By: Stephen Newman
Current Expected Credit Losses (CECL) affects insurance companies that file IFRS or GAAP financial statements. Although the early adoption date isn’t until 2018, take steps now to make the transition easier and you’ll increase your ability to analyze these financial instruments today.
What is CECL?
CECL is an evaluation of a potential for credit-related losses on instruments that are not carried at fair value. GAAP reporting requires a look at the lifetime expected credit losses; IFRS requires a bifurcation to 12 months and lifetime credit risks. If you report on both accounting bases, then implementing analysis systems and processes for both today saves a reworking of your systems later.
What do you need to make these evaluations? You need systems that model securities, loans, etc. and the data behind these projections. Since these are no longer just asset management tools, these procedures are likely to be subject to SOX and ICOFR audit testing over financial reporting. Although there currently is not a prescribed analysis for forecasts of credit losses, there is likely to be several relevant methodologies (e.g. discounted cash flows, other-than-temporary impairments, and default risk charge).
To run these analyses, you must have up-to-date metrics for your portfolio holdings. Using historic measures often helps project credit risks. In addition, pooling assets with similar risk characteristics aids the analysis. Regardless of the method used, rigorous documentation is needed to support any conclusions that you reach. Integrating the projections with current holdings information (including pricing) streamlines the projection and analysis process.
SS&C supports global accounting requirements with a broad set of middle- to back-office capabilities that allow investment managers to automate the day-to-day activity in investment portfolios. Our Extend tables allow you to track historic information on your portfolio assets (subject to CECL) and customize the data captured for your analysis. Offered as a deployed, hosted, or outsourced solution, our data collections and robust reporting makes CECL easier and more efficient for you.
Learn more about how SS&C insurance solutions can help you get ready for CECL.