CECL’s methodology: Considering Historical Losses ●Data documenting historical loss can be from both internal and external sources ●Data sources are required to adjust for current credit grades ●Data sources must account for portfolio mix changes and credit quality changes
Paragraph 326-20-30-7 “When developing an estimate of expected credit losses on financial asset(s), an entity shall consider available information relevant to assessing the collectibility of cash flows. This information may include internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts.” Paragraph 326-20-30-9 “Historical loss information can be internal or external historical loss information (or a combination of both). An entity shall consider adjustments to historical loss information for differences in current asset specific risk characteristics, such as differences in underwriting standards, portfolio mix, or asset term within a pool at the reporting date or when an entity’s historical loss information is not reflective of the contractual term of the financial asset or group of financial assets.” |