Introduction
After years of waiting and debating, the long awaited credit
losses standard has finally been issued. The pronouncement
introduces the idea of a new "Current Expected Credit
Losses" model (affectionately known as "CECL"). CECL
will impact the accounting and reporting related to financial
assets reported at amortized cost (primarily loans and trades
receivable) as well as debt securities and off-balance sheet credit
exposure. However, the scope of this article is geared almost
exclusively towards financial institutions and how the new
standards relate to the allowance for loan losses.
At a high level, the concept is fairly simple. Previously
financial institutions were recording an allowance for loan losses
based on losses which were currently incurred. In other words, what
do I have for losses in my portfolio right now? The new requirement
is to estimate all expected credit losses throughout the life of
the portfolio. Said another way, we now not only
