RW Advantage - Webinars

This webinar will focus on the recently issued FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326). As a result of that ASU, financial institutions must discontinue using the current GAAP incurred loss method for determining the allowance for loan and lease losses (ALLL).

The long-standing incurred loss model will be replaced with a new current expected credit loss (CECL) model. CECL requires assets at the balance sheet date based on:

• Historical experience
• Current conditions
• Reasonable (supportable) forecasts

The ALLL determination will still be subjective and will require many currently used management judgments about past events and current conditions. CECL will also require forward-looking information (i.e. forecasted information) to reflect the full amount of expected credit loss over the life of the financial assets (the loans).

This session will emphasize that no single method for estimating credit losses is mandated. It will however emphasize the following requirements:

• Use risk-based pools of amortizable financial assets (e.g. loans)
• Estimate credit losses over the contractual term of the financial assets or pool of financial assets
• Use all available internal and external quantitative and qualitative information and past events and conditions (e.g. loan guarantees, LTV rates, FICO scores, risk ratings, unemployment rates, GDP, housing indices, actual loss experience, past economic cycle activity)
• Use reasonable and supportable forecasts
• Choose appropriate credit loss model (e.g. discounted cash flows, regression analysis, probability of default, loss rate, roll rates)

Each institution must develop its own method to support its reasonable estimates of its expected credit loss forecasts. Accordingly, the session will briefly review illustrations of various approaches to credit loss estimation.