Nonprofits: How the New CECL Accounting Standard Impacts Financial Reporting
Understanding the current expected credit loss standard
Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASU's, is effective as of Jan. 1, 2023 for calendar-year organizations. The standard introduces the current expected credit loss module commonly referred to as "CECL" (pronounced see-suhl) and takes aim at the current reactive method of recognizing credit losses with a more proactive method.
The Impacts of CECL
The standard will most certainly have the largest impact on the banking and financing industry; however, it will apply to not-for-profits to the extent that they have financial instruments (think trade receivables, contract assets and loans receivable; receivables such as pledges and contributions fall outside the scope of the standard).
Under the previous standard's incurred loss model, credit losses were recognized when it was probable that the loss had been incurred while taking into consideration historical loss and current economic conditions. Under this model, losses if any, are generally recognized subsequent to the initial transaction.
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