Revisiting CECL: A Look into How CECL Applies to Construction Companies

By Lisa Palladino, on August 17th, 2023

You’ve likely heard of the new accounting standard (ASU 2016-13) current expected credit losses methodology (CECL) by now, especially if you are a member of the financial institutions industry. However, CECL applies to more than just financial institutions. In fact, it affects all companies with Generally Accepted Accounting Principles (GAAP) financial statements. In this article, we will explore the basics of CECL as well as key considerations for construction companies to be aware of during this time.

Purpose of the New Standard (ASU 2016-13)

The US GAAP is taking a proactive approach to determining credit losses opposed to reactive approach.

Allowances are to be booked on the balance sheet based on an expected loss model opposed to a probable loss that has already been incurred. What does this mean? It requires companies to measure expected losses for assets (in scope) based on historical experience, current conditions, and reasonable supportable forecasts. Trade receivables are the most common asset in scope. Just the mere fact that the company doesn’t have bad debt year over year doesn’t get you off the hook for potentially booking an allowance for credit losses.

Implementation takes effect Jan 2023. This means any interim financial statements for 2023 would need to have CECL implemented accordingly.

Typical Assets in Scope for the New Standard

Loan receivables

  • Trade receivables
  • Accrued interest receivables
  • Contract assets (i.e., costs in excess of billings)

Developing a Method for Your Business

CECL allows companies to apply judgment in developing methods that are appropriate for their industry and their business practices to determine the proper credit loss. However, no matter what the method is it must be developed in a sound and reasonable manner.

Steps for Calculating a Credit Loss Allowance for Trade Receivables

Below are some example step procedures to calculate a credit loss allowance for trade receivables would be to:

  1. Pool trade receivables
  2. Determine if there are similar risk characteristics; what is best characteristic to your company
    1. Examples are customer credit rating, aging categories (60 days past due, 90 days past due etc.), industry type, geography, product lines
  3. Identify the method to calculate allowance for credit losses
    1. Aging matrix based on historical loss and forecasting situations
      1. Management to determine % of potential write off in each bucket in #2 above
        1. Apply the percentages
  4. Calculate the allowance

Navigating the implementation of CECL can be complex and time consuming. If you need further guidance or have any questions on CECL implementation, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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