The MST 2018 National CECL Conference will feature a session from a former member of the Financial Accounting Standards Board (FASB), Larry Smith. Currently a senior managing director with FTI Consulting, Mr. Smith served two five-year terms with the FASB. During his tenure as a board member, the FASB undertook major projects and promulgated new standards in the areas of revenue recognition, leases, credit losses, derivatives and consolidations, among others. He served as chairman of the Transition Resource Group for ASC Topic 326 “Measurement of Credit Losses on Financial Instruments” (CECL), working with various constituencies in addressing implementation issues related to the new standard. He also served as the FASB’s Official Observer to the PCAOB’s Standing Advisory Group.
Mr. Smith’s session will focus on the fundamental principles of the CECL model, including a discussion of the various alternatives in estimating credit losses that are permitted under the standard and the FASB’s considerations in creating those alternatives and the related disclosure requirements. He will address the flexibility the standard provides in: selecting a loss estimation methodology, determining what data should be used to estimate losses, establishing pools with shared risk characteristics, making reasonable and supportable forecasts, and complying with the disclosure requirements.
“At the end of the day,” he noted, “the fundamental principle of the CECL model is that financial assets carried at amortized costs should be recorded net of a valuation allowance so that the net amount is what the entity expects to collect. There is little specific prescriptive guidance on how one applies that principle. Consequently, there are a plethora of judgments that must be made to apply the new standard.”
Mr. Smith brings an interesting perspective to the MST 2018 National CECL Conference. He was one of two Board members who voted against the new CECL standard. While agreeing that users of financial statements should be provided with an estimate of expected lifetime losses, he disagreed with the requirement to recognize expected lifetime credit losses on the day a financial asset is originated or purchased. “I didn’t think the standard reflected the economic realty of lending activities,” he said.