Current Expected Credit Loss Accounting

The FASB issued an accounting standard update (ASU 2016-13) on current expected credit losses (CECL) on June 16, 2016. Prior to this update, companies reported credit losses only when it was probable a loss had been incurred.

This “incurred loss method” became a problem during the 2008 financial crisis. Banks weren’t recognizing losses fast enough, as GAAP didn’t allow them to consider future developments. Thus, in spite of a bleak economic outlook, loan loss reserves weren’t being adjusted to account for the future expected losses.

Under the new CECL method, companies must incorporate information from forward-looking forecasts to estimate credit losses over the entire contractual life of the asset. In short, banks and other companies must now forecast future economic conditions and record expected credit losses. We are therefore shifting from an incurred-loss model to an expected-loss model, and this is intended to accelerate the recognition of impairments.

0:00 FASB issued ASU 2016-13 on current expected credit losses (CECL)
0:14 Why FASB felt a change was needed
0:30 New CECL method
0:55 What companies are affected
1:20 What CECL rules don't apply to
1:33 Journal entry to record credit loss allowance
2:05 How to measure the allowance for expected credit losses
2:33 Journal entry to write-off uncollectible account
2:44 International accounting rules (IFRS 9)

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