Back to Insights

The CECL Model – What Should My Not-For-Profit Organization Expect with Implementation?

April 3, 2024 4 Min Read Alerts, Article, Not-for-Profit
Daniel M. Bergvall, CPA Manager, Audit & Accounting

The Financial Accounting Standards Board (FASB) released an update that is currently in effect for private companies and not-for-profit organizations. Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses, changes the accounting for credit losses from a reactive accounting analysis to a proactive model using an expected credit loss methodology. Essentially, this accelerates the timing of when an allowance is recorded.

This is more commonly referred to as the current expected credit loss methodology (the CECL Model). The CECL Model requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current market conditions, and reasonable and supportable forecasts. The objective of the CECL Model is to estimate the net amount the entity expects to collect on its financial assets by using an allowance for credit losses.

How and When Will the New CECL Rules Impact Your Not-For-Profit Organization?

While financial institutions are the entities the update impacts the most, the update applies to all entities and impacts the following financial assets recorded at amortized cost: trade receivables, contract assets, lease receivables, loan receivables, and held-to-maturity debt securities. This will impact many organizations regarding receivables that result from revenue transactions within the scope of FASB ASC 606, Revenue from Contracts with Customers, and any bad debt allowance related to those receivables. This does not include receivables related to contributions since they are also not within the scope of FASB ASC 606. 

The ASU was effective for private companies and not-for-profit organizations whose fiscal years began after December 15, 2022. For calendar year end organizations, the entity would have adopted and implemented the new methodology as of January 1, 2023. For most non-calendar year end organizations, this would have been adopted for the fiscal year beginning in 2023.

What is the Change Required with the New CECL Model?

Under the previous guidance, an allowance would be assessed based on historical losses and recorded for a receivable once there were conditions that would give rise to uncertainty on collection (or an incurred loss was predictable). For instance, a past due receivable or a customer in bad financial condition. Under the CECL Model, entities are required to evaluate and record an allowance at the time the receivable is initially recorded. While historical losses are still part of the analysis, organizations must also evaluate current market conditions and forecasts in their determination of recording an allowance for credit losses. 

How Can a Not-For-Profit Organization Implement the CECL Model?

The update does not include specific details on how to calculate the expected credit loss estimate. Ultimately, an organization’s management determines the appropriate calculation that best fits the receivables of the organization.

These calculations can include, but are not limited to:

  • Pooling characteristics of receivables and evaluating collectability by pool
  • Determining which historical periods to utilize in an analysis of historical experience
  • Evaluating the qualities of the historical information and the current market conditions
  • Analyzing the buckets of past due collections against past collections history
  • Utilizing the best available information

What Else is There to Consider?

If, historically, an organization has not incurred bad debts, has had minimal bad debts, or certain write-offs can be determined as isolated incidents, then those don’t necessarily need to be factored into the historical loss information and subsequent calculation. An organization may take the stance that based on historical information as well as current market conditions and forecasts, the need for an allowance would be minimal.

If you have any questions or would like to discuss implementing the CECL Model, please contact Dan Bergvall, Manager, Audit & Accounting or any member of our Not-for-Profit Industry team.

Upcoming Event: 2024 Not-for-Profit Industry Breakfast Seminar

Join us on Thursday, April 25 at the Sheraton Valley Forge Hotel for our 2024 Not-for-Profit Industry Breakfast Seminar. Click here for more information and to register.

Contact the Author

Daniel M. Bergvall, CPA

Daniel M. Bergvall, CPA

Manager, Audit & Accounting

Not-for-Profit Specialist, Construction Specialist

Contact Us

We invite you to connect with us to discuss your needs and learn more about the Kreischer Miller difference.
Contact Us
You are using an unsupported version of Internet Explorer. To ensure security, performance, and full functionality, please upgrade to an up-to-date browser.