CECL Standard Receives Practice Aid Issued by the AICPA

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Ryan P. Pospeck, CPA

On September 9, 2019, the AICPA issued its non-authoritative Practice Aid, Allowance For Credit Losses – Audit Considerations, to be used by Auditors and their Community Banking clients in their overall implementation of CECL.

Overall the guide works to summarize the significant provisions of the accounting standards and addresses key considerations for the disclosure requirements and the significance of internal controls. The guide additionally identifies Management and the Board’s overall responsibilities related to the implementation of CECL.

The guide also posts a series of standard questions to consider as part of the implementation, and some factors and loan characteristics that Bank Management should include in their analysis. The guide still allows for multiple models to determine the allowance for loan loss estimate, but states that Bankers should take into consideration the following objectives:

  1. The entity’s model validation process should include
    1. Evaluation of the conceptual soundness and mathematical integrity of the methodology, including the appropriateness of parameters and sensitivities.
    2. Ongoing monitoring, including: 
      1. validation process prior to usage,
      2. period reviews to ensure that it continues to be suitable for its intended use, and,
      3. consistency and completeness of the model’s inputs with objectives of the financial reporting framework and whether the appropriate inputs are available for use in the model. Outcome analysis, a comparison of model outputs to corresponding actual outcomes. 
  2. Appropriate change control policies, procedures, and access security controls are in place. 
  3. The model is appropriately changed or adjusted on a timely basis, when necessary. 
  4. The model is periodically calibrated, reviewed, and tested for validity by a separate and objective function.
  5.  The model maximizes the use of relevant objective inputs and minimizes the use of subjective inputs when not anchored to actual evidence.
  6.  The model, including the model’s intended applications and limitations, and its key parameters, required data, results of any validation analysis performed, and any adjustments made to the output of the model are adequately documented.

While the guidance acknowledges that practices will evolve with the expectations from regulators and experts over time, for any additional questions or guidance related to CECL, feel free to reach out to Ryan Pospeck at pospeckr@fbl-cpa.com.