CECL
Also known as: Current Expected Credit Loss
US GAAP standard requiring forward-looking estimation of expected credit losses over instrument lifetime.
CECL replaces the prior incurred-loss model under US GAAP with a forward-looking expected-credit-loss model, requiring entities to recognize lifetime expected credit losses on financial assets measured at amortized cost and certain off-balance-sheet credit exposures at origination. Issued by FASB as ASU 2016-13 (codified in ASC 326), it became effective for SEC filer Public Business Entities for fiscal years beginning after December 15, 2019, and for other entities for fiscal years beginning after December 15, 2022. The standard is principles-based on methodology — banks may use discounted cash flow, loss-rate, vintage, probability-of-default/loss-given-default, or other reasonable methods — but requires reasonable and supportable forecasts of future economic conditions over a period the entity supports.
Core components
- Lifetime expected credit loss estimate
- Pooling of similar risk characteristics
- Reasonable and supportable forecast period plus reversion to historical loss
- Methodology flexibility (DCF, loss rate, vintage, PD/LGD)
- PCD assets (purchased credit-deteriorated)
- TDR accounting changes
- Disclosure requirements
- Day-one allowance impact on capital
Primary use case
Credit loss accounting for US GAAP filers, primarily banks, credit unions, and other financial institutions holding loan portfolios and held-to-maturity debt securities.
Common criticisms
- Pro-cyclicality (forward-looking provisions rise sharply in downturns, reducing capital precisely when banks need to lend)
- model complexity and substantial implementation cost
- subjectivity in macroeconomic forecasts limits comparability
- divergence from IFRS 9 imposes dual-reporting burden on global firms
- banking regulators provided multi-year capital transition relief reflecting day-one impact concerns.
Lineage
- Siblings
- IFRS 9, Basel III, DFAST