What Are the CECL Disclosure Requirements?

The Current Expected Credit Losses (CECL) accounting standard, introduced by the Financial Accounting Standards Board (FASB) in ASU 2016-13, changed how entities account for credit losses. It replaced the incurred loss model with a forward-looking approach that requires estimating expected losses over the entire life of a financial instrument. This shift necessitates a more proactive process for recognizing credit impairments.

The disclosure requirements under CECL, codified in ASC Topic 326, are designed to provide financial statement users with a clear understanding of the credit risk in an entity’s portfolio. These disclosures aim to illuminate how management monitors credit quality and the methodology used to develop its estimate of expected credit losses. The rules require a mix of quantitative and qualitative information, offering a view of how estimates have changed from one period to the next.

Information Required for CECL Disclosures

To comply with CECL’s disclosure requirements, an entity must provide a detailed description of the accounting policies and methodologies used to estimate the allowance for credit losses. This includes explaining the factors that influenced management’s judgment, such as historical loss experience, current economic conditions, and the use of reasonable and supportable forecasts. Any changes to these estimation techniques or their rationale must be explained.

The process involves collecting specific quantitative data. Key figures include the beginning and ending balances of the allowance for credit losses for the reporting period. Entities must also track the gross amount of financial assets written off as uncollectible and the amounts recovered on assets that were previously charged off. The provision for credit losses, which is the expense recognized for the period, is another required data point.

For any financial assets acquired with deteriorated credit quality since origination, known as purchased credit deteriorated (PCD) assets, specific information must be compiled. This includes the initial allowance for credit losses established at the acquisition date, which is added to the purchase price to determine the asset’s amortized cost basis.

An entity must also identify and track its chosen credit quality indicators. These are metrics used to monitor the risk characteristics of financial asset portfolios, such as risk ratings, delinquency status, or credit scores. The selection of these indicators should be systematic and applied consistently to pools of financial assets with similar risk characteristics.

Structuring the Allowance for Credit Losses Disclosure

The main CECL disclosure is the roll-forward of the allowance for credit losses (ACL), which details the changes in the allowance from the beginning to the end of the reporting period. This disclosure is presented in a tabular format and must be disaggregated by portfolio segment for financing receivables and by major security type for debt securities. This disaggregation allows users to understand the specific areas driving changes in credit risk.

The roll-forward table begins with the opening balance of the ACL. It then details key activities during the period, including the current period’s provision for expected credit losses, gross charge-offs for assets deemed uncollectible, and recoveries on amounts previously charged off. The table concludes with the ending balance of the ACL.

Accompanying the quantitative roll-forward table are narrative disclosures. These narratives provide context for the numbers, explaining the reasons for changes in the allowance balance. For instance, an entity must discuss how changes in factors like portfolio composition, underwriting standards, or economic forecasts influenced the period’s provision for credit losses.

Disclosing Credit Quality Information

Disclosing credit quality information involves presenting the amortized cost basis of financial assets, categorized by the credit quality indicators an entity uses to monitor its portfolios. This disclosure provides a snapshot of the credit risk profile of the assets at the reporting date. The presentation is in a tabular format, showing the amortized cost of assets within each credit quality category, such as by internal risk rating.

A component of this disclosure is the aging analysis of past-due financial assets. This schedule details the amortized cost of assets based on their delinquency status, broken down into categories like 30-59 days, 60-89 days, and 90 or more days past due. The aging schedule helps users assess the level of delinquency within the portfolio.

For assets on nonaccrual status, specific disclosures are required. An entity must disclose the amortized cost basis of these assets and any policies related to placing assets on nonaccrual, resuming interest accrual, and recording payments received.

The disclosures must also include the date when the credit quality indicators were last updated for each category. This detail is important for users to understand the timeliness of the credit quality assessment.

Public Business Entity Vintage Disclosures

A specific requirement for Public Business Entities (PBEs) is the vintage disclosure. This involves disaggregating the amortized cost basis of financing receivables by their year of origination. The purpose of vintage disclosures is to allow financial statement users to observe the credit quality trends of different loan cohorts over time.

The vintage disclosure table presents the amortized cost of financing receivables for each origination year presented separately. For each vintage, the entity must disclose information based on its chosen credit quality indicators. This allows for an analysis of how the credit quality of loans originated in one year has evolved compared to those from another.

Under Accounting Standards Update (ASU) 2022-02, PBEs are also required to disclose current-period gross write-offs by origination year. This adds another layer of detail, showing which loan vintages are contributing most to current period losses.

There is an exception for certain short-term receivables; vintage disclosures are not required for items like trade receivables that are due in one year or less. For longer-term financing receivables, this disclosure provides a tool for analyzing underwriting quality and portfolio performance.

Disclosures for Specialized Financial Assets

CECL includes specific disclosure rules for certain types of financial assets that have unique characteristics. These rules ensure that the particular risks associated with these assets are made transparent to financial statement users.

Purchased Financial Assets with Credit Deterioration (PCD)

For purchased financial assets that have experienced a more-than-insignificant credit deterioration since origination (PCD assets), entities must provide distinct disclosures. This includes a roll-forward of the allowance for credit losses specifically for the PCD portfolio. Upon adoption of CECL, an entity must also disclose the adjustments made to the carrying amounts of these assets, as the initial allowance is added to the asset’s basis rather than being recorded as an expense.

Collateral-Dependent Financial Assets

When an entity determines that repayment of a financial asset is expected to be provided substantially through the operation or sale of the underlying collateral, it is considered collateral-dependent. For these assets, the entity must disclose the amortized cost basis. This disclosure highlights the portion of the portfolio for which the primary source of recovery is not the borrower’s cash flows but the value of pledged assets.

Off-Balance-Sheet Credit Exposures

CECL’s scope extends to certain off-balance-sheet credit exposures, such as unfunded loan commitments, standby letters of credit, and financial guarantees. Entities are required to disclose the methodology used to estimate the expected credit losses on these exposures and the corresponding liability recorded. The disclosure should describe the factors influencing this judgment, including historical funding experience and current economic forecasts, to provide a complete picture of the entity’s credit risk.