Tips for mastering accurate CECL regulatory reporting

Now that the initial call reporting hurdles of CECL adoption have been overcome, it’s time to consider the impact of ongoing transactions on regulatory reporting.

From changes in purchased credit-impaired (PCI) loans to unused commitments, your financial institution may be facing new reporting challenges. To help ensure an accurate CECL Call Report and minimize your risks, it’s important to understand not only accounting structures but also how you’re managing the reporting process.

Common reporting challenges

Here are some ways your institution can better navigate three common regulatory reporting challenges:

1. Allowance for PCI loans

Other than the required reserve amount, the administration of the allowance for losses has remained the same. The primary changes involve the treatment of the allowance for PCI loans acquired in a merger or acquisition.   

Prior to CECL adoption, the PCI allowance was net with loans and reported on RC, item 4.b — Loans held for investment.

After CECL adoption, the terminology has been changed to the allowance for purchase credit deteriorated loans and is now net with the allowance for loan losses on RC, item 4.c.

Additionally, any changes to the allowance for purchase credit deteriorated loans should be an adjustment to the provision for loan losses.

2. Allowance for credit losses related to off-balance sheet credit exposures

One of the most significant reporting challenges lies in establishing an allowance for credit losses related to off-balance sheet credit exposures.

While the allowance for credit losses on off-balance sheet credit exposures existed long before CECL, it was not common to carry a reserve for unused commitments. To add to the confusion, many of the CECL calculation solutions intertwine the calculations for the loan loss reserve requirements with the reserve requirements for unused commitments, leading some banks to incorrectly combine the newly created reserve for unused commitments with the existing loan loss reserve.

Unlike the allowance for loan loss, which is a contra asset, the reserve or unused commitments should be a separate liability account. Having a separate general ledger account will make reporting on RC-G, Item 3 — Allowance for credit losses on off-balance-sheet credit exposures more efficient.

3. Adjustments between allowance for loan losses and allowance for unused commitments

Some banks may experience reporting issues resulting from journal entries related to offsetting adjustments in the required allowance for unused commitments and the required allowance for loan losses due to unused commitments being advanced or paid down.

To decrease the allowance for unused commitments and increase the loan loss reserve, the initial thought has been to run a debit journal entry to the loan loss reserve and a credit entry to the allowance for unused commitments. Unfortunately, making an adjustment between the balance sheet accounts will force RI-B, Part II — Changes in allowances for credit losses out of balance.

The correct entries to help ensure the allowance for loan losses balances requires entries to be run through the income statement as provisions. The decrease of one will offset the increase in the other and net to zero.

To accomplish this, a provision for off-balance sheet credit exposure should be created and used to record any increases or decreases to the allowance for unused commitments. For example, if the required reserve for unused commitments decreases by $50,000, and the requirement for the loan loss reserve increases by $50,000 the entries would be as follows:

The debit to the provision for loan losses of $50 reported on RI-B, Part II, item 5, will increase the allowance for loan losses and items. As a result, RI-B, Part II, item 7 — Balance end of current period will agree to the loan loss reserve reported on RC, item 4.c — Less: Allowance for loans and leases. The credit to the provision for off-balance sheet credit exposures should be reported as a negative $50 on RI-B, Part II, item M.7. 

For this example, the total of RI-B, Part II, Item 5 and RI-B, Part II, Item M.7 will net to zero and agree to the reporting of $0 on RI, item 4 — Provision for loan and lease losses.

Tips for accurate reporting

While CECL has caused some regulatory reporting challenges, the following strategies for success will help create a clear and accurate reporting process:

1. Create general ledger accounts for each CECL component your bank is required to carry. The following guide can be used to create general ledger accounts and map to the appropriate Call Report items:
   

    

   Balance sheet general ledger accounts	RC/RC-G	RC-R, Part I, capital
   Allowance for credit losses (contra asset)	RC, 4.c	Include in allowance includable in tier 2 capital.
   Reserve for off-balance sheet credit exposure (liability)	RC-G, 3	Include in allowance includable in tier 2 capital.
   Allowance for AFS debt securities (contra asset) — if applicable	RC, 2.a	Include in allowance includable in tier 2 capital.
   Allowance for HTM debt securities (contra asset) — if applicable	RC, 2.b	Include in allowance includable in tier 2 capital.
   Purchase credit deteriorated reserve (contra asset)	RC, 4.c	Do not include in tier 2 capital.
   Income statement general ledger description	RI	RI-B Part II
   Provision for credit losses	RI, 4	RI-B Part II, 5 Column A
   RI-B Part II, 5 Column A	RI, 4	RI-B Part II, M.7
   Provision for HTM debt securities — if applicable	RI, 4	RI-B Part II, 5 Column B
   Provision for AFS debt securities — if applicable	RI, 4	RI-B Part II, 5 Column C

    

2. Create and share procedures for increasing or decreasing each reserve the bank must carry to help ensure entries are completed consistently with the reporting requirements.
3. Review the CECL related general ledger accounts prior to quarter end to identify and resolve any potential recording errors.

Navigating the complex landscape of financial reporting in the context of CECL adoption demands a keen understanding of how the accounting structure and transactions impact regulatory reporting. By investing time to understand the process and align entries with reporting requirements, unwarranted edits can be minimized, and the risk of potential Call Report amendments can be mitigated.

How Wipfli can help

Wipfli brings both experience and a practical approach to helping your financial institution overcome its accounting challenges. Our experienced audit and assurance team is ready to help you with all aspects of CECL, from model validation and training to call report assistance. Contact us today to learn how we can support you in navigating CECL successfully.

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