The CECL Handbook: A Practitioner’s Guide
First published:
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The evolution of purchased loan accounting: from FAS 91 to the CECL transition
Michael W Brown
Introduction
An overview of CECL: setting the context
Outlining the most impactful assumptions and challenges under CECL: an auditor’s view
Outlining the most impactful assumptions and challenges under CECL: a banker’s view
A banking industry perspective on key CECL decisions
Challenges and solutions for wholesale portfolios
Challenges and solutions for retail mortgage portfolios
Challenges and solutions for retail credit card portfolios
Challenges and solutions for student loans
Challenges and solutions for securities portfolios
The evolution of purchased loan accounting: from FAS 91 to the CECL transition
Challenges and solutions for qualitative allowance
Challenges and solutions: an auditor’s point of view
Early view of CECL integration into stress testing: practical approaches
Too many cooks in the kitchen: mastering the art of managing CECL volatility
Beyond CECL: rethinking bank transformation
Data collision: efficient lending under CECL
Cutting through the hype: how CECL is impacting investor views of procyclicality, credit analysis and M&A
Concentration risk: the CECL magnifying glass
Closing thoughts
The accounting for purchased loans has undergone a number of changes under US generally accepted accounting principles (US GAAP) since the early 1990s. However, accounting for performing loans that have not experienced deterioration in credit quality has not changed significantly at all. The changes over the years have been centred around loans generally purchased at a discount that have suffered deterioration since origination as both the Financial Accounting Standards Board (FASB) and investors in these assets have grappled with income recognition practices. This chapter will provide some historical background on the accounting for purchased loans, before shifting the focus to the significant change in accounting for purchased credit-deteriorated (PCD) loans that occurs at CECL transition. A real-life example of the CECL transition and the related journal entries will be presented at the end of the chapter.
FAS 91: DECEMBER 1986
Under Statement of Financial Accounting Standards 91 (FAS 91) released by FASB in December 1986, all loans acquired in an acquisition were treated identically for accounting purposes. For loans purchased as a group, the purchaser had two options
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