By Keoni Moniz, CPA, Assurance Senior
In 2016, FASB issued ASU 2016-13, Financial Instruments-Credit Losses, also known as Current Expected Credit Losses (CECL). Effective for all fiscal years beginning after December 15, 2022, this standard will be applicable for all non-profit organizations. While primarily directed at financial institutions, any organization that holds financial assets not accounted for at fair value may be affected. Most common examples of these financial instruments that may have an impact on not-for-profit reporting are: notes receivable, held to maturity debt securities, and grant and trade receivables. Promises to give (contributions and pledges) will not be impacted by this standard and are scoped out. The objective of this standard is to consider expected losses over the contractual term of a financial asset, usually upon initial recognition. This replaces the prior standard where losses are recognized only as they become probable.
Luckily, this new standard allows some flexibility in how an organization may determine its expected credit loss; it does not mandate a specific method. When considering short term grant and trade receivables, CECL will mostly be in line with current practices, however, a forward looking assessment will need to be considered when anticipating losses and determining an allowance, even for trade receivables that have not yet reached their due date. Inputs for this calculation may include: discounted cash flow method, historical loss rates, current conditions, analysis of aging schedules, or customer credit worthiness.
Organizations with loan or lease financing receivables may need to consider expected credit losses arising from financing activity at loan or lease inception. Considering historical loss data, as well as current conditions, estimated expected credit loss should reflect the likelihood of borrower defaulting on payments. Operating lease receivables, and related party loans will not fall within scope of this standard.
Additional disclosures required by CECL will allow users of financial statements to better understand how the Organization manages risk, estimates losses, and how these estimates change from year to year. Required disclosures will include: the Organization’s assumptions and estimates considered when calculating a loss allowance, an analysis of overdue receivables, a roll forward of expected credit losses, and other applicable indicators of customer credit quality.
If you have any additional questions about CECL and your Organization, please reach out to our team of experienced accountants in our Nonprofit Group.