Accounting Standard Updates
12 Days of SSAP: CECL Considerations Recap
Hot Take:
JLK Rosenberger is carrying on our holiday tradition of taking a new perspective on a holiday classic – the Twelve Days of Christmas. Rather than filling your head with turtle doves and gold rings, we are focusing on the latest changes to SSAP and how they will impact your insurance entity in 2024 and beyond.
The 2023 effective date for non-public companies of what is termed “the CECL standard” (Financial Instruments – Credit Losses) took years to come to final fruition from its original 2016 issue date. The CECL promulgation was then rejected by statutory accounting (SAP) since SAP already maintained long-established methods of impairment assessment and recognition. This Day 7 takes us through a quick reminder of what to consider when reporting on the GAAP side for the CECL standard.
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Even though the NAIC rejected ASU 2016-13 – Financial Instruments – Credit Losses and related subsequent ASUs for statutory accounting, navigating GAAP application might still be challenging. Here is a quick recap of the main provisions of the update for those who are subject to GAAP reporting and have yet to apply it.
The key takeaway of the standard is the shift from the incurred loss model (under legacy GAAP) to the current expected credit loss model (CECL). While the incurred loss model recognizes credit losses only when it is probable that a loss has occurred, the CECL model requires entities to estimate expected credit losses over the entire life of a financial instrument, even before any loss event takes place.
Similar to the legacy GAAP incurred loss model, entities must continue using historical data and factoring in current economic conditions when estimating credit losses. However, the CECL model places greater emphasis on incorporating forward-looking information and mandates the use of reasonable and supportable forecasts in the estimation of credit losses.
The guidance offers flexibility in selecting estimation methods, provided they align with the entity’s historical experience and incorporate an assessment of future economic conditions.
CECL applies to all financial instruments measured at amortized costs. In addition, ASU 2016-13 introduced the revised impairment model for available-for-sale debt securities. Below are common accounts impacted by ASU 2016-13:
**Entities have the option to make an accounting policy election to exclude accrued interest receivable from the measurement of the allowance for credit losses. This is acceptable if it is separately presented on the balance sheet and any uncollectible balances are written off promptly.
***Available-for-sale debt securities are not subject to CECL but rather must be evaluated using the revised impairment model.
As with every significant update, the standard introduces new disclosure requirements to improve transparency and provide stakeholders with more meaningful information.
Deep Dive – Learn more about what’s brewing at SAPWG and about the topics related to the implementation of ASU 2016-13:
