Methodology

I recently sat down to help my seven-year-old son with his math homework. It was simple addition and subtraction; however, the methodology used to calculate the answer was much different than I had learned. After helping him for a while, I showed him the method I had learned when I was his age. While the methods were very different, they came to the same answer.

In a way, FASB’s current expected credit loss (CECL) standard is not that different. The standard allows financial institutions to pick from a variety of methodologies to calculate their allowance for loan losses. There is no right or wrong methodology; it really depends on the size and complexity of each financial institution’s loan portfolio. In addition, not only will financial institutions need to choose what methodology to use to calculate their allowance for loan losses, they also will need to decide how to calculate it. For some institutions, it may make sense to develop an Excel-based spreadsheet; for others it may be better to partner with a third-party vendor to assist with the calculation. In the end, there is no right or wrong answer - it simply depends on the internal resources each institution has available and how it wants to utilize them.

Regardless of the methodology and tools, the important thing is that institutions need to seriously begin consideration of the direction they want to take during 2019 and begin executing on that plan to ensure they will have the proper data gathered and available for the methodology chosen. If you have questions in regard to where to get started, information is available at https://www.wipfli.com/industries/financial-institutions/audit-and-accounting/cecl. You can also contact your Wipfli relationship manager.