RC: Could you provide an overview of what the current expected credit losses (CECL) accounting standards means for financial institutions (FIs), regulators and supervisory authorities? What are the key drivers behind the introduction of the CECL standards, which come into force on 15 December 2019?

Kimner: CECL, formally known as ASU 2016-13, is a new US GAAP standard for credit loss accounting. It was published by the Financial Accounting Standards Board (FASB) in June 2016 and replaces today’s ‘incurred loss’ approach, under FAS 5 and FAS 114, with a lifetime expected loss approach. One of the key drivers for this new accounting standard was the financial crisis of 2008 and the need to better estimate potential credit losses for assets held in FIs’ portfolios. The existing incurred loss approach recognises losses only when they have reached a probable threshold of loss, which, many analysts suggest, had a dramatic impact during the financial crisis, as potential future losses were recognised and provisioned for late in the loss cycle. This resulted in the underfunding of loss reserves. The FASB, working with the International Accounting Standards Board, recognised a need to change the incurred loss accounting standard for estimating future losses, and the two organisations jointly embarked on establishing a common standard. Subsequently, the two standards boards diverged in their approaches and as a result, the CECL standard for the US is different from the IFRS 9 standard.

Apr-Jun 2017 Issue