Accounting Changes Coming For Banks

This article is part of a series titled Auditing of our country's financial institutions ”. St. Written by Julia Stackhouse, vice president and chief of the Louis Federal Reserve, the series was released at least once a month. Since then, many reforms have been made. It is important to note that this model is largely based on historical trends and indicators to estimate potential asset losses.

If the financial and economic conditions are good and do not change, this model works adequately. Unfortunately, when entering the financial crisis, it did not. Provision for asset losses was very low, especially when assets in the loan portfolio were compared to the quality of loans granted and the likelihood of changes in economic conditions.

In addition, insufficient provision of losses meant large accruals on earnings over a short period of time, reflecting expected credit losses. 

Why CECL?

The FASB decided to address these shortcomings by offering a more flexible accounting standard: CECL. Assessments will be based on historical experience in assessments, current circumstances and “reasonable and reasonable estimates”. Finally, CECL, which is mandatory for many companies, can be applied to suit the size and complexity of the company.