Updates to the Current Expected Credit Loss Standard

In 2016, the Financial Accounting Standards Board (FASB) issued an accounting standard for recognizing impairment losses on financial assets, known as Current Expected Credit Loss (CECL). While many publicly traded companies and banks have long dealt with CECL accounting, privately held firms and nonprofit organizations are now also subject to these rules, based on the most recent updates issued by the FASB.

Here’s what your organization needs to know about the updates:

Impairment losses on financial assets issued by the FASB have long been identified as a major weakness in current Generally Accepted Accounting Principles (GAAP) in the U.S., with FASB issuing the original CECL standard in 2016 to address concerns about delays in recognizing deteriorated asset values.

In 2022, the FASB released a new update (Topic 326) to the standard that will impact nonprofit organizations preparing reports for fiscal periods ending in 2023. The update aims to eliminate the barrier to timely recognition of credit losses by using an expected loss model instead of an incurred loss model.

Previously, organizations would measure and record allowances when a loss would likely be incurred. With this update, organizations will do so upon the initial recognition of the financial instrument. This means that your organization is required to predict possible losses from day one, using historical data, future events and current conditions to make the assessment.

As your organization navigates this updated process, here are a few tips from SST’s accounting experts:

• Determine whether and when these new rules apply to your organization.
• Pick a methodology for determining CECL allowances.
• Prepare for more disclosures.
• Stay updated on changes to CECL standards.

For help with CECL reporting, consult with the accounting experts at SST.