CECL standard implementation for the consumer industry has been saved
Perspectives
CECL standard implementation for the consumer industry
What’s at stake?
Companies in the consumer industry may feel the impact of new requirements under the current expected credit loss (CECL) standard if they hold significant financial assets. We address the potential challenges and provide a methodical approach to help prepare consumer industry executives to meet the upcoming deadline.
Explore content
- How will CECL implementation affect the consumer industry?
- With deadlines quickly approaching, how prepared are you?
- Common CECL implementation challenges for the consumer industry
- A systematic approach to CECL
- Get in touch
How will CECL implementation affect the consumer industry?
The Financial Accounting Standard Board’s (FASB’s) current expected credit loss (CECL) standard takes effect for entities that are US Securities and Exchange Commission filers for fiscal years beginning after December 15, 2019.
Why should the C-suites and boards of companies in the consumer industry take notice? Because CECL implementation could be one of the most challenging accounting standards change projects in decades if you have material portfolios in scope. The new standard applies to all companies holding financial assets and net investment in leases that aren’t accounted for at fair value through net income. More specifically, it will impact companies that have financial assets such as loans, debt securities, trade receivables, off-balance-sheet credit exposures, and reinsurance receivables.
Although financial institutions are the most obvious companies affected by CECL—providing credit is core to their business—they’re not alone. Companies in the consumer industry will also face the impact of the new requirements under the standard if they hold significant financial assets, whether they’re involved in extending credit or not. Awareness of this potential exposure, a grasp of the challenges in CECL implementation, and a methodical approach to compliance can help prepare consumer industry executives to meet this fast-nearing deadline.
With deadlines quickly approaching, how prepared are you?
Three types of holdings may present potential issues for companies in the consumer industry:

Lending products
The automotive industry provides a notable example of how consumer companies that extend credit to their customers and dealers will need to adapt to CECL. Transitioning to CECL is expected to generally increase reserves for such automotive companies, and the impact will vary from company to company.

Held-to-maturity securities
The nature of a company’s holdings under its corporate treasury policy will dictate the scope of CECL requirements. Institutions investing only in US Treasuries may apply the zero loss expectation, while other sovereign debt and agency securities (e.g., Fannie Mae, Freddie Mac) would require an analysis. All other holdings will require an evaluation along with expanded documentation.

Accounts receivable
CECL guidance is principles-based, thus permitting the use of different methodologies to estimate allowances. Because receivables are typically short-term, consumer companies will likely be able to leverage current processes with certain modifications to align with an expected loss model versus an incurred loss model. Whatever the source of the allowance requirement, company leaders are likely to face several important questions in conveying the situation to their board and investors. Why is the number different and how did we reach it? How can we best convey that the allowance will have a greater quarter-to-quarter P&L impact and be more volatile? How will the risk function regard the projections?
Common CECL implementation challenges for the consumer industry
From our experience, companies are facing several challenges with CECL implementation, including:
- The need for a broad gap assessment between the current and future state. Conducting an assessment following the initial scoping can help identify critical components the project plan may be missing. Do we have the right data, people, and technology in place to be compliant by the implementation deadline?
- No end-to-end view of the CECL estimation process. A comprehensive view of the process requires close integration between risk and finance, which can create uncertainty around governance, roles, and responsibilities. New CECL-driven estimation processes can upend the current view of product profitability.
- Insufficient data, resulting in delays in modeling and making important decisions. CECL compliance requires a view of a full economic cycle. That cycle can extend beyond typical data retention guidelines, which creates a need to identify data gaps and address them with external data feeds.
- Siloed work streams with limited cross-work-stream buy-in on critical decisions. Data required for estimation can reside in various places—for example, with the product team, the team managing the data hierarchy and data warehouse, the accounting function, or the risk modeling team. Prior interaction may have been limited and will now require further coordination, complicating the process. The forward-looking element of CECL requires much more data as well as lockstep coordination across these groups in process changes.
- Resource constraints for the model build, model risk management, and internal controls. If the gap assessment indicates insufficient resources are available for model builds, consumer industry company leaders will need to decide whether to acquire in-house talent or use external providers. In addition, should out-of-the-box technology not meet project requirements, work will be required to align solutions with the company’s risk profile.

A systematic approach to CECL
Deloitte’s end-to-end CECL implementation model for the consumer industry, along with lessons learned in two years of client engagements, suggests a series of actionable review steps companies can consider as they assess and refine their programs:
Well-controlled data that reflect a full credit cycle are essential for CECL compliance. Data remediation decisions should be reviewed by allowance governance leadership. Production data acquisition and management is often overlooked in CECL planning, possibly requiring significant effort to integrate into the CECL model calculation. Steps to consider include:
– Perform model assessment and identify changes required– Perform data availability and data quality gap assessment for financial disclosures, risk data, and model inputs
– Identify the need for new or modified internal controls and processes
CECL can be more complicated than today's incurred loss model. Defining the target operating model will provide the roadmap for a solid production design. Tabletop reviews or walkthroughs of the end-to-end production process with representatives of all impacted functions may assist in identifying issues early and avoiding costly fixes late in the implementation. Steps include:
– Create a change management plan for the transition from current to target state– Select an IT, data, and modeling approach; document business requirements; and make changes to IT and data delivery architecture
– Document accounting policies and design, implement, and test internal controls
– Develop and implement models
– Provide insights into sensitive drivers that impact financial results
Meeting the CECL implementation deadline for the consumer industry isn’t the end of the project. A sustainable process will be needed for model refinement, ongoing data collection, and other requirements. Steps include:
– Assess model performance– Conduct training
The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.
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