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Similaire à PwC CECL Overview Placemat_Final
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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