Trey Turnage, CPA Gordon Dobner, CPA

Transcription

1 CECL Breaking Down the Final Standard July 27, 2016 Trey Turnage, CPA Partner Gordon Dobner, CPA Director 1

2 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar NEW IMPAIRMENT GUIDANCE Incurred/Probable Expected/Lifetime 2

3 NEW IMPAIRMENT GUIDANCE Current Guidance Topic Scope ASC Contingencies- Loss Contingencies (FAS 5) ASC Receivables- Loans & Debt Securities - Acquired with Deteriorated Credit Quality ASC Receivables- Overall ASU Topic ASC ASC Scope Financial Instruments-Credit Losses- Amortized Cost (CECL) Financial Instruments- Credit Losses- AFS Debt Securities ASC Investments- Debt Securities CECL IMPLEMENTATION DATES Effective Date (for Entities with Calendar Year-Ends) ASU Impairment (CECL) * Type PBE SEC Interim & annual filers PBE small Interim & annual All others Annual Interim * Early adoption permitted for all entities for periods beginning after December 15,

4 OTHER MAJOR PROJECTS EFFECTIVE DATES PUBLIC ENTITIES 2018 ASU Revenue Recognition ASU Classification & Measurement 2019 ASU Leases 2020 ASU CECL CECL SCOPE Included Financing receivables Held to maturity debt Loan commitments, guarantees, standby L/C Lease receivables Reinsurance receivables Receivables on repurchase & securities lending agreements Excluded Financial assets at fair value Available for sale debt (updated model) Participant loans defined contribution benefit plans Insurance policy loans NFP pledges receivable 4

5 POLLING QUESTION 1 Which of the following is NOT within the scope of ASU ? Reinsurance receivables Investments in equity securities Investments in debt securities measured at FV-OCI Loan commitments not measured at FV-NI I don t know RANGE OF INFORMATION Entities cannot rely solely on past events to estimate expected credit losses Start Begin with historical losses Adjust Look forward for a reasonable period Revert Revert to historical averages Entities are not required to develop forecasts over asset s or pool s contractual term 5

6 POLLING QUESTION 2 For a 30-year mortgage, does CECL require a 30-year forecast? Yes No Unsure INDIVIDUAL VS. POOLED? Entities can develop credit loss estimates on a pooled basis if the assets share similar risk characteristics; if not, an individual evaluation is appropriate 6

7 POLLING QUESTION 3 Does CECL get rid of individual loan impairment assessments? Yes No Unsure METHODS Specific approach is not mandated Banks can leverage existing credit risk management systems & processes, including Discounted cash flow Loss rate method Roll rate method Probability of default Aging schedules 7

8 METHODS Fancy model No, Excel spreadsheets ok! Additional data Yes Banks will need to capture & save additional loan level data risk rating by individual loan, loan duration, individual loan balance, individual loan chargeoffs & recoveries (partial & full), etc. AVAILABLE FOR SALE DEBT SECURITIES OTTI model eliminated Allowance approach Losses will be recognized sooner than under today s guidance; however, model allows for immediate gain recognition on recovery 8

9 PURCHASED ASSETS WITH CREDIT DETERIORATION Modifies definition of what were previously known as purchased credit-impaired (PCI) Acquired financial asset or acquired groups of financial assets with similar risk characteristics that have experienced a morethan-insignificant deterioration in credit quality since origination, based on the buyer s assessment PURCHASED ASSETS WITH CREDIT DETERIORATION Same approach as originated assets Initial allowance for credit losses will be added to purchase price rather than being recorded as a credit loss expense in income statement Subsequent changes in allowance for credit losses for PCD assets will be recorded as a credit loss expense in income statement 9

10 PURCHASED ASSETS WITH CREDIT DETERIORATION (PCD) Bank ABC pays $750,000 for a bond with a par amount of $1,000,000. Bond is measured at amortized cost basis. At purchase, allowance for credit loss on unpaid principal balance is estimated at $175,000 Loan par amount $ 1,000,000 Loan noncredit discount $ 75,000 Allowance for credit losses $ 175,000 Cash $ 750,000 $75,000 noncredit discount would be accreted into interest income over bond s life PCD TRANSITION RELIEF Assets previously accounted for PCI assets would be classified as PCD assets at adoption Allowance for expected credit losses for all PCD assets would be grossed up at adoption Interest income would continue to be based on asset yield as of adoption date 10

11 POLLING QUESTION 4 For PCD financial assets, interest income would be based on contractual cash flows. True False I don t know DISCLOSURES Many existing disclosure have been carried forward without change Past due loans Nonaccrual loans TDRs Judgment will be required in determining correct level of detail to satisfy financial statement users without aggregating too much data or including excess details 11

12 NEW DISCLOSURES CREDIT QUALITY How does management monitor credit quality of its financial assets & assess risks? Includes both quantitative & qualitative information, including A description of credit quality indicator Amortized cost basis, by credit quality indicator For credit quality indicator, date or range of dates in which information was last updated NEW DISCLOSURES CREDIT QUALITY VINTAGE Not required for entities that aren t public business entities For PBEs that are non-sec filers, transitional relief will allow banks to build up data over time to meet full disclosure requirements 12

13 CURRENT REGULATORY EXPECTATIONS The agencies do not expect smaller and less complex institution will need to implement complex modeling techniques. The ASU allows expected credit loss estimation approaches that build on existing credit risk management systems and processes, as well as existing methods (e.g. historical loss rate, roll-rate, discounted cash flows) 6/17/16 Joint Statement 13

14 SUCCESSFUL TRANSITION Learn Discuss Review Identify Plan Become familiar with new standard Board of directors, audit committee Existing allowance & credit risk management process that can be leveraged Data needs & system change Gap analysis Crossfunctional effort Determine impact on capital CECL IMPLEMENTATION DATES Because appropriate allowance levels are institution-specific amounts, the agencies will not establish benchmark targets or ranges for the change in institutions' allowance levels upon adoption of CECL, or for allowance levels going forward. - Joint Statements 6/17/

15 BKD.COM THOUGHTWARE 15

16 CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars. CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com. 16

17 Trey Turnage Gordon Dobner