CECL scope and the expected credit loss model

• Identify assets inside and outside the scope of 326-20
• Explain how the allowance is measured and recorded under 326-20-30-1
• Apply the information requirements: history, current conditions, forecasts and reversion
• Evaluate when an expected loss of zero is supportable

Scope

Subtopic 326-20 applies to (326-20-15-2):

• financial assets measured at amortized cost, including financing receivables, held-to-maturity debt securities, receivables from revenue transactions under Topic 606 and Topic 610, reinsurance receivables, and receivables from repurchase and securities lending agreements,
• net investments in leases recognized by a lessor under Topic 842,
• off-balance-sheet credit exposures not accounted for as insurance, such as loan commitments and financial guarantees.

It does not apply to (326-20-15-3) financial assets measured at fair value through net income, available-for-sale debt securities, participant loans of defined contribution plans, policy loan receivables of insurers, a not-for-profit's pledges receivable, loans and receivables between entities under common control, or receivables from operating leases (added by ASU 2018-19).

Two exclusions trip people up. Intercompany loans between commonly controlled entities need no CECL allowance, though collectibility still matters for other reasons. AFS securities follow Subtopic 326-30 (Lesson 13).

The allowance

The allowance for credit losses is a valuation account deducted from amortized cost to present the net amount expected to be collected. At each reporting date the entity records credit loss expense or a reversal for the amount needed to adjust the allowance to management's current estimate (326-20-30-1 and 326-20-35-1). There is no probable threshold. Losses are recognized on day one for newly originated or acquired assets.

Contractual term

Losses are estimated over the contractual term, considering prepayments (326-20-30-6). The term is not extended for expected extensions, renewals and modifications unless the extension or renewal option is in the original or modified contract at the reporting date and is not unconditionally cancellable by the entity. A three-year note with no renewal clause is measured over three years even if the borrower always renews.

Information to use

Under 326-20-30-7 the entity considers available information about past events, current conditions, and reasonable and supportable forecasts. It need not search for information not reasonably available without undue cost and effort, and internal information may be sufficient.

• History. Historical loss experience on assets with similar risk characteristics is the usual starting point. Adjust it for differences in underwriting, portfolio mix and asset term (326-20-30-8).
• Not history alone. An entity shall not rely solely on past events. Historical rates are adjusted for how current conditions and forecasts differ from the period the history covers, through qualitative or quantitative adjustments (326-20-30-9).
• Reversion. Beyond the period for which the entity can make reasonable and supportable forecasts, it reverts to historical loss information (326-20-30-9).

Remote risk and zero loss

The estimate reflects the risk of loss even when that risk is remote (326-20-30-10). An entity is not required to record losses where history adjusted for current conditions and forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Collateral value alone does not support zero; the nature of the collateral and potential changes in its value must be considered. The exception is the collateral maintenance provisions in 326-20-35-4 through 35-6.

Off-balance-sheet exposures

For unfunded commitments the entity estimates losses over the contractual period in which it is exposed to credit risk through a present obligation to extend credit, unless that obligation is unconditionally cancellable by the issuer. The result is recorded as a liability for credit losses, not as part of the asset allowance (326-20-30-11).

Audit angle

Start by testing scope: obtain a listing of financial assets and commitments, map each to in-scope or excluded, and check that exclusions such as common control receivables are real. The CECL private company guide summarizes the common pools.

Mapping the scope at Bellwether Ag Supply Co.