Allowance for Credit Losses and Current Expected Credit Loss Methodology
This section of the ACL chapter covers:
Current Expected Credit Loss Implementation Date
The CECL accounting standard is effective for credit unions for fiscal years beginning after December 15, 2022, and requires a “modified retrospective” implementation, meaning CECL must be adopted as of the first date of the financial statement reporting year.
While FCUA § 1760, Members’ meetings, requires all FCUs to have a fiscal year ending on December 31, FASB enables an audit to be conducted on a different financial reporting year-end. This distinction is important because the CECL accounting standard requires adoption at the start of the financial reporting year. For CPAs to issue an unmodified (or clean) opinion, they will test the adoption as of the first day of the financial reporting year, which may not be January 1, 2023.
While many credit unions will adopt CECL as of January 1, 2023, others will implement CECL on the date that their non-calendar financial statement year begins. In practice, a credit union with a financial statement reporting year ending September 30, 2023, will implement CECL on October 1, 2023.
Supervisory committee audits normally do not establish a financial statement reporting year because the audit does not involve preparing a full set of financial statements (balance sheet, income statement, statement of cash flows, notes, and report). Many credit unions keep their books and records on a calendar year but choose a reporting date other than December 31 for their supervisory committee audit based upon the availability of their accountant. In many cases, this report is an “as of” date report and is not a full set of financial statements for a twelve-month period. In practice, the application of FASB standards requires a full set of financial statements to establish a precedent for a financial statement reporting year that is other than December 31. Without it, the credit union will retain its fiscal year ending December 31.
Another distinction is that AUP engagements by licensed accountants (Certified Public Accountants), to meet the regulatory requirements for a supervisory committee audit, are not considered “audits” by those licensed accountants. This is because accountants performing AUP engagements do not render opinions. Though the work performed meets regulatory requirements, the work is not as thorough as an audit conducted under GAAS where licensed accountants render an opinion.
Thus, determining the financial statement reporting year is important in order to determine whether CECL was implemented on the appropriate date, which is the first day of the financial statement reporting year.
To determine the financial statement reporting year, review the prior year’s independent financial audit report or supervisory committee audit report. If the report contains the balance sheet (statement of financial condition), the income statement (statement of income and expense or statement of operations and comprehensive income), the statement of cash flows, and notes for a twelve-month period, then that twelve-month period is the credit union’s financial statement reporting year. While a full set of financial statements prepared by licensed accountants is the best evidence, preparation by licensed accountants is not required.
Depending upon the credit union’s financial statement reporting year and the timing of the examination, CECL may not be implemented when the 2023 examination is conducted. In this case, examiners will assess the ALLL and the PLLL following guidance from NCUA Letter to Credit Unions 22-CU-02, NCUA's 2022 Supervisory Priorities.
With the implementation of the CECL accounting standard ASC 326, Financial Instruments—Credit Losses, the ACL for loans and leases account (Call Report account AS0048) replaces the ALLL account (Call Report account 719). While the Call Report establishes new accounts, a credit union is not required to change or add accounts to its chart of accounts. A credit union may continue to use its ALLL and PLLL accounts and then cross walked them to the new Call Report accounts.
Exception for Credit Unions under $10 Million in Assets
Credit unions with assets greater than $10 million must fund the ACLLL account in accordance with GAAP. FICUs with less than $10 million in assets are not required to determine their ACLLL account funding under current GAAP. Instead, these credit unions can use any reasonable reserve methodology (incurred loss) provided it adequately covers known and probable loan losses; the incurred loss methodology is the former GAAP under ASC 450-20, Loss Contingencies, and ASC 310-10-35, Subsequent Measurement. Refer to the Subsequent Measurement topic for guidance on measuring loan impairment.
A federally insured state-chartered credit union may be required by its state credit union supervisor to follow GAAP regardless of asset size.
Transition to the Current Expected Credit Loss Methodology
NCUA regulation § 702.703, CECL transition provisions, provides an add-back to the Net Worth Ratio for Prompt Corrective Action for the effect of adopting CECL. The rule applies to all credit unions with assets of $10 million or more. CECL early adopters are ineligible. Also, CECL must cause undivided earnings (retained earnings) to decrease in order for credit unions to get the benefit of this three-year phase in. Upon the first day of adopting CECL, the expected increase in the ACL, related to loans and leases, investments, and unfunded commitments, is debited to undivided earnings. Subsequent changes to ACL balances are recorded to the CLE. For a credit union that is eligible for the three-year phase in, no general ledger adjustments are required; the phase in is calculated through the Call Report process, automatically updating the Net Worth Ratio for Prompt Corrective Action.
Full and Fair Disclosure
An adequately funded ACLLL account provides for full and fair disclosure of a credit union’s financial position and enables a credit union’s disclosure of accurate financial statements. Failure to fund the ACLLL account can diminish the safety and soundness of a credit union by distorting its true financial condition. In extreme cases, this distortion can hide inadequate levels of net worth from regulators.
The ACLLL account must be funded by debiting the CLE on loans and leases account (Call Report account IS0011), which impacts a credit union’s earnings and net worth. Maintaining an ACLLL account does not change capital adequacy requirements. For more information, please see NCUA regulation § 702.101, Capital measures, capital adequacy, effective date of classification, and notice to NCUA.
Financial institutions often refer to the CLE account as the PCL account.
Accounting Entries
The transactions affecting the ACL for loans and leases account are:
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Charge-offs—When a loan balance is charged off, the ACLLL account is debited and the loans account is credited.
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Recoveries—When a partial or full recovery is received, cash is debited and the ACLLL account is credited.
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Debits and credits to CLE—To increase the balance in the ACLLL account, the CLE account is debited and the ACLLL account is credited. If the ACLLL account is overfunded, a credit union may debit this allowance account and credit the CLE account.
The tables below illustrate the transactions described above.
| Account | Debit | Credit |
|---|---|---|
| Charge-offs | ||
| ACLLL | $15,000 | |
| Loans and leases | $15,000 | |
| Recoveries | ||
| Cash | $10,000 | |
| ACLLL | $10,000 | |
| Increase in ACLLL | ||
| CLE on loans and leases | $45,000 | |
| ACLLL | $45,000 | |
| Decrease in ACLLL | ||
| ACLLL | $20,000 | |
| CLE on loans and leases | $20,000 | |
Table 1 – Journal Entries shows the debit and credit of each transaction.
In Table 2 – “T” Accounts, these accounting entries are recorded in the general ledger accounts of ACLLL (Balance Sheet) and CLE on Loans and Leases (Income Statement) to demonstrate the effects of the transactions on the respective general ledger account balances.
| ACLLL (in Balance Sheet) | CLE on Loans and Leases (in Income Statement | |||
|---|---|---|---|---|
| Debit | Credit | Debit | Credit | |
|
Beginning Balance
|
$500,000 | |||
| a. Charge-offs | $15,000 | |||
| b. Recoveries | $10,000 | |||
| c. Increase in allowance | $45,000 | $45,000 | ||
| d. Decrease in allowance | $20,000 | $20,000 | ||
| Ending Balance | $520,000 | $25,000 | ||
Table 2 – “T” Accounts
All FICUs are required to analyze the adequacy of the ACLLL account to comply with NCUA regulation § 702.113, Full and fair disclosure of financial condition, and must fund their allowance account. Each credit union may establish a systematic, consistently applied methodology, appropriate for its unique circumstances. In other words, the CECL methodology is tailored to the size and complexity of the credit union and its loan portfolio.
For more information, see ASC 326-20, Financial Instruments—Credit Losses.
Reporting ACL on the Call Report
Within the Call Report, credit losses are reported on the balance sheet in three accounts:
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ACLLL (AS0048)
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ACL on investment securities (AS0041)
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ACL on off-balance sheet credit exposures (LI0003)
The guidance on ACLLL (AS0048) is separate and distinct from the other two ACLLL accounts. For thoroughness, the Methodology section of this chapter explains credit losses on all applicable financial instruments.
Last updated on June 05, 2023
