If You Have Trade Receivables Then You Will Apply CECL: Current Expected Credit Losses (CECL) FLEXCAST

Overview

As the country went through the financial crisis in the mid 2000s, related to mortgage portfolios, the accounting guidance for reporting losses was challenged. GAAP was using an “incurred loss” for recognizing credit losses when a loss was probable. Users were adjusting decision models for possible “expected losses”. Users criticized the delay in reporting losses and also what appeared to be diversity in the application of “probable”. As a result, FASB was asked to review the guidance for recording credit losses. ASU 2016-13 Measurement of Credit Losses on Financial Instruments was issued after an eight-year period of development. Although the standard was developed in response to loans and debt securities, FASB issued the standard to cover most financial assets including trade receivables. The standard calls for recording expected credit losses that reflects losses that are expected over the contractual life of the asset. In almost all cases credit losses are recognized upon initial recognition of the asset. Information to consider will include historical loss information, adjustments to historical information for changes in asset specific risks, current economic conditions, and reasonable and supportable forecasts about future conditions (with reversion to historical loss information for future periods beyond those that can be reasonably forecast). Pooling is required when assets share similar risk characteristics. The expected current credit loss and the allowance for credit losses may be determined using various methods. No particular method is required. Example 5 from the standard which calculates the expected credit loss for trade receivables is presented. This example uses a provision matrix (an aging of receivables) to calculate the expected credit loss. The nature of Purchased Credit Deteriorated (PCD) financial assets are discussed along with an example of how to record them. CECL disclosures are explained and sources of information on CECL accounting in general and articles discussing CECL for trade receivables are provided. The course ends with the actions taken by Congress during 2019 and 2020 to challenge FASB’s accounting for credit losses.

Highlights

Current Expected Credit Losses. Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments - Credit Losses. Effective Dates. Codification Improvements.

Prerequisites

None.

Designed For

CPAs, CFOs, controllers, financial professionals, and auditors.

Objectives

Understand the controversy in accounting for credit losses that led to a new standard. Be aware of the effective date of the standard for nonpublic entities. Discuss the differences between the existing GAAP and the new CECL GAAP. Identify the effect of the CECL process on the balance sheet and income statement. Explain how to handle recoveries and write-offs related to CECL. Identify the need for pools of assets with similar risks and possible variables that might be used to construct pools. Cite characteristics of the information such as qualitative and quantitative that is used in estimating CECL. Explain the contractual term to be used and the approach used when reasonable and supportable forecast cannot be made across the entire contractual life. List the steps taken to estimate CECL. Complete a simple estimation of CECL for trade receivables using an aging (Matrix provision). Define a Purchased Credit Deteriorated (PCD) financial asset and how to account for a PCD. Discuss disclosure requirements of CECL. Understand the action of Congress to delay the implementation of CECL.

Preparation

None.

Notice

This is a FlexCast (no exam required) and may be viewed only Monday - Saturday, 5am - 5pm PT. You may take up to one year from the date of purchase to complete the course. Pause your FlexCast and resume at a convenient day during the hours above. Partial credit for 2+ credit courses: If you are unable to complete the course in one sitting, partial credit can be awarded (minimum of one credit). To earn the remaining credits, you must return later and start the course from the beginning. Use chat to ask questions of a subject matter expert during the program.