4 minutes
A survey suggests many credit unions aren’t ready for this significant accounting change. Is yours?
Credit union executives are gearing up for what very well may be the biggest accounting change experienced in their lifetimes: CECL, the Financial Accounting Standards Board’s new current and expected credit loss model. As early as 2020, the accounting process that’s been in place for the past 40 years will no longer be accepted; there will be a new standard for recognizing and calculating credit losses.
Jack Henry & Associates’ Strategic Initiatives Group conducted a survey earlier this year of more than 400 financial institutions that measured market understanding, readiness, perceived challenges and impact surrounding CECL. The results indicate that financial institutions aren’t quite as organized or prepared as they should be at this point.
Three years may seem like a long time, but it actually is not when considering the data collection, archiving and coordination that must happen to be ready for CECL. As the compliance deadline nears, credit unions should keep the following steps in mind to better prepare for a successful and timely CECL implementation.
1. Do your research. The first step toward compliance is establishing a solid understanding of the requirements and impact across your credit union. While this may seem obvious, a surprising 34 percent of financial institutions do not yet fully understand what is required by CECL, according to survey results. It’s important for credit union employees to get on the same page now, so there’s less confusion when changes occur later. Executives and those leading the CECL initiative should be especially well-versed in the shifting regulation so they can serve as strong resources for others.
2. Take action now. The changes presented by CECL are significant, so waiting to take action would be a costly mistake. However, an alarming 63 percent of financial institutions report that they haven’t yet started planning for the shift.
Credit unions should create a comprehensive roadmap to proactively prepare for reaching CECL compliance. This plan must include specific deadlines and goals so your credit union can ensure the necessary progress is being made. There are no shortcuts in this process—all credit unions are different, so what works for one credit union may not be the best plan for another.
It’s beneficial for credit unions to conduct an internal analysis to determine where CECL could potentially have the most impact in their institution. For example, almost 70 percent of financial institutions anticipate that the amount and diversity of the historical data required or the complexity of models will present the greatest challenges, and 60 percent of financial institutions anticipate negative impact to earnings and risk management as the biggest concerns post-CECL implementation. Credit unions that are able to infer challenges and areas of impact will be better equipped and prepared to proactively address these concerns head-on.
3. Ensure cross-department collaboration. CECL preparation and readiness will not be successful without proper communication. Employees and departments across the credit union must be aligned with the roadmap, timeline and goals to ensure a smooth transition. For example, nearly 75 percent of financial institutions have yet to determine data collection and storage efforts. Collecting CECL data is an effort that will require early and frequent collaboration between finance and IT departments. Without open channels of communication, this process will prove more difficult than necessary.
4. If you plan to hire a partner or purchase a solution, choose soon. According to the survey, 61 percent of financial institutions are going to choose a CECL solution/partner in the next year. It’s important for credit unions to make this decision sooner rather than later to avoid potential implementation and installation bottlenecks that may interfere with meeting the implementation schedule. FASB has referenced several viable model types for CECL, and it’s up to credit unions to determine which will best suit their organization’s particular needs. While all credit unions require a model with solid forecasting, durability and accuracy, varying levels of sophistication are available.
There is no time to waste when it comes to CECL preparation. Credit unions must ensure executives and employees are thoroughly educated, create and execute a strategic plan, encourage collaboration across all departments and consider whether partnering paves the right path to get ready for this significant change. By taking a proactive approach now, credit unions will have the chance to work through initial challenges and make any necessary modifications before the compliance deadline officially arrives.
Shanon McLachlan is senior managing director, ProfitStars, a division of Jack Henry & Associates, Monett, Mo.
