PORTFOLIOVIEW

The 2016 Financial Accounting Standards Board (FASB) guidance on the Current Expected Credit Loss (CECL) approach is a radical change in how the financial industry is required to account for Allowance for Loan and Lease Losses (ALLL). Starting in 2020, CECL requires institutions to provision for losses over the entire life of each credit exposure at the incidence of booking, instead of the current ALLL approach when the losses are incurred... Due to the wide latitude allowed in achieving this objective, the general responses by the industry, accounting firms and advisory firms have been to repurpose existing methods in wide use and layer management's judgment over these methods to estimate the CECL lifetime losses using "reasonable and supportable" forecasts... The incurred loss approach depends on charge-offs that are a lagged recognition of losses of impaired loans, but do not capture their quality deterioration that occurred well before the incidence of default.