Definition
ASC 326 does not prescribe one method for estimating expected credit losses. A vintage (static pool) method groups assets by origination period and tracks cumulative losses as each cohort ages, producing loss curves applied to current cohorts. A roll-rate method measures the percentage of balances in one delinquency bucket that move to the next, ending in charge-off, and chains the rates to estimate losses. Other accepted methods include loss rate, aging schedule, discounted cash flow, and probability of default.
Why it matters in an audit or review
Auditors evaluate whether the method fits the portfolio and whether the data are complete and relevant, then test the mathematical accuracy and the qualitative adjustments for current conditions and forecasts. Method changes require support.
Example
(Illustrative) Of $100,000 in the current bucket, 8% rolls to 30 days past due; of the 30-day bucket, 25% rolls to 60 days; of the 60-day, 50% rolls to 90 days; and of the 90-day bucket, 80% is charged off. Following one path from current to charge-off, the cumulative loss rate is 0.08 x 0.25 x 0.50 x 0.80 = 0.8%, or $800 per $100,000 of current balances. A full model also includes cures and other paths.
Common mistakes
- Using a short history that excludes a downturn.
- Ignoring prepayments or recoveries in cohort data.
Sources
- FASB ASC 326-20-30-3 (methods for estimating expected credit losses)
- FASB ASC 326-20-55 (implementation examples)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error