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CECL: 5 things you need to know about credit risk · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought leadership from PWC.
• 0:08
  SPEAKER_03: Welcome to PWC's Accounting Podcast.
• 0:12
  SPEAKER_03: I'm Heather Horn.
• 0:14
  SPEAKER_03: Thanks for joining me as we continue our Tuesday series in which one of our all-star podcast guests takes over the podcast, picks the topics for the month, and joins me on all the episodes.
• 0:26
  SPEAKER_03: My guest for August is Brett Dooley, Deputy Chief Accountant in PWC's National Office, who leads our financial instruments team.
• 0:35
  SPEAKER_03: And just a reminder from last week that in the interest of keeping things August ready, Brett's committing to keeping each of his episodes under 25 minutes.
• 0:45
  SPEAKER_01: Cecil is for everyone.
• 0:47
  SPEAKER_01: Sometimes people think of Cecil as just a banking thing.
• 0:50
  SPEAKER_01: It's important to banks.
• 0:52
  SPEAKER_01: But when you look across non-financial institutions, there's still a lot of loans and receivables and securities.
• 0:59
  SPEAKER_01: So you have corporates with trade receivables, with long-term receivables that may have a lot of credit risk in them.
• 1:05
  SPEAKER_03: In today's episode, Brett shares insights on the accounting for current expected credit losses, also known as Cecil, including the fact that it's not just for banks, which hopefully you already know.
• 1:19
  SPEAKER_03: Brett's five reminders in 25 minutes focus on accounting for Cecil, including the various models, estimation methodologies, and disclosure considerations.
• 1:30
  SPEAKER_03: He also summarizes what you should expect from the FASBI's current exposure draft on accounting for acquired assets.
• 1:36
  SPEAKER_03: It's great information for any company holding assets with credit risk, which it's probably most companies.
• 1:44
  SPEAKER_03: Brett has a lot to cover, so let's get started.
• 1:49
  SPEAKER_03: Brett, thanks so much for joining me again today.
• 1:52
  SPEAKER_03: And this is another one of our topics in our August series.
• 1:55
  SPEAKER_03: And today's topic is hopefully one most of our listeners are very familiar with because it's relatively recent and we've done a lot of podcasts on that.
• 2:04
  SPEAKER_03: But that is about Cecil.
• 2:06
  SPEAKER_03: And I am very excited to hear of that huge, gigantic Cecil topic.
• 2:11
  SPEAKER_03: What you're going to pick out is the five things you want to remind people of.
• 2:14
  SPEAKER_03: And I actually think it's perfect timing, a couple years into it, good time for people to kind of relook at their sort of processes, controls, and otherwise, and make sure they're hitting things correctly.
• 2:26
  SPEAKER_03: So this is not going to give us a whole you are not going to learn to do this accounting from listening to this podcast, but let's still level set and just give a reminder what it stands for and what it's really intended to do.
• 2:38
  SPEAKER_01: Okay.
• 2:39
  SPEAKER_01: Sure.
• 2:40
  SPEAKER_01: So and I think this is a good time, like you said, for to talk about Cecil given where we are in the economic cycle and a lot of uncertainty on the horizon.
• 2:51
  SPEAKER_01: Starting off maybe to level set, you know, Cecil is the current expected credit loss standard.
• 2:57
  SPEAKER_01: It applies to all companies and it applies to investments in financial assets that are held at amortized cost.
• 3:04
  SPEAKER_01: So think of loans, trade receivables, held to maturity debt securities.
• 3:09
  SPEAKER_01: And it's how we recognize impairment on those types of assets.
• 3:14
  SPEAKER_01: It requires you to make an estimate, forward-looking estimate of the expected losses over the full contractual life of the arrangement and record those as an allowance, generally with an offset to expense right when you originate or acquire the asset.
• 3:30
  SPEAKER_01: So my first reminder in the series, we'll start to um tick off our one of five, is that Cecil is for everyone.
• 3:37
  SPEAKER_01: Sometimes people think of Cecil as just a banking thing.
• 3:40
  SPEAKER_01: And it's certainly 100%.
• 3:41
  SPEAKER_01: It's important to banks.
• 3:42
  SPEAKER_01: But when you look across non-uh financial institutions, there's still a lot of loans and receivables and securities.
• 3:50
  SPEAKER_01: So you have corporates with trade receivables, with long-term receivables that may have a lot of credit risk in them.
• 3:56
  SPEAKER_01: Even in nonprofits in the healthcare industry, you have customer receivables.
• 4:00
  SPEAKER_01: And so the same concept of Cecil applies across industries.
• 4:04
  SPEAKER_01: The extent of it may be different depending on how much credit risk you take with your customers or counterparties.
• 4:11
  SPEAKER_01: Trevor Burrus, Jr.
• 4:12
  SPEAKER_03: Although Brett, I think it's almost similar to what we were talking about with investment securities in our earlier episodes, where sometimes some of these are actually more difficult for non-financial institutions to apply because maybe they're not as familiar or don't have the same depth.
• 4:26
  SPEAKER_03: So almost maybe needs more focus in some cases.
• 4:30
  SPEAKER_01: Yeah.
• 4:31
  SPEAKER_01: At least it's different focus.
• 4:32
  SPEAKER_01: Yes.
• 4:32
  SPEAKER_01: The other area that I emphasize to people where you have to think about this is in business combination or where you're purchasing assets, whether that's an acquisition of a portfolio or whether you're acquiring a new business.
• 4:46
  SPEAKER_01: This is a this is something we can get into a little more later, but that's a special thing I like to point out to people.
• 4:52
  SPEAKER_03: Okay, so you definitely piqued my interest because I don't know that I have focused on that.
• 4:56
  SPEAKER_03: And we just did an entire series on business combinations with Jay Sulliver, and this did not come up.
• 5:01
  SPEAKER_03: So what is special about business combinations that you would highlight that?
• 5:05
  SPEAKER_01: Well, it's about this day one loss concept.
• 5:08
  SPEAKER_01: Um so when whether you originate or acquire assets, you're setting up an allowance for the expected losses over the life of that receivable with a charge, generally with a charge to expense.
• 5:18
  SPEAKER_01: So when I'm dealing with loan originations that happen every day, uh, you know, I'm constantly taking that day one expense, but it almost becomes part of ongoing activity.
• 5:30
  SPEAKER_01: But suddenly when I hit a business combination, right, I'm going to I'm going to record all of those assets, including my receivables, at fair value.
• 5:38
  SPEAKER_01: And that fair value includes a discount for credit concerns.
• 5:42
  SPEAKER_01: And so companies can think, well, I've already marked down this receivable to 95 cents on the dollar, for example, because it's a fair value, but you still have to record a Cecil allowance against that, even though you've already marked it down to fair value.
• 5:57
  SPEAKER_01: Under the same concept of when I originated a loan, that was at fair value when I originated generally, but I still record a day one loss then.
• 6:06
  SPEAKER_01: Oh, a business combination, suddenly you can have a big portfolio that has a sizable Cecil reserve on day one flowing through earnings right after the business combination, like on you know, on 30 seconds after you close.
• 6:19
  SPEAKER_01: And that's counterintuitive to some people.
• 6:21
  SPEAKER_03: But um you are confirming you need to do that, and it's something companies should prepare for, I guess, as they're going through their business combinations.
• 6:28
  SPEAKER_03: And I would assume disclosure will be important.
• 6:31
  SPEAKER_01: Absolutely.
• 6:32
  SPEAKER_03: All right.
• 6:33
  SPEAKER_03: So then uh what about, you know, one of the other things we've been talking about is the current economic environment.
• 6:40
  SPEAKER_03: And in particular, when you're thinking about expected credit losses, obviously the economy has a big impact on that.
• 6:46
  SPEAKER_03: So what are some of the things that are top of mind right now?
• 6:49
  SPEAKER_01: Yeah.
• 6:49
  SPEAKER_01: I mean, when you think back to when we first adopted Cecil in 2020, like we've seen a lot, a wide range of economic changes and uncertainty.
• 6:58
  SPEAKER_01: So here, my second reminder for the series is that models and estimates aren't static and you should always seek continuous improvement.
• 7:06
  SPEAKER_01: And I think that concept applies to every layer of this loss estimation process, whether it's complex or simple.
• 7:13
  SPEAKER_01: So starting with macroeconomic assumptions and economic forecasts that you're going to going to apply.
• 7:19
  SPEAKER_01: Then going to the models themselves, if you use complicated models to take those inputs and generate loss estimates.
• 7:28
  SPEAKER_01: And then the third layer being like considering that output and calibrating it to other estimation methods you may have, other market data, making qualitative adjustments if you need to.
• 7:39
  SPEAKER_01: And the reminder here is none of this can occur in a vacuum and none of it should be static.
• 7:44
  SPEAKER_01: You should constantly be revisiting.
• 7:47
  SPEAKER_01: Now, for some companies with complex modeling, this can be inherent in risk management and model management.
• 7:54
  SPEAKER_01: So models at the most sophisticated banks are constantly being calibrated and recalibrated on and some regularity.
• 8:02
  SPEAKER_01: They're taking findings of internal audit, credit review, model validation processes.
• 8:08
  SPEAKER_01: They're contributing to that and they're updating their models.
• 8:11
  SPEAKER_01: One thing we see is in one period you may have an event or condition that you considered through a qualitative adjustment.
• 8:19
  SPEAKER_01: And over time you find a way to take that circumstance and bake it into the underlying model.
• 8:25
  SPEAKER_01: We also see situations where a methodology may have been established for weighting different economic scenarios.
• 8:32
  SPEAKER_01: I'm going to consider a base case and an upside and downside.
• 8:35
  SPEAKER_01: And I assign probability weights to those, like how am I thinking about those weightings?
• 8:39
  SPEAKER_01: And is the current economic environment such that I should be changing those weightings more to the downside or the upside?
• 8:47
  SPEAKER_01: All of these things reflect things that should be under continuous review.
• 8:51
  SPEAKER_01: And the other thing I mentioned here is that sensitivity analysis is also often helpful for this.
• 8:58
  SPEAKER_01: How does the output change if I change one of my inputs?
• 9:04
  SPEAKER_01: It helps you understand what are the really most critical inputs to this that I may need to spend a lot of time on to make sure I get right and I get socialized and management buy-in onto that input.
• 9:18
  SPEAKER_01: And what are less important inputs that that maybe you can deal with in other ways?
• 9:22
  SPEAKER_01: Or it actually may tell you that your model may need to be refined to consider other inputs and not just be so reliant on one single input.
• 9:31
  SPEAKER_03: So, Brett, it sounds like for some of that at least, these are things that companies should almost, I don't want to say be continuously looking at, but they really almost need to be anticipating some of this, you know, what's the most important inputs, what are potential inputs, and otherwise, you don't want to just be every quarter kind of throwing up your hands and starting over, but you really need to kind of at least be thinking about what you want to focus on, is that fair?
• 9:57
  SPEAKER_01: I think that's right.
• 9:58
  SPEAKER_03: But so that makes sense to me.
• 10:00
  SPEAKER_03: It also sounds very complicated.
• 10:01
  SPEAKER_03: So now if I'm listening and thinking, well, my model that I use isn't that complicated.
• 10:07
  SPEAKER_03: Does that really still apply?
• 10:09
  SPEAKER_01: Yeah, so I think some of this uh some of the same principles still apply.
• 10:12
  SPEAKER_01: You know, are you considering current economic conditions?
• 10:15
  SPEAKER_01: Are you assuming that all of your customers are going to default in the same way or for the same reasons they have in the past?
• 10:22
  SPEAKER_01: Are you operating in the same sectors, the same geographies?
• 10:26
  SPEAKER_01: Do you have the same types of borrowers that you've always had?
• 10:28
  SPEAKER_01: Are there portfolio specific or industry-specific credit concerns that are are emerging or that you foresee that that didn't you didn't have in the past?
• 10:39
  SPEAKER_01: You know, one good example here is there's a lot of focus of stress in the commercial real estate market.
• 10:44
  SPEAKER_01: So, you know, that may cause changes in uh characteristics for a certain customer base.
• 10:50
  SPEAKER_01: Are you do you have specific customers that are that might be disrupted by um stress in the commercial real estate industry?
• 10:57
  SPEAKER_01: All of these things would affect a complicated model, but they also affect a very simple estimate, just looking at your customers and thinking about what's changing.
• 11:05
  SPEAKER_01: So whether you're challenging complicated models or you're challenging your assumptions and your simple forecasts, I think it's important to make sure you're considering current conditions and how the past may not necessarily predict the future.
• 11:19
  SPEAKER_03: And then I know, Brett, one of the things we talk about a lot with Cecil is disclosure.
• 11:24
  SPEAKER_03: And so I'm guessing that providing transparent disclosures on the impact of the current economic conditions will be important.
• 11:32
  SPEAKER_03: Uh, but is there anything else, you know, that you would be focused on when you're thinking about disclosure of assumptions or otherwise?
• 11:41
  SPEAKER_03: Yeah.
• 11:41
  SPEAKER_01: Maybe we'll we'll make this our the third, the third uh key reminder for today, and that Cecil is often a critical accounting instrument.
• 11:49
  SPEAKER_01: Um, but but in all cases, you should give careful consideration to disclosure obligations.
• 11:54
  SPEAKER_01: Um and I think early on with Cecil adoption, you know, back in 2020, we were, you know, companies were working through a lot of complexities in the adoption itself, um, trying to identify best practices and both how to estimate losses and making their disclosures.
• 12:11
  SPEAKER_01: Uh, they were doing all that while coping with the global pandemic and unprecedented economic conditions.
• 12:17
  SPEAKER_01: Remember going through like, you know, unprecedented unemployment levels and how that affected estimates.
• 12:24
  SPEAKER_01: Um at the same time, users were trying to sort out how they're going to use this information, both the dis the required disclosures as well as management's discussion around them and how the new Cecil framework would be actually applied in practice.
• 12:37
  SPEAKER_01: So frankly, in the in that context of a lot of moving parts, we actually didn't see many SEC comment letters to companies uh for a period of time.
• 12:46
  SPEAKER_01: But we're starting to see more now.
• 12:48
  SPEAKER_01: And I'd say we see the staff focused on a few things.
• 12:51
  SPEAKER_01: And I'll here I'll specifically call out details, uh sensitivities, and uh specific exposures.
• 12:58
  SPEAKER_01: So going through those um for critical accounting estimates in particular, you're required to provide qualitative and quantitative information to understand the estimation uncertainty, right?
• 13:10
  SPEAKER_01: And to and how the how the estimate has or um could have an effect on your financial condition.
• 13:18
  SPEAKER_01: So what the staff is looking for is for companies not just to recite what their accounting policies are and and how they did the model.
• 13:26
  SPEAKER_01: They want to understand the assumptions used, the methods and estimates that have a material impact.
• 13:32
  SPEAKER_01: And very importantly, like why is that estimate subject to uncertainty?
• 13:37
  SPEAKER_01: Like, what are these inputs that you're uncertain about?
• 13:41
  SPEAKER_01: Um, how much each estimate or assumption has changed over time?
• 13:45
  SPEAKER_01: You know, are you using very different assumptions than you did a year ago?
• 13:49
  SPEAKER_01: Um, and what's the sensitivity to the reported amount?
• 13:52
  SPEAKER_01: It's one thing to say this is an important estimate, but um they they they're looking for um financial statement users to get a sense of if someone used a different input or a different estimate or a different model, how much could that change the results?
• 14:07
  SPEAKER_01: So so financial statement users get a sense of the sensitivity to the financial results um that that these different inputs or estimates could have.
• 14:16
  SPEAKER_01: And then I think the the third thing I mentioned was making sure companies can look at these forecasts at a more granular level if if required.
• 14:27
  SPEAKER_01: So considering different portfolio segments that could be affected differently as forecasts changed.
• 14:34
  SPEAKER_01: One good example here is I mentioned the additional focus on commercial real estate, understanding those exposures to uh commercial real estate, how that impacted reserve estimates, and uh and how sensitive reserve estimates could be if if those um assumptions around what's going to happen with commercial real estate uh turn out to be wrong.
• 14:54
  SPEAKER_03: So, Brett, I know sometimes with judgments, companies struggle with the level of detail to provide.
• 14:59
  SPEAKER_03: Is that really an issue here?
• 15:01
  SPEAKER_01: Aaron Powell I'd say that um the level of granularity around assumptions here is often um affected by the interdependency of all these assumptions.
• 15:10
  SPEAKER_01: Sometimes if I can tell you this is the input I used for this economic variable, but in order to really understand that, you need to know how that affects five other variables.
• 15:22
  SPEAKER_01: And it's and to tell you if I tweaked this variable by you know 5%, what impact would that have on my reserve is often complicated because I may have made qualitative adjustments for that.
• 15:36
  SPEAKER_01: Um it may affect other factors or maybe offsetting or or incremental impacts from other things.
• 15:41
  SPEAKER_01: And so I think the complexity around this is one thing that that drives how companies talk about it in their filings.
• 15:47
  SPEAKER_03: Right.
• 15:48
  SPEAKER_03: Well, it definitely sounds like having a very good understanding of the model and even going back to the points you made earlier about the importance, relative importance of different inputs and otherwise is also helpful when we're thinking about disclosures.
• 16:00
  SPEAKER_03: So then I know another thing that kept coming up, particularly is in 2020, but since then is just subsequent events, because you know, you're uh reporting information as the balance sheet date, but at least with your annual reports, maybe two months later, and a lot can happen in that time, as we've seen.
• 16:19
  SPEAKER_03: So, how do you think about subsequent events here?
• 16:21
  SPEAKER_01: Yeah.
• 16:22
  SPEAKER_01: My my headline here, the fourth tip is that the Cecil estimates could change based on subsequent events, but they often do not when you go through the analysis.
• 16:31
  SPEAKER_01: Um it's it's a little bit unique, right?
• 16:35
  SPEAKER_01: Because Cecil changed the whole estimation of credit losses from an incurred loss model focused on what has happened to an expected loss model, a forward-looking uh framework.
• 16:44
  SPEAKER_01: And so we had to think about subsequent events guidance and how to apply that when my whole framework in the first place is.
• 16:52
  SPEAKER_03: Oh, we should have been considering them already, basically.
• 16:55
  SPEAKER_03: Right, right.
• 16:56
  SPEAKER_01: And maybe we ground people with a refresher of subsequent event guidance.
• 16:59
  SPEAKER_01: So there's two types of subsequent events.
• 17:02
  SPEAKER_01: Um, one is recognized subsequent events that require adjustments to the financial statements.
• 17:08
  SPEAKER_01: Um, and then the second are non-recognized subsequent events that require disclosure, but you're not going to actually change your financial statements.
• 17:15
  SPEAKER_03: Right.
• 17:15
  SPEAKER_03: And I'll just chime in here, as we've talked about before on the podcast, those ones where you do make an adjustment, we would call type one subsequent events, and the ones where you don't are type two, although I think that's been gone from the literature for quite some time.
• 17:30
  SPEAKER_03: Definitely people still refer to that in that parliament.
• 17:33
  SPEAKER_03: So it's it's kind of funny.
• 17:34
  SPEAKER_03: Trevor Burrus, Jr.
• 17:34
  SPEAKER_01: You and you and I are are both old school in that regard.
• 17:38
  SPEAKER_01: Um so the question is like when you're dealing with a forward-looking estimate, how do I how do I think about this?
• 17:43
  SPEAKER_01: Because there are events that can happen after the balance sheet date, but before you issue financial statements that could go either way.
• 17:51
  SPEAKER_01: And I think the way you start to make this um determination is first thinking about the nature of the information you received.
• 17:59
  SPEAKER_01: What did I already consider that information in my estimate?
• 18:03
  SPEAKER_01: Is it a knowable fact or is it really part of my loss estimate or forecast or or assumption?
• 18:09
  SPEAKER_01: Um and then the treatment can also depend on when you receive it.
• 18:13
  SPEAKER_01: There are companies that even after the quarter or the month end, the period end date, are still actively in their process for coming up with their loss estimate.
• 18:24
  SPEAKER_01: And so information received while you're active in that process may be treated differently than information you receive like after you've finished that process and I'm all signed off on that process, and then I get new information afterwards.
• 18:38
  SPEAKER_01: So the timing of that can drive the result here.
• 18:42
  SPEAKER_01: So I think the SEC staff has noted that there could be that different information you receive could fall into either one of these buckets.
• 18:50
  SPEAKER_01: And so they gave a speech a number of years ago uh articulating a framework and some principles for how you might think about this.
• 18:58
  SPEAKER_01: Um and they included a fact pattern related to the U.S.
• 19:01
  SPEAKER_01: government's announcement of estimated unemployment rates that is received after the balance sheet date.
• 19:07
  SPEAKER_01: This happens all the time when you when you get unemployment estimates.
• 19:11
  SPEAKER_01: And the SEC staff stated that it would not object to the registrant either considering or not considering those changes in their estimate of credit losses.
• 19:21
  SPEAKER_01: So we encourage companies to develop first develop an accounting policy for how you're gonna think about these changes when your process kind of closes to new information and and you're done, and and and how you're gonna think about um subsequent information you get.
• 19:36
  SPEAKER_01: Um then consistently apply that accounting policy.
• 19:40
  SPEAKER_01: You you may require detailed disclosures helping readers understand if there are significant events, like how you thought about them and and how you incorporated them into your estimate.
• 19:49
  SPEAKER_03: So I guess from your point on the policy perspective, you don't want to each quarter be thinking or or make it look like that you're picking and choosing which information to include and otherwise.
• 20:01
  SPEAKER_03: But if you have just a policy, whether good or bad information, then you know what you're going to do with it.
• 20:06
  SPEAKER_03: It makes it a lot easier to deal with then and from a control perspective as well.
• 20:11
  SPEAKER_03: So then uh definitely important to think about, but I know we're here to give reminders on CSIL, but I was hoping we could give our fifth one just to talk about the exposure draft that's out there related to purchase financial assets.
• 20:25
  SPEAKER_03: And uh comments are due at the end of this month.
• 20:28
  SPEAKER_03: So anything to add on that or that you can share?
• 20:31
  SPEAKER_01: Yeah, I the a good fifth, fifth and closing reminder that this purchase assets exposure draft would represent a big change for a lot of companies.
• 20:39
  SPEAKER_01: We talked about this day one loss for acquired assets.
• 20:43
  SPEAKER_01: And this would, this proposal would require all acquired financial assets, with uh just a few limited exceptions, to follow what we call a gross-up approach that's currently applied to purchase credit deteriorated assets, where there's no credit loss recorded to earnings upon acquisition, but that allowance that you establish is offset by a gross up on the asset side.
• 21:06
  SPEAKER_01: So remember I said that you generally have a day one charge to earnings.
• 21:11
  SPEAKER_01: Um this is the exception.
• 21:12
  SPEAKER_01: So for purchase credit deteriorated assets under current gap, uh, that initial allowance is offset by an increase to the cost basis of the asset.
• 21:22
  SPEAKER_01: So you don't you have a balance sheet gross-up, you don't have a day one earnings impact for purchase credit deteriorated.
• 21:28
  SPEAKER_01: So we're left with two models for acquired assets.
• 21:31
  SPEAKER_01: We've got regular assets where you're going to take any Cecil charged earnings, and you've got this PCD model that's an increase to the asset basis.
• 21:39
  SPEAKER_01: Trevor Burrus, Jr.
• 21:40
  SPEAKER_03: Brad, before you go on, for our listeners that may not be familiar with that concept of purchase credit deteriorated, well, first of all, does it really matter for this discussion?
• 21:48
  SPEAKER_03: But second of all, is there an easy way to explain what that is?
• 21:52
  SPEAKER_01: It does matter, I guess, in background.
• 21:54
  SPEAKER_01: But the easy way to explain it is if you're acquiring an asset that has d has deteriorated.
• 22:00
  SPEAKER_01: Like kind of bad credit quality, um you're gonna be in you're gonna be in this model.
• 22:05
  SPEAKER_01: There's a lot of judgment to be used on how you define PCD versus regular assets.
• 22:10
  SPEAKER_03: That's what I was kind of curious about.
• 22:11
  SPEAKER_01: But it's essentially like very simply, think of it like I'm buying some assets and I've got a por uh portion of the portfolio that are already 90 days past due.
• 22:20
  SPEAKER_01: You know, so significant delinquency or like low credit ratings um, you know, for you know, for companies um that may conclude that may lead you to conclude that those assets are you know PCD as we call them today.
• 22:34
  SPEAKER_03: All right.
• 22:35
  SPEAKER_03: Well, definitely having just one model, since you just said there's two makes it sound easier.
• 22:39
  SPEAKER_03: But go ahead.
• 22:40
  SPEAKER_03: Is there more background sort of that you can share of of how we came to this?
• 22:45
  SPEAKER_01: Yeah.
• 22:45
  SPEAKER_01: So in their implementation review, uh their post-implementation review, the FASBI heard feedback from investors that this accounting for acquired financial assets is confusing and maybe overly complicated.
• 22:57
  SPEAKER_01: Um do we really need to have two models?
• 23:00
  SPEAKER_01: Could we apply just one model to all acquired assets?
• 23:03
  SPEAKER_01: And so the the FASBI expressed a preference to apply a single accounting model to all purchased financial assets.
• 23:10
  SPEAKER_01: So they issued an exposure draft in late June that would have all financial assets acquired in a business combination and all seasoned financial assets.
• 23:19
  SPEAKER_01: So after a period of time, if if they're transferred, they would follow this gross-up approach.
• 23:24
  SPEAKER_01: So no day one loss, uh, you gross up the balance sheet instead.
• 23:28
  SPEAKER_03: And let me pause you.
• 23:29
  SPEAKER_03: So when you were talking about those seasoned financial assets, that would be an asset acquisition, is that right?
• 23:34
  SPEAKER_01: That's right.
• 23:34
  SPEAKER_01: Okay.
• 23:34
  SPEAKER_01: That's right.
• 23:35
  SPEAKER_01: So this would remove the requirement to determine whether acquired assets is is um PCD, you know, purchase credit deteriorated or not.
• 23:45
  SPEAKER_01: It would simplify that.
• 23:47
  SPEAKER_01: Um and it it wouldn't change the accounting for originated financial assets or acquired financial assets that are not seasoned.
• 23:55
  SPEAKER_01: So for example, if you originated an asset, you originated a loan, and I bought it from you two days later, that wouldn't be a seasoned asset.
• 24:03
  SPEAKER_01: I would I would account for that as if I as if I had originated it myself.
• 24:07
  SPEAKER_03: All right.
• 24:07
  SPEAKER_03: And then comments on this are due at the end of August, August 28th.
• 24:11
  SPEAKER_01: Right.
• 24:11
  SPEAKER_01: So I we encourage, you know, for for companies that are involved in in acquiring assets, you know, maybe banks that are acquiring portfolios of loans or companies that are looking at business combinations where this day one, um, this day one charge um from Cecil has been a big deal that they focused on.
• 24:30
  SPEAKER_01: I think those are the kind of companies that want to pay attention to this and and give the comments to the FASBE.
• 24:35
  SPEAKER_03: And again, not to make this too much about this exposure draft, but on the surface, it seems like this is just good news.
• 24:41
  SPEAKER_03: Uh is there more when you dig into it that there may be some aspects that companies may be less supportive of, or you really have to dig into the exposure draft to get a sense.
• 24:50
  SPEAKER_01: Aaron Powell I think you have to dig in, but I I think that there will be mixed opinions on this.
• 24:55
  SPEAKER_01: Um it doesn't it addresses this day one loss concept for some assets, but it doesn't address it for originated financial assets.
• 25:04
  SPEAKER_01: So we're still creating or having living with the difference between originated and acquired.
• 25:09
  SPEAKER_01: And so I think that that um that the views on this will vary.
• 25:13
  SPEAKER_03: All right.
• 25:14
  SPEAKER_03: So definitely it's important then to weigh in.
• 25:16
  SPEAKER_03: And as we always say, you don't have to answer every question in the exposure draft if you want to send a letter and give a point of view.
• 25:22
  SPEAKER_03: So definitely uh do that if you have one.
• 25:25
  SPEAKER_03: And then, Brett, more broadly, uh, where should people go for more information on Cecil?
• 25:31
  SPEAKER_01: In our loans and investments guide, chapter seven has information on the model and a lot of a lot of QA in there.
• 25:37
  SPEAKER_03: All right, perfect.
• 25:38
  SPEAKER_03: And Brett, I have to say, you're 25 minutes, you're like right on the dot on this one.
• 25:42
  SPEAKER_03: So very impressed with this new format and such a pleasure to have you on.
• 25:46
  SPEAKER_01: Always happy to be here.
• 25:48
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• 25:50
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• 26:10
  SPEAKER_03: From Thought Leadership at PWC, I'm Heather Horn.
• 26:14
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