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In February, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration (NCUA) and the Office of the Comptroller of the Currency (the agencies) released a final interagency policy statement on the allowance for credit losses (ACL) related to the implementation of the CECL methodology.

The statement describes the measurement of expected credit losses under CECL (Accounting Standards Codification (ASC) 326-20) and the accounting for impairment on available-for-sale (AFS) debt securities in accordance with ASC 326-30; the design, documentation and validation of expected credit loss estimation processes, including the internal controls over these processes; the maintenance of appropriate ACLs; the responsibilities of boards of directors and management; and examiner reviews of ACLs.

This guidance is effective once an entity adopts ASC 326 and supersedes any previous policy statements on loan loss reserves.

The policy statement is generally consistent with ASC 326 and retains all the flexibility and judgmental nature of the guidance.


  • Examiners should generally accept an institution’s ACL estimates and not seek adjustments to ACL when management has provided adequate support for the loss estimation process employed and the ACL balances and assumptions are in accordance with generally accepted accounting principles and regulatory reporting requirements.
  • No specific loss estimation method is endorsed, and no additional details are provided about specific implementation choices, nor are templates supplied for certain methods.
  • Two lists of qualitative factor adjustments are included that may be considered for held-to-maturity (HTM) and AFS debt securities. Expected credit losses for AFS debt securities are measured using a discounted cash flow (DCF) method. While the qualitative factors included may affect the institution’s cash flow expectations used in the DCF calculation, the agencies have no expectation for institutions to develop and apply a separate qualitative analysis outside of the DCF model. Qualitative factor adjustments should be considered and applied, as needed, to HTM debt securities.
  • The noncredit discount on purchased credit-deteriorated (PCD) assets recorded at acquisition should be accreted into interest income over the PCD’s remaining life on a level-yield basis.
  • ASC 326 does not provide a prescriptive definition of “more-than-insignificant” credit deterioration in determining PCD status. The acquiring institution’s management should establish and document a reasonable process to consistently determine what constitutes a more-than-insignificant deterioration in credit quality.
  • Accounting policy elections related to accrued interest receivable may be made by class of financing receivable or major security type (which aligns with ASC 326).
  • For regulatory reporting purposes, the ACL for a collateral-dependent loan is measured using the fair value of collateral, regardless of whether foreclosure is probable.
  • A list of factors is included to evaluate whether expectations of zero credit loss are appropriate.
  • The policy statement includes a “suggestion” to compare actual credit losses to estimated credit losses. The comparison can assist in evaluating the appropriateness of the ACLs each quarter and by informing management about the reasonableness of judgments applicable to future periods. This comparison is only one point of information available. Other methods, such as ratio analysis, also may provide useful information in analyzing the ACLs. Management also may develop other methods, metrics or tools not described in the policy statement to assist in the evaluation and analysis of the institution’s ACLs.
  • External auditor independence may be impaired if the external auditor performs validation activities for management when the external auditor also conducts the institution’s independent financial statement audit. A party independent of the ACL processes should validate the ACLs and may be from an internal audit function, a risk management unit of the institution or a contracted third party.

Other Potential Updates

Several comments received during the proposal process were outside the agencies’ scope. The Federal Financial Institutions Examination Council will consider whether clarifications or amendments to the regulatory reporting instructions are necessary for the following issues:

  • Updates to the determination of nonaccrual status. Institutions should continue to refer to existing regulatory reporting instructions for information on reporting nonaccrual PCD assets.
  • Updates to the instructions for the Consolidated Reports of Condition and Income. The NCUA Call Report Form 5300 currently requires that the expense needed to adjust the liability for expected credit losses for off-balance-sheet credit exposures should be reported as a separate provision expense in the income statement while ASC 326 requires the amount needed to adjust the liability for expected credit losses on off-balance-sheet credit exposures to be reported as part of credit loss expense.

Although the final policy statement does not address capital requirements, the NCUA is considering a rulemaking that will address the potential impact to regulatory net worth.

Visit BKD’s CECL Resource Center for various BKD Thoughtware® articles, webinars and other resources to aid your implementation effort. Contact your BKD Trusted Advisor™ for further assistance.

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