Basics of the Current Expected Credit Loss (CECL) Model

ASU No. 2016-13, also known as the Current Expected Credit Loss (CECL) model, introduces significant changes in the accounting for credit losses on financial assets. Effective for years beginning after Dec. 15, 2022, the new ASU requires entities to estimate all expected credit losses on financial assets measured at amortized cost basis, deducting this from the amortized cost basis to present a net amount expected to be collected. The new method considers historical experience, current conditions, and reasonable and supportable forecasts, unlike previous guidance which focused solely on what was “probable” to be collected.

Moreover, the new guidance expands disclosure requirements and amends accounting practices for credit losses on available-for-sale debt securities. Credit losses on these securities are now recorded through the allowance for credit losses, limited to the amount by which the fair value is below the amortized cost. Disclosure requirements now include qualitative and quantitative information about the allowance for credit losses, a roll-forward of the allowance, and descriptions of credit quality. The allowance for expected credit losses should now be presented on the balance sheet. These changes aim to provide a more forward-looking approach to credit loss estimation and enhance transparency in financial reporting.

For specific details, view our Basics of the Current Expected Credit Loss (CECL) Model handout. Contact a KSM advisor with more questions or complete this form.

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