CECL stands for Calculated Expected Credit Loss. It requires a new methodology to be used, dictated by the Financial Accounting Standards Board (FASB), for estimating future credit losses. Though primarily focused on lenders, CECL applies to all entities that extend credit. CECL was to go into effect for all SEC filers beginning on January 1, 2020, but due to COVID, entities that had not yet implemented it were given a two-year grace period that ends this year. All other public and private firms are required to be CECL compliant beginning January 1, 2023.
The implication is that in a little over one year, every company will need to comply with CECL by implementing a new method of projecting credit losses and thereby bad debt reserves. CECL requires a financial asset (or a group of assets) to be measured on an amortized cost basis and reflected at the net amount that you expect to collect. CECL also requires the consideration of a broader range of risks such as economic, industry, political and environmental.
We have launched this survey on ListServ to get a better idea of the business credit community's engagement with CECL, your level of awareness, and how many organizations have already implemented CECL. How difficult was it to implement and what was the impact? Even though only seven people responded, it is clear that there is an opportunity for Credit Today (and our partner Highako Academy) to raise awareness and provide insights regarding the transition to CECL. The following two graphics speak for themselves.
While there were just slightly more who had heard of CECL than not, most had no idea if their organization was doing anything about CECL. The good news for the many of you who still have CECL preparations in the future is that those who have implemented CECL found that process either not difficult or somewhat difficult.
Here are three other questions we asked and the responses we received:
What was the impact of implementing CECL in terms of your bad debt reserve?
- Stayed about the same
Please tell us how your organization is preparing for CECL implementation, or how it has already implemented CECL.
- Credit loss estimate on our entire receivable portfolio, even current receivables. Historically we only looked at delinquent and doubtful accounts in our analysis.
Please tell us why your organization is not making plans for CECL compliance.
- My boss may not be aware of the FASB change
Source: Credit Today ListServ: Snapshot Survey on CECL Preparation
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