If we have selected the wrong experience for you, please change it above.
Current expected credit losses (CECL)
On the Radar: Insights on implementing the CECL model
The current expected credit loss (CECL) model under Accounting Standards Update (ASU) 2016-13 aims to simplify US GAAP and provide for more timely recognition of credit losses. In recent years, the Financial Accounting Standards Board (FASB) has issued a number of final and proposed amendments to the standard. What is the practical effect of the guidance as it stands today? Get the highlights in this summary.
The basics of CECL accounting
ASC 326 provides comprehensive guidance on recognizing and measuring credit losses related to financial assets measured at amortized cost (e.g., held-for-investment loans and held-to-maturity [HTM] debt securities), net investments in leases, reinsurance recoverables, certain off-balance-sheet credit exposures (e.g., certain loan commitments), and available-for-sale (AFS) debt securities. The CECL impairment model, which is based on expected losses, applies to all of the above except AFS debt securities, which are subject to a different model. The objectives of the CECL model are to:
- Increase the consistency of the credit impairment model applied to debt instruments.
- Ensure timely recognition of credit losses through use of an expected loss model that requires an entity to recognize an allowance of lifetime expected credit losses.
- Provide flexibility by not requiring entities to use a specific method in estimating expected credit losses.
Consistent Impairment Models
As noted above, the CECL model is consistently applied to recognize and measure credit losses related to financial assets measured at amortized cost, net investments in leases, reinsurance recoverables, and certain off-balance-sheet credit exposures; the credit impairment model for AFS debt securities is separate. Assets measured at fair value (e.g., trading securities) or under lower-of-cost-or-market models (e.g., mortgage loans held for sale) are not subject to separate credit loss guidance since credit losses are reflected in the measurement models that apply to such assets.
The CECL model does not specify a threshold for recognizing an impairment allowance. Rather, an entity recognizes its estimate of expected credit losses for financial assets as of the end of the reporting period. Credit impairment is recognized as an allowance — or contra-asset — rather than as a direct write-down of the amortized cost basis of a financial asset.
An entity’s estimate of expected credit losses should reflect the losses that occur over the contractual life of the financial asset. When determining the contractual life of a financial asset, an entity is required to consider expected prepayments either as a separate input in the method used to estimate expected credit losses or as an amount embedded in the credit loss experience that it uses to estimate such losses. The entity is not allowed to consider expected extensions of the contractual life unless extensions are a contractual right of the borrower.
An entity must consider all available relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts, as well as their implications with respect to expected credit losses. That is, while the entity can use historical charge-off rates as a starting point for determining expected credit losses, it has to evaluate how conditions that existed during the historical charge-off period may differ from its current expectations and, accordingly, revise its estimate of expected credit losses. However, the entity is not required to forecast conditions over the contractual life of the asset. Rather, for the period beyond the period for which the entity can make reasonable and supportable forecasts, the entity reverts to historical credit loss experience.
Ways to measure expected credit losses
The table below summarizes various measurement approaches that an entity could use to estimate expected credit losses under ASC 326.
Measurement approach |
High-level description |
DCF method |
Expected credit losses are determined by comparing the asset’s amortized cost with the present value of the estimated future principal and interest cash flows. |
Loss-rate method |
Expected credit losses are determined by applying an estimated loss rate to the asset’s amortized cost basis. |
Roll-rate method |
Expected credit losses are determined by using historical trends in credit quality indicators (e.g., delinquency, risk ratings). |
Probability-of-default method |
Expected credit losses are determined by multiplying the probability of default (i.e., the probability the asset will default within the given time frame) by the loss given default (the percentage of the asset not expected to be collected because of default). |
Aging schedule |
Expected credit losses are determined on the basis of how long a receivable has been outstanding (e.g., under 30 days, 31–60 days). This method is commonly used to estimate the allowance for bad debts on trade receivables. |
Ongoing Standard-Setting Developments
The FASB has continued its postimplementation review of ASC 326 and recently issued the following two ASUs to further refine the application of the CECL model to certain current receivables and contract assets (ASU 2025-05) and certain purchased loans (ASU 2025-08):
- ASU 2025-05 — This ASU establishes a practical expedient for current receivables and contract assets arising from ASC 606 transactions. Specifically, the practical expedient allows entities to assume that conditions as of the balance sheet date remain unchanged over the remaining life of such accounts receivable and contract assets, reducing the need for complex macroeconomic forecasting for these short term balances. Nonpublic entities that elect the expedient may also choose a policy of considering subsequent cash collections (through issuance of the financial statements) when estimating credit losses on those balances.
- ASU 2025-08 — This ASU expands the CECL “gross up approach” beyond purchased credit-deteriorated (PCD) assets to include purchased seasoned loans (PSLs). Generally, PSLs are acquired loans (excluding credit cards) that are not PCD and meet specified criteria (e.g., it is acquired in an ASC 805 business combination, it is obtained more than 90 days after origination by a transferee that did not participate in origination).
In addition to these two ASUs, the FASB solicited feedback on its future standard-setting agenda as part of its January 2025 invitation to comment (ITC) (comments were due by June 30, 2025). Feedback on ASC 326 was received as part of the ITC. Examples of ASC 326 topics on which stakeholders provided feedback included making additional simplifications to the guidance and enhancing certain disclosure requirements. Accordingly, further refinements to ASC 326 may be made as the FASB resolves its postimplementation review of the standard.
Roadmap: Current Expected Credit Losses
See Deloitte’s Roadmap Current Expected Credit Losses (CECL) for comprehensive discussions related to ASU 2016-13, including the amendments made by the FASB’s recently issued ASUs 2025-05 and 2025-08.
Don’t miss a beat on the latest for accounting
Accounting and financial reporting is full of nuanced challenges. That’s why we developed our Roadmap Series—so you can stay ahead of hot topic perspectives and challenges with deep industry knowledge. Each comprehensive guide provides guidance you need to lead your teams with strategic insight.
Andrew Pidgeon
