Understanding the New CECL Standard: What You Need to Know

The Financial Accounting Standards Board (FASB) introduced the Current Expected Credit Loss (CECL) standard under ASC 326, effective for private entities starting from fiscal years beginning after December 15, 2022. This means it applies to 2023 calendar year-ends and fiscal year-end periods thereafter.

What’s changed under CECL?

Under the old rules, you reserved for credit losses when you saw signs of trouble. Think of it as waiting until you see someone struggling before worrying about getting paid. The new CECL standard requires a proactive approach. From the moment you provide credit, you need to estimate potential losses.

How to estimate credit losses

• Look at past experiences (look to customers payment history)
• Consider current economic conditions (is the economy doing well or poorly?)
• Make reasonable predictions about the future (will the economy get better or worse?)

For construction companies, this means estimating and recognizing potential credit losses on trade receivables from the moment they are recorded. This involves considering past experiences, current economic conditions, and future predictions.

Challenges and proposed updates to CECL

The standard has caused complexities for private entities with less sophisticated modeling and forecasting, often with little benefit. Many entities could prove the collectability of receivables through subsequent collections or understanding customer relationships, resulting in minimal changes other than disclosure.

To address these challenges, the FASB proposed an update to provide private companies with a practical expedient and accounting policy elections when estimating expected credit losses for current accounts receivable and contract assets.

This exposure draft was developed to address challenges encountered when applying the guidance in Topic 326 to current accounts receivable and current contract assets arising from transactions accounted for under Topic 606, Revenue from Contracts with Customers, and has a comment deadline of January 17, 2025.

This update aims to reduce the time and effort needed to analyze and estimate credit losses without compromising the usefulness of the information.

Key takeaways

• The CECL standard requires a proactive approach to estimating credit losses considering past experiences, current economic conditions, and future predictions.
• The proposed practical expedient removes complexity and uncertainty that entities may encounter when estimating credit losses. Entities will be able to assume that current conditions as of the balance sheet date persist throughout the forecast period, rather than making assumptions about economic conditions or other factors.
• The proposal includes an accounting policy election expedient to consider subsequent collection activity. This is expected to simplify entities’ estimates of expected credit losses.

How we can help

Let us know if you need any assistance as you navigate these changes and other accounting standards.