What is Current expected credit loss (CECL)?
In short
The current expected credit loss (CECL) model requires companies to recognize an allowance for all credit losses they expect over the life of financial assets measured at amortized cost, such as trade receivables, loans and held-to-maturity debt securities.
Key takeaways
- Losses are estimated from the day the asset is recognized, using past events, current conditions and reasonable and supportable forecasts.
- It replaced the older 'incurred loss' model, which waited until a loss was probable.
- An aging schedule or loss-rate method can still be used to estimate the allowance under CECL.
Example
A company with $500,000 of receivables expects, based on history adjusted for a weakening economy, to collect all but 3%. It records an allowance of $15,000 even though no customer has yet defaulted.
Where it's tested
FAR: Cash, Receivables & Bad Debts — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company writes off a specific $8,000 account as uncollectible using the allowance method. What is the effect on total assets and net income?