accounting Future Accounting Focus on whether impairment is

• ther than temporary

Focus on whether unrealized loss is attributable, at least in part, to credit Recognize OTTI as a reduction of security’s cost basis Generally recognize an allowance for credit losses Recognize reversals of impairment as an adjustment to future interest income Recognize reversals of impairment immediately as a reduction of allowance for credit losses

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• Eliminates other-than-temporary impairment model

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• Discounted Cash Flow Analysis
• Loss Rate Method
• Vintage Analysis
• Probability of Default

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• Day 1

AFS Securities

Record at pre-adoption amortized cost and apply “allowance concept” prospectively Record recoveries with OTTI taken upon receipt

Transaction related disclosures

Cumulative effect of change on retained earnings Effect of adoption on any line item

• Thereafter

Apply CECL model for changes in credit quality which are immediately recognized in income

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• Financial Statement Disclosures

Now required to disclose amortized cost basis by each credit quality indicator by class of loan and major security type New vintage disclosures New collateral dependent financial asset disclosures Purchased credit deteriorated asset reconciliation Allowance roll-forward by type of investment security now required for HTM and AFS securities

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• CECL Committee
• CECL Modeling
• Develop Reports
• Document Process
• Assess Impact on Internal Control over Financial Reporting
• Capital Planning
• Audit & Regulatory Approval
• Board Communication

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• Determine required members

Finance Credit Lending Risk Management Operations Information Technology Audit

• Assign accountability for execution and oversight
• Set meeting schedule

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• Define interfaces, workflow and documentation
• Determine data needed
• Validate data
• Methodology selection
• Determine modeling software

Excel Other software options

• Parallel runs
• Develop Reports to facilitate governance and oversight