Have you been hearing the term CECL in financial and accounting circles?
CECL, pronounced “sea seal” is the common short-hand for Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (topic 326). CECL doesn’t just apply to financial institutions, it applies to nonprofits too.
The main goal of the standard is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets.
Implementation Dates
The standard is applicable to nonprofits and the ASU is effective for non-public entities for fiscal years beginning after December 15, 2022. Implementation dates are as follows:
New Requirements
The standard requires establishing a methodology for estimating credit losses of balances within the scope of the standard that considers the past, present and future. The standard also requires documentation of the analysis and calculation. Items with similar risk characteristics may be grouped together for this purpose.
For nonprofit organizations which hold the types of balances included in the scope of the CECL ASU, this means they will most likely need to estimate and record an allowance for doubtful accounts, or Allowance for Credit Losses (ACL). For many nonprofits, this may be the first time they do so.
Important Note: After the implementation date for your organization, the incurred loss impairment method, under which adjustments to receivables are made when they become uncollectible, is no longer compliant with generally accepted accounting principles in the United States (GAAP).
Certain types of balances held by nonprofits are included in the scope of the CECL ASU, while other types of balances held by nonprofits are excluded.
Five Most Common Types of Balances Scoped In (Included) for Nonprofits:*
1. Accounts receivable
2. Contract assets which are the result of exchange revenue transactions or other income
3. Notes or Loans receivable from an unrelated entity, including programmatic loans receivable
4. Loans receivable from officers or employees
5. Receivables related to operating leases held by a lessor
Five Most Common Types of Balances Scoped Out (Not Included) for Nonprofits:*
1. Contributions receivable
2. Financial Assets reported at fair value, such as investments
3. Intercompany notes or receivables including those between parties under common control
4. Receivables arising from operating leases
5. Loans made to participants by defined contribution employee benefit plans
*See the full standard and full list of balances scoped in and scoped out at: FASB ASU 2016-13
The Analysis
Important Note: Organizations will no longer be able to assert that receivables are 100% collectible without providing significant documentation, using the CECL framework, to support that claim. This includes cases where the risk of loss is highly remote, even for these, Organizations are required to estimate the lifetime credit losses for balances within the scope of ASU 2016-13.
Required Disclosures:
Note Disclosures – including:
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