CECL Preparation: Documenting CECL

The CECL Standard requires more than just another update in the calculation of a financial institution’s (FI’s) allowance for credit losses; the new standard also pushes institutions to be more involved in the entire allowance process, especially on the management/executive level. From explanations, justifications and rationales to policies and procedures, the standard requires them all. The FI needs to discuss them, understand them, and document them.

The first point is to discuss all decisions that must be made regarding the CECL process. This includes everything from the definition of default to the justification of which methodology to use for which segment of the data. Although these discussions may be onerous, the CECL standard requires full understanding and completeness of all decisions. Once there is understanding, all decisions must be documented for regulation purposes:

CECL Topic 326-20-50-10: An entity shall provide information that enables a financial statement user to do the following:

  1. Understand management’s method for developing its allowance for credit losses.
  2. Understand the information that management used in developing its current estimate of expected credit losses.
  3. Understand the circumstances that caused changes to the allowance for credit losses, thereby affecting the related credit loss expense (or reversal) reported for the period.

CECL Topic 326-20-50-11: To meet the objectives in paragraph 326-20-50-10, an entity shall disclose all of the following by portfolio segment and major security type:

  1. A description of how expected loss estimates are developed
  2. A description of the entity’s accounting policies and methodology to estimate the allowance for credit losses, as well as discussion of the factors that influenced management’s current estimate of expected credit losses, including:
    • Past events
    • Current conditions
    • Reasonable and supportable forecasts about the future
  3. A discussion of risk characteristics relevant to each portfolio segment
  4. Etc.

Although these may seem like surprising jumps in requirements for CECL, these are simply more defined requirements than under existing ALLL guidance. Note that some of the general requirements under the existing guidance will remain relevant under CECL, such as:

  • “the need for institutions to appropriately support and document their allowance estimates”
  • the “…responsibility for developing, maintaining, and documenting a comprehensive, systematic, and consistently applied process for determining the amounts of the ACL and the provision for credit losses.”
  • the requirement “…that allowances be well documented, with clear explanations of the supporting analyses and rationale.”

As you can see, documentation is an important component of the CECL standard. While the documentation will, at least initially, require more effort to produce, it will also give the FI opportunity to fully understand the inner workings of their CECL process.

Lastly, advice to avoid some headache—take the time to document throughout the entire process of CECL. As my math professor always said, “the due date is not the do date.”


  1. FASB Accounting Standards Update, No. 2016-13, Financial Instruments – Credit Losses (Topic 326).
  2. Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses. FIL-20-2019. April 3, 2019.

Samantha Zerger, business analytics consultant with FRG, is skilled in technical writing. Since graduating from the North Carolina State University’s Financial Mathematics Master’s program in 2017 and joining FRG, she has taken on leadership roles in developing project documentation as well as improving internal documentation processes.

Five Easy Steps Toward Implementing the Fiduciary Rule

The Department of Labor’s fiduciary rule became effective in June with an implementation date that is now less than four months away. It is, of course, uncertain that the regulation will stay in place under the new administration. President-elect Trump has named Andrew Puzder as Labor Secretary, and he may wish to buy time to repeal the rule by deferring the implementation date. According to Barron’s, however, “delaying or repealing the rule could easily take a year or more.”[i]

Major financial services institutions have already made key decisions and launched the related systems, training, and client communications projects to meet the current April 10, 2017 deadline. Smaller banks may be less prepared.

We’re not qualified to offer legal or regulatory advice; if your company is affected by the new rule, we urge you to call in a compliance consultant. Nonetheless, as financial and operational risk managers, we’d like to offer a few practical suggestions to help you get started.

All firms that offer investment advice to retirement savers have to meet certain fundamental requirements by the implementation date:

  • Comply with the Impartial Conduct Standards set forth in the rule (act in the investor’s best interest, give no misleading information, and charge no more than reasonable compensation).
  • Notify investors that your institution and its advisors are acting as fiduciaries, and describe the firm’s conflicts of interest.
  • Appoint a person responsible for addressing conflicts of interest and ensuring compliance with the Impartial Conduct Standards.

The first step is to determine whether to continue offering commission-based products and services (Wells Fargo’s plan) or to convert to a fee-only basis (Merrill Lynch’s approach). This is a board-level decision, and the answer will depend upon such factors as the competitive environment and the bank’s ability to manage cultural as well technological and process changes under deadline pressure.

The second step is to appoint the person who will have ongoing responsibility for resolving conflicts of interest and monitoring advisors’ investment recommendations. In addition to technical competence, desirable qualities include strong communications and negotiating skills.

The third step is to assemble the project team that will analyze the business requirements and make any necessary changes to the firm’s document management, accounting, and client reporting systems.

A sound fourth step, in our view, is to confirm that your firm has current know-your-customer and suitability documentation for every client relationship. You can’t defend any investment recommendations without this information. Now is a good time to make sure it’s complete and up-to-date.

The fifth step can be initiated in parallel with the fourth one. It is to develop advisor training materials in two areas: how to explain “fiduciary status” to their clients, and what the Impartial Conduct Standards require of them.

If it remains in force, the fiduciary rule will massively change the financial services industry over the next few years. Certainly, it will squeeze the profitability of retail investment advisory services, and it may also foster the spread of robo-advising. In the short term, however, banks primarily face regulatory and operational risk, and hoping for a timely reprieve is not a prudent compliance strategy. These first five steps mitigate the risk of getting caught short as the implementation date approaches.

Philip Lawton, CFA, CIPM, is a guest blogger for Financial Risk Group.

[i] “Trump’s DOL Pick: Fiduciary Friend or Foe?” Barron’s, November 9, 2016.

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