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BEYOND THE CURRENTEXPECTED CREDIT LOSSProviding smart, proactive solutions across the CECL implementation life cycle
PG 10
PG 11
PG 12
PG 8
PG 6
PG 4
Internal Controls
Model Development & Validation
Internal Audit
Financial Reporting
CECL Program Governance
CECLImplementation
The global financial crisis highlighted the need for timely response to, and financial reporting of, credit losses on loans and other financial instruments. Many believed the incurred loss approach identified losses “too little and too late” and suggested a more forward-looking “expected loss” approach for recognizing and reporting credit losses sooner, and thus the need for a more forward-looking approach.
In June 2016, the Financial Accounting Standards Board (FASB) published ASC 326, Financial Instruments – Credit Losses, through ASU 2016-16 that defines the new CECL requirements. Under the new requirements, credit losses under GAAP move from an “incurred” measurement to a lifetime “expected” loss measurement. While current rules generally observe a 12- to 36-month loss horizon for “probable” credit losses, CECL removes the “probable” loss threshold and requires a “lifetime credit loss” allowance to be established on day one.
Current Expected Credit Loss (CECL)
CECL Implementation 4
Entities holding financial assets and net investments in leases that are not accounted for at fair value through net income including:
Who does it apply to?
When does it apply?
• Loans
• (AFS) Debts Securities
• Trade Receivables
• Net Investments
• Off-Balance SheetCredit Exposures
• ReinsuranceReceivables
2018
After 12/15/2018 all entities may early
adopt, including interim periods within those
fiscal years
2019
After 12/15/19 for public business entities that are SEC
filers, excluding smaller reporting companies, including
interim periods within those fiscal years
2022After 12/15/22 for all other entities, and
interim periods within fiscal years beginning
after 12/15/22
CECLImplementation
Protiviti helps clients throughout the CECL implementation lifecycle, with expertise in PMO, methodology design and implementation, data remediation, documentation of processes, policies and procedures, model development and validation, SOX Controls design and internal audit assurance.
CECL Implementation 5
Protiviti CECL Implementation Framework
CECL Program Governance
Key CECL Implementation Considerations
AssuranceExternal Audit & Regulator CoordinationInternal Audit
Assurance Assessment & Approach
Policy & Procedure AccuracyAppropriateness &
Effectiveness of Controls
Quality & Accuracy of Data Reasonable & Supportable Forecasts
1. Develop CECL Methodology• IT-Data sourcing & remediation• Economic forecast
• Quantitative models• Qualitative factor framework
• Reserve aggregation
2. Document Key Assumptions• Methodology • Models • Accounting policy • Whitepapers
3. Document End-to-End Process• Process flows/policies & procedures • Financial reporting process
4. Develop SOX Internal Controls• Design, document, and test internal controls
5. Model Validation• Governance & controls
6. Parallel Run + Impact Analysis• Iterative feedback loop to implement enhancements
7. Develop Disclosure Templates• Pre-Implementation • Post-Implementation
• Oversight• Project management
• Cross-functional coordination• Risk management
• Implementation &documentation support
CECLImplementation
CECL Program Management: Enabling Timely and Successful Implementation
CECL Program Governance 6
Protiviti’s CECL Project Management Office (PMO) offering enables the management of critical inter-dependencies and results in effective CECL implementation. We’ll partner with you to deliver a timely and successful implementation through the following core principles:
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VENDOR MANAGEMENT
CECLPMO
CROSS-FUNCTIONAL
COMMUNICATION
PROJECT ROADMAP
DOCUMENT PROTOCOL
RISK MANAGEMENT
CHANGE CONTROL
ISSUE MANAGEMENT
CECL Program Governance
CECL Program Governance 7
1. CROSS-FUNCTIONAL COMMUNICATION
• Implement structure to connect the different functions impacted by CECL implementation: financial reporting, accounting, finance, credit, risk, modeling data, technology, etc.
2. PROJECT ROADMAP
• Build and communicate CECL implementation project plan to stakeholders
• Manage and see to completion all implementation activities
• Identify and track upstream and downstream dependencies
3. CHANGE CONTROL
• Implement change control process for requesting, assessing, tracking, and approving changes to the implementation
• Plan and monitor execution of the parallel run process
• Build and operationalize training strategy to support organizational change management
• Escalate potential barriers and present alternative solutions
4. ISSUE MANAGEMENT
• Build processes to identify, assess, prioritize, track and report implementation issues
• Identify and manage critical inter-dependencies across the CECL program
5. RISK MANAGEMENT
• Build processes to identify, assess, prioritize, track and report implementation risks
• Aggregate risk information to identify hot spots across the CECL implementation program
• Embed risk management across the implementation program
6. DOCUMENT PROTOCOL
• Implement procedures to document, review, and validate all key CECL assumptions
• Embed QA and validation processes into implementation
• Monitor CECL production process and quality through meaningful metrics
7. VENDOR MANAGEMENT
• Implement centralized management and tracking of CECL vendors
• Coordinate across vendors
• Monitor project budgets
CECL Program Governance
Financial Reporting 8
CECL Financial Reporting Assistance
Protiviti partners with clients to ensure financial reporting processes meet CECL requirements by 1) evaluating and documenting key CECL decisions and policy elections, 2) determining the end-to-end allowance for the credit loss process and capital impact estimation, and 3) developing pre and post implementation financial statement disclosures.
KEY METHODOLOGY DECISIONS AND POLICY ELECTIONS
Protiviti advises clients on making key CECL methodology decisions and policy elections on numerous factors that contribute to the ACL determination. Examples include modeling and methodology design choices, cohort selection, methodology adopted, qualitative factors, treatment of Purchase Credit Impaired (PCI) and Purchase Credit Deteriorated (PCD) assets existing at transition.
WHITEPAPERS
Protiviti assists with documenting key decisions and policy elections in
whitepapers and accounting memoranda. As this documentation will be
reviewed by internal audit, external auditors, and regulators, it must be robust
and completed with sufficient lead time for review, discussion and revision.
Financial Reporting
Financial Reporting 9
PRE-IMPLEMENTATION IMPACT DISCLOSURE
Protiviti performs assessments of the potential impact of CECL on earnings and
capital, which is then disclosed in quarterly footnotes prior to implementation.
POST-IMPLEMENTATION DISCLOSURES
Protiviti assists with data sourcing, documentation and template design for
post-implementation disclosures which are greatly expanded under ASC 326,
requiring expanded data and analysis to facilitate investor understanding of
credit risk and CECL model design.
Financial Reporting
Managing the CECL Internal Controls Environment
Internal Controls 10
Protiviti helps our clients build and manage robust internal control environments from risk and control identification through to building an overall control testing program.
CECLRISKS &
INTERNAL CONTROLS
AREAS
ALLOWANCE CALCULATION FOR
CREDIT LOSSGOVERNANCE
FORWARD LOOKING ECONOMIC FORECAST
FINANCIAL DISCLOSURES
PROCESS DOCUMENTATION
Protiviti helps update process documentation to reflect the CECL control environment
CONTROL IDENTIFICATION
Protiviti assists to define and identify the relevant CECL controls and how they will be evidenced, including controls around transition
CONTROL TESTING
Protiviti performs initial testing of controls
REMEDIATION
Protiviti assists to remediate identified control gaps
PROGRAM IMPLEMENTATION
Protiviti builds overall control testing programs to ensure sustained compliance with CECL requirements
Internal Controls
CECL Model Development and Validation 11
CECL Model Development and Validation
Protiviti’s CECL model offerings range from developing GAAP compliant CECL models and methodology, to model validation, and finally to providing assurance over model processes and controls. We’ll partner with you across the life cycle of model risk management — from development through assurance.
LINE OF BUSINESS & MODEL RISK MANAGEMENT
Protiviti develops and implements models and creates model documentation.
• Aligned with CECL accounting guidance and regulatory SR 11-7 MRM principles
• Macroeconomic forecast scenarios
• Reasonable & supportable period, mean reversion period
MODEL GOVERNANCE & VALIDATION
Protiviti provides independent model validation and develops and implements model governance programs to establish controls for model risk management.
• Manage the soundness, appropriateness, accuracy, and usefulness of models
• Governance and controls over a significant accounting estimate for financialreporting purposes
INTERNAL AUDIT
Protiviti’s internal audit quantitative subject matter experts provide assurance over model processes and controls and evaluate adherence to internal policies and regulatory expectations by the first and second lines.
• Internal Audit of CECL implementation readiness and CECL model alignmentwith accounting and regulatory guidance
• Governance and controls over key CECL models and process components
Model Development & Validation
Internal Audit 12
CECL Internal Audit Assessment & Approach
Protiviti’s CECL internal audit methodology includes five key areas that are critical for the CECL process. We help our clients address these areas by performing CECL pre-implementation audits and advising on clients’ CECL internal audit assessment and approach.
ACCURACY OF POLICY AND PROCEDURES & COMPLIANCE WITH NEW ACCOUNTING GUIDANCE
Protiviti subject matter experts understand the accounting requirements under CECL and help client internal audit teams verify that policies and procedures are complete, accurately and consistently applied and periodically updated by management and staff.
APPROPRIATENESS AND EFFECTIVENESS OF THE PROCESS AND CONTROLS
Protiviti works with clients to obtain an understanding of management’s processes, procedures and related internal controls to design tests that effectively assess the effectiveness of the controls and risks of material misstatement.
QUALITY AND ACCURACY OF DATA & INFORMATION SYSTEMS
Protiviti provides assessments and expertise to ensure data and information systems capture, house and enable analysis of data needed both to estimate expected losses and to prepare the disclosures required under CECL. Protiviti also performs testing of information systems and interfaces to ensure the data flowing through the process is both accurate and complete.
Internal Audit
Internal Audit 13
REASONABLE & SUPPORTABLE FORECASTS AND PORTFOLIO SEGMENTATION
Protiviti’s subject matter experts can evaluate and challenge the reasonableness of management’s modeling choices and judgement in estimating CECL.
FINANCIAL STATEMENT DISCLOSURES
Protiviti assesses the completeness of management’s financial statement disclosures, ensuring disclosures align with CECL accounting standard requirements and provide clear information on the key components of the estimation process and detail on credit quality required under CECL.
Internal Audit
CONTACTS
Ariste RenoManaging [email protected]
Todd PleuneManaging [email protected]
Bill ByrnesManaging [email protected]
Charlie SorannoManaging [email protected]
ABOUT PROTIVITI
Protiviti is a global consulting firm that delivers deep expertise, objective insights, a tailored approach and unparalleled collaboration to help leaders confidently face the future. Protiviti and our independently owned Member Firms provide consulting solutions in finance, technology, operations, data, analytics, governance, risk and internal audit to our clients through our network of more than 75 offices in over 20 countries.
We have served more than 60 percent of Fortune 1000® and 35 percent of Fortune Global 500® companies. We also work with smaller, growing companies, including those looking to go public, as well as with government agencies. Protiviti is a wholly owned subsidiary of Robert Half (NYSE: RHI). Founded in 1948, Robert Half is a member of the S&P 500 index.
Charlie AndersonManaging [email protected]
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© 2019 Protiviti Inc. An Equal Opportunity Employer M/F/Disability/Veterans. PRO-0319-100031 Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services.
© 2019 Protiviti Inc. An Equal Opportunity Employer M/F/Disability/Veterans. PRO-0319-101116 Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services.
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BRAZIL*
Rio de Janeiro Sao Paulo
CANADA
Kitchener-Waterloo Toronto
CHILE*
Santiago
COLOMBIA*
Bogota
MEXICO*
Mexico City
PERU*
Lima
VENEZUELA*
Caracas
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EUROPE, MIDDLE EAST & AFRICA
FRANCEParis
GERMANYFrankfurtMunich
ITALYMilanRomeTurin
NETHERLANDSAmsterdam
UNITED KINGDOMBirminghamBristolLeedsLondonManchesterMilton KeynesSwindon
BAHRAIN*Manama
KUWAIT*Kuwait City
OMAN*Muscat
QATAR*Doha
SAUDI ARABIA*Riyadh
UNITED ARAB EMIRATES*Abu DhabiDubai
EGYPT*Cairo
SOUTH AFRICA*DurbanJohannesburg
ASIA-PACIFIC AUSTRALIABrisbaneCanberraMelbourneSydney
CHINABeijingHong KongShanghaiShenzhen
INDIA*BengaluruHyderabadKolkataMumbaiNew Delhi
JAPANOsaka Tokyo
SINGAPORESingapore