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Accounting for Debt Securities under CECL Webinar

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The Current Expected Credit Loss model (CECL) is the new accounting model FASB has issued for the recognition and measurement of credit losses for loans and debt securities.

Amounts that banks do not expect to collect will be recorded in an allowance for credit losses on Held-To-Maturity (HTM) and (Available-for-Sale (AFS) debt securities.

We will present and discuss the system approach to accounting for the debt securities under CECL.

The CECL model applies to the following types of Securities measured at amortized cost.

Corporate bonds, mortgage backed securities, municipal bonds and other fixed income instruments.

The FASB concluded that a AFS security should be assessed for impairment differently than an amortized cost asset being held to collect cash flows. The new model will apply to AFS debt securities while HTM debt securities will be assessed for impairment using the CECL model.

AFS - reserves are assessed on an individual security (position) basis.

(When Principal Loss is realized – from Payment shortfall)

1) Loss recorded through an allowance, instead of a direct write-off of amortized cost.

2) The allowance is limited to the difference between fair value and the amortized cost.

3) If the security has been distressed one day to 1 year, year you have to determine if an impairment loss should be recognized under the CECL model. An entity will no longer be permitted to use the length of time a security has been in an unrealized loss position by itself or in combination with other factors to determine that a credit loss does not exist.

4) Any subsequent changes to the fair value of the security after the balance sheet reported effective date are ignored.

Source:

http://www.ey.com/Publication/vwLUAssets/TechnicalLine_03320-161US_Impairment_12October2016/$FILE/TechnicalLine_03320-161US_Impairment_12October2016.pdf

See page 2 of (TechnicalLine_03320-161US_Impairment_12October2016.pdf)

HTM - reserves are assessed on a pooled basis. (Grouped financial assets with similar risk characteristics)

1) Choose method for measuring losses (multiple methods are supported)

2) Determine historical loss experience on the evaluated pools/asset

3) Adjust historical loss experience for current conditions and forecasts

4) Revert to historical losses for periods for which reasonable forecasts cannot be made


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