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8/1/2016
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CECLBreaking Down the Final Standard
Gordon Dobner, CPADirector
Trey Turnage, CPAPartner
July 27, 2016
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• 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 & email address
All group attendance sheets must be submitted to [email protected] within 24 hours of live webinar Answer polls when they are provided
• If all eligibility requirements are met, each participant will be emailed their CPE certificates within 15 business days of live webinar
TO RECEIVE CPE CREDIT
NEW IMPAIRMENT GUIDANCE
Incurred/Probable Expected/Lifetime
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NEW IMPAIRMENT GUIDANCE
Topic Scope
ASC 450-20(FAS 5)
Contingencies- Loss Contingencies
ASC 310-30 Receivables- Loans & Debt Securities -Acquired with Deteriorated Credit Quality
ASC 310-10 Receivables- Overall
ASC 320-10 Investments- Debt Securities
• ASU 2016-13Topic Scope
ASC 326-20 Financial Instruments-Credit Losses-Amortized Cost (CECL)
ASC 326-30 Financial Instruments- Credit Losses-AFS Debt Securities
• Current Guidance
Effective Date (for Entities with Calendar Year-Ends)
ASU 2016-13 Impairment (CECL)
*
Type 2020 2021 2022
PBE – SEC filers
Interim & annual
PBE – small Interim & annual
All others Annual Interim
* Early adoption permitted for all entities for periods beginning after December 15, 2018
CECL IMPLEMENTATION DATES
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2018• ASU 2014-09 Revenue Recognition• ASU 2016-01 Classification & Measurement
2019• ASU 2016-02 Leases
2020• ASU 2016-13 CECL
OTHER MAJOR PROJECTS – EFFECTIVE DATES PUBLIC ENTITIES
• 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
CECL SCOPE
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Which of the following is NOT within the scope of ASU 2016-03? 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
POLLING QUESTION 1
Start –Begin with historical
losses
Adjust –Look forward for a
“reasonable” period
Revert –Revert to historical
averages
RANGE OF INFORMATION
Entities cannot rely solely on past events to estimate expected credit losses
Entities are not required to develop forecasts over asset’s or pool’s contractual term
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For a 30-year mortgage, does CECL require a 30-year forecast? Yes No Unsure
POLLING QUESTION 2
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
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Does CECL get rid of individual loan impairment assessments? Yes No Unsure
POLLING QUESTION 3
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
METHODS
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• 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 charge-offs & recoveries (partial & full), etc.
METHODS
• OTTI model eliminated• Allowance approach• Losses will be recognized sooner than under today’s guidance;
however, model allows for immediate gain recognition on recovery
AVAILABLE FOR SALE DEBT SECURITIES
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• 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 more-than-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
PURCHASED ASSETS WITH CREDIT DETERIORATION
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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 $ 1,000,000Loan—noncredit discount $ 75,000Allowance for credit losses $ 175,000Cash $ 750,000
$75,000 noncredit discount would be accreted into interest income over bond’s life
PURCHASED ASSETS WITH CREDIT DETERIORATION (PCD)
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
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For PCD financial assets, interest income would be based on contractual cash flows. True False I don’t know
POLLING QUESTION 4
• 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
DISCLOSURES
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• 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
• 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
NEW DISCLOSURES – CREDIT QUALITY VINTAGE
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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
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Learn
• Become familiar with new standard
Discuss
• Board of directors, audit committee
Review
• Existing allowance & credit risk management process that can be leveraged
Identify
• Data needs & system change
• Gap analysis
Plan
• Cross-functional effort
• Determine impact on capital
SUCCESSFUL TRANSITION
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 6/17/2016
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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: www.learningmarket.org.
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 may be awarded upon verification of participant attendance
• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at [email protected].
CPE CREDIT
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Trey Turnage | 601.948.6700 | [email protected]
Gordon Dobner | 713.499.4600 | [email protected]