Dear CSH: What does the new current expected credit loss (CECL) accounting standard mean for our nonprofit’s financial reporting?
Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASU’s, is effective as of January 1, 2023 for calendar year organizations. The standard introduces the current expected credit loss module commonly referred to as “CECL” (pronounced see-suhl) and takes aim at the current reactive method of recognizing credit losses with a more proactive method.
The Impacts of CECL
The standard will most certainly have the largest impact on the banking and financing industry; however, it will apply to not-for-profits to the extent that they have financial instruments (think trade receivables, contract assets, and loans receivable; receivables such as pledges and contributions fall outside the scope of the standard).
Under the previous standard’s incurred loss model, credit losses were recognized when it was probable that the loss had been incurred while taking into consideration historical loss and current economic conditions. Under this model, losses if any, are generally recognized subsequent to the initial transaction.
CECL will require recognition of credit losses when expected, taking into consideration not only historical loss and current economic conditions, but future conditions as well. Therefore, expected credit losses are recognized at the time of initial transaction and adjusted prospectively as more information becomes known. The inclusion of a consideration of future conditions is a significant change not only to this standard but to generally accepted accounting principles in general, which are largely based on historic and current data, and will require significant assumptions and estimates.
Organizations should prepare for their year-end reporting requirements now by identifying the assets that fall into the scope of this standard, documenting assumptions and supporting data for these assumptions, and developing and recognizing an expectation of credit loss as of January 1, 2023 and December 31, 2023 (for calendar year organizations).
The above is meant for a summary and does not cover all of the requirements and exceptions included in the standard. Those implementing this standard should refer to the Accounting Standards Codification Topic 326 in its entirety and should reach out to their CPA for guidance.
Learning More About Current Expected Credit Loss
To learn more about CECL and how to navigate its impact, please contact our CSH nonprofit services team.