The time for proper accounting of credit impairment is running out. How prepared is your team? Do you even know what the biggest concern of the auditors will be? This was the call to action voiced by Tom Caragher, Senior Product Manager of Risk and Performance at Fiserv, a US provider of financial services technology on October 26, 2017.

He spoke about implementation of current expected credit losses (CECL) at a webinar sponsored by the Global Association of Risk Professionals. (Note that CECL is the impairment standard under Financial Accounting Standards Board (FASB).)

“When it comes to CECL, there are many myths to explode,” Caragher said, showing an artist’s conception of the North American mythical creature, Bigfoot, as he tackled the first of several myths: “the President is going to make it go away.” Not so, he said.

“FASB requires periodic estimates of the lifetime expected credit losses for all financial assets,” he said and emphasized the deadline is 2020/2021—“regardless of asset size.” (He provides a table of timelines on slide 8; you can see the video in the link below.)

Many risk managers think, “I don’t have to worry about it” so many firms have done nothing so far. Caragher said he has found only two firms that plan to jump into CECL early. “One is starting de novo—and does not want to have to needlessly go through transition.”

Other firms say they are not impacted by the new regulation because they’re not above $10 billion in assets. Caragher pointed out the $10 billion cut-off applies to the Dodd-Frank Act Stress Test (DFAST), not CECL. All financial institutions are affected, “even department stores, if they offer lines of credit.”

Another myth is that “CECL doesn’t apply to me: I don’t have losses.” He said that most firms do not truly have zero loss—and even so, that would in itself attract more regulator interest.

Capital implications

The impact of CECL could be material but understanding the actual impact beforehand is important. The original estimates predicted a 10 to 50 percent increase in the allowance for loan and lease losses (ALLL). There are a handful of firms who believe they’ll have a 500 percent increase in ALLL. The question asked is “how realistic is that belief?”


Rumors of the ALLL increase are like sea monsters in glacial lakes, such as the Loch Ness monster. “Create a plan for how to find out the reality about this myth,” he urged. Draft a cross-functional team to help collect information and identify data needs. The team should include: credit manager, chief financial officer, controller, accounting, IT, treasury, and persons from asset liability management and compliance.

“Get them all in a room, just like a group project at school,” he said. “The best prepared so far [for CECL] are those who’ve already built a team.”

Data, data, data

“Auditors say the biggest concern is finding sufficient historical data,” Caragher noted. Auditing firms expect that by Q3 2018, the questions will drill down into the quality and coverage of that data. Firms need to ask themselves, “What is the minimum amount of history I need?”

Myth: “I can get historical average loss rate for CECL with two months’ history.”

Another myth: “You have to have at least 20 years’ of history to start.”

The above two myths can be tested and debunked… so he challenged the audience with this myth: “My core has all my data and all the history I need.” He said it’s necessary to call and check that core functions are actually saving the history.


As a side note to the Cyclops picture, Caragher said that some experts think the ancient Greeks, on seeing the skull of an elephant, mistook the nasal hole for a central round eye socket. Cyclops provided the segue into internal data that must be saved as part of CECL. Caragher provides detailed lists for parameters needed; these can be seen in the video link below. (Slide 26-27)

Convo with auditors

When talking to auditors, Caragher emphasized the importance of knowing your firm’s data. Know the source of your historical data, and how much you have, and whether holes are present.

Getting good data will allow you to further segment portfolios and find where they losses are and help to meet the “reasonable and supportable” component of CECL.

He suggested involving the auditors in the conversation. Getting an idea of what they expect as well as interpretation changes can help smooth the transition.


As far as attaining CECL readiness, Caragher boiled it down to a three-step process: create a team, gather and normalize the data (“hardest”), and integrate normalized data into PCLM (“easiest”).

A variety of methods to estimate CECL exist, such as discounted cash flow (DCF)loss rate; vintage analysis; probability of default (PD) and weighted average remaining maturity (WARM). The WARM method could increase the loss balance simply by the way it’s set up.

The DCF method is the most difficult, and only two percent of firms polled are choosing that method.

For FASB firms, two messages came through loud and clear from the webinar: begin planning for CECL immediately; and talk to your auditor as you make your way forward.ª


Click here to view the GARP Webcast on “CECL: Truths, Myths and Plotting a Clear Path”