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Credit Losses Standard Tips for Audit Committees

The new credit losses standard being introduced by FASB focuses on new credit losses. And the financial services sector will certainly have to wade through some challenges as it’s implemented. 

However, the good news is that there is also a tool that can be used to help reduce some of the concerns and keep businesses on track as much as possible. It’s critical for companies to be aware of the new standard even though it won’t be fully introduced in the private and public sectors for a couple of years.

What are the Requirements of the New Credit Losses Standard?

The new standard requires an expected credit loss (CECL) model and is intended to outline financial reporting of credit losses that financial institutions are expecting for the future. Fortunately, a new Center for Audit Quality (CAQ) tool is being implemented in order to provide committees with valuable information that can help them see how certain aspects could impact their overall business function.

The new standard will be in full swing for public sector companies in the year 2021, and private companies will be effective in 2022.

What Should Committees be Aware of?

In the oversight role, the CAQ indicates that the audit committees should be aware of the following:

  • A full understanding of the standard
  • The methods to make proper credit loss estimates
  • Any issues associated with the company’s previous methods and credit loss experiences
  • A thorough understanding of how the company is forecasting credit loss
  • Just how the standard will impact the financial institution
  • Effectively communicating the new standard both internally as well as with investors
  • How accounting will respond to financial deterioration
  • Permissibility of reversal of credit losses based on net income

Overview

While the new credit losses standard may take some time for companies to implement into their business, the tool will help keep things in mind as you move forward. This doesn’t necessarily mean that it will go without issue, but it could reduce some of the expected issues and get financial leaders on track.

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