When the Financial Accounting Standards Board (FASB) introduced a new impairment model, commonly known as CECL (Current Expected Credit Losses), applicable to the U.S. GAAP based countries such as the United States, Israel, Japan (limited), Switzerland (optional), it represented major shift from the existing incurred loss model.
Like IFRS 9, financial institutions in these countries now need to adopt a forward-looking expected loss model. Unlike IFRS 9, CECL permits historical factors to retain a greater role in the process. Additionally, there is a difference in how the results of expected loss calculations are used throughout an organization and in reports to regulators and shareholders.
Impairment and the expected credit losses model
In support of the expected credit losses model within CECL, our solution will include:
- Develop and build an expected credit loss model that needs to be run in multiple scenarios
- Implement PD/LGD and EAD term structures based on best practices methodologies
- Ability to implement from a tactical towards a strategic solution for IFRS 9 compliance
- Expected Credit Loss calculators which can work with expert judgment or macroeconomic scenarios
- Re-usage of methodologies such as vintage or loss rate methodologies as described by the standard
- A combination of term structures based on forward-looking and historical extrapolation methodologies
- Specific CECL reporting as described by the FASB
- Accounting schemes that include the logic for the expected credit losses over the full instrument’s lifecycle
- Support for calculation and subsequent accounting processing of credit-adjusted effective interest rate (EIR), amortized cost and effective interest for purchased or originated credit-impaired instruments
Disclosures requirements
- By combining the lifecycle information on each individual financial instrument with a transparent and auditable contract level CECL sub-ledger and powerful reporting tools, positions us for full compliance with CECL. The solution offers full transparency and traceability that fully satisfies internal and external audit needs.
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