As part of the effort to stave off a recession amid the COVID-19 pandemic, Congress has provided relief to banking organizations by delaying the implementation of a fundamental change to the accounting for credit losses. The new accounting standard, referred to as the Current Expected Credit Losses standard (CECL) was adopted in the wake of the Great Recession with a 2020 implementation date. At that time, loan loss allowances had not kept pace with the losses experienced because the accounting was based on an incurred loss model that focused on current losses within a loan portfolio. By contrast, CECL requires loan loss estimates based on the losses expected over the life of a loan, an inherently predictive, forward-looking estimate. Under CECL, losses require management to develop and document “reasonable and supportable” forecasts to estimate expected credit losses.
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