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PwC CECL Overview Placemat_Final
1.
Proposed accounting changes
– Financial instruments impairment Significant changes In the aftermath of the global financial crisis, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) undertook efforts to amend existing accounting guidance for impairment of financial assets. The FASB’s “Current Expected Credit Loss” (CECL) model and the IASB’s impairment model (IFRS 9) are based on expected losses, with important and significant differences. Organizational impact The proposal impacts all in scope financial assets*. The changes to the accounting and estimation of credit losses impacts numerous functional areas. • Requires an entity to recognize an allowance for all expected credit losses over the life of the asset on “day one” (no “incurred loss” trigger). • Estimate of credit losses should consider estimated prepayments but not modifications or extensions unless in conjunction with a troubled debt restructuring. • Entities estimate expected credit losses based on 1) historical information, 2) current economic conditions, and 3) reasonable and supportable forecasts • Purchase price for assets purchased with more than insignificant credit deterioration grossed up for the CECL estimate on day one • Separate impairment approach for AFS debt securities. HTM securities subject to CECL Overview of Proposed FASB Model (CECL) • Recognize losses from estimated defaults over the next twelve months unless there has been significant deterioration in credit quality since origination, in which case lifetime expected credit losses are recognized. • Explicit requirement to reflect the time value of money (i.e., PV of expected cash flows) • Single impairment model for loans and securities Differences in Final IASB Model (IFRS 9) Your organization will need to assess and manage the cross functional impact of the standard. The effort should focus on the design, development, and documentation of the process and policy enhancements. The team should test and validate the changes.Regulatory reporting Tax Information technology Risk management Financial reporting Internal audit * In-scope financial assets will include, among other asset types, loans and securities not carried on the balance sheet as FV-NI. Processes & Controls: Reliance on new processes, data and methodologies impacting control design and operation Data and Infrastructure: Increased data requirements and infrastructure to support credit modelling and disclosures Methodology & Modeling: Modelling of lifetime losses reflective of management forecasts Impacts loans, securities, and receivables © 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
2.
Proposed accounting changes
– Financial instruments impairment © 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. Key Provisions CreditLossModelling • Moving from an “incurred loss” estimate to a lifetime expected credit loss estimate • Modeling techniques • Likely to increase the allowance requirement although the impact will vary depending on the life of the asset, existing loss emergence period estimates, and the timing of estimated defaults • Existing loss forecasting (including stress testing) models can be used, but will likely require some adaptation • A range of modeling techniques are being considered – the final standard may increase the modeling complexity involved • Incorporating reasonable and supportable forecasts • Use of different techniques for the period beyond the point where reasonable and supportable forecasts are possible • Modelling that incorporates forward-looking projections linked to specific macroeconomic drivers is complex requiring longer history of relatively stable borrower/loan characteristic data and sufficiently robust default/loss observations • May require greater reliance on vendor models and/or data, as many companies will not have sufficient internal data to develop macroeconomic models, particularly with any level of granularity • Requires consideration of what constitutes a “reasonable and supportable forecast” • May involve different techniques to forecast beyond the near-term such as mean reversion of macroeconomic inputs to a loss forecast model, a long-term average loss rate, etc. AccountingandReporting • Changes to the accounting model for purchased credit impaired assets and certain beneficial interests • Requires business rule definition of what constitutes “more than insignificant deterioration” • Requires sourcing origination data for comparison to current credit characteristics • Operational difference between acquired assets with and without deterioration (CECL day 1 through a balance sheet gross up versus CECL day 1 through earnings, respectively) • Updates to the “other-than- temporary” (OTTI) impairment model for securities • Available-for-Sale Securities subject to a “modified” OTTI approach; credit recoveries are recorded through a reserve; elimination of OTTI “filters” for the extent and duration of loss • Held to maturity securities will be subject to CECL and will not follow the impairment model used for AFS debt securities • Enhanced disclosure requirements • Expectation of significantly enhanced disclosure requirements to facilitate comparison by investors of portfolio credit quality indicators and management forecasts underlying loss estimates • Impact of CECL and IFRS 9 differences • IFRS 9 operationally and methodologically more complex due to requirements to monitor a expected lifetime credit loss “trigger”; and the explicit requirement for consideration of time value of money • Likely to result in significantly different estimates for similar portfolios, increasing the complexity of controls and disclosures for joint filers • Who in my organization should be engaged in planning and assessing the impact of the proposed changes? • How can we leverage existing processes and methodologies developed for regulatory reporting purposes (i.e. stress testing)? • Do we understand the diversity in our portfolio and how our various asset classes will be impacted? • Do we understand the current state of data infrastructure and technology supporting the ALLL and OTTI estimation process? • What is the impact on our quarterly closing cycle if we change OTTI filters? • What data elements are required for new disclosures and are those data elements readily accessible to our organization? • What are the appropriate internal parties responsible for testing and validating models? • Do we have adequate resources and expertise to design, develop, test, and validate credit models? • Should securities be modeled at a pool level or individual security level? Testing and Validation Support • What data requirements and enhanced qualitative information should be considered for disclosures to key stakeholders regarding the impact of the proposed changes? • What systems and vendors do we rely upon for interest income recognition processes? • Are our existing systems and vendors capable of handling impairment calculations under the new model? • What would be the best method for developing and integrating the new required disclosures into the existing financial reporting framework? Readiness Assessments & Planning Design and Development Key Considerations Key Questions that Clients Should Consider Securities Specialists David Lukach Partner (646) 471 -3150 david.m.lukach@pwc.com Frank Serravalli Partner (646) 742-7510 frank.serrvalli@pwc.com Robert Kianos Senior Manager (973) 236-7854 robert.w.kianos@pwc.com Chris Merchant Partner (202) 346-5050 chris.merchant@pwc.com Jessica Pufahl Director (646) 574-2159 jessica.m.pufahl@pwc.com Matt Keller Manager (646) 471-6742 matthew.h.keller@pwc.com Please Contact Loan/ALLL Specialists: Mike Shearer Managing Director (646) 471-5035 michael.a.shearer@pwc.com Ben Havird Manager (704) 344-4385 benjamin.havird@pwc.com
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