Research Opportunities to Confirm or Dispel the Myths of CECL: Looking Past the Headlines to Actual Results

Abstract

CECL—an accounting response to lessons learned from the 2008 to 2009 financial crisis—like most accounting standards, is not perfect. Imperfections are a direct result of tradeoffs embedded in major new standards issued by the Financial Accounting Standards Board. Tradeoffs arise from cost—benefit judgments made over many years by individual Board members—often holding diverse views about costs and what constitutes decision-useful information. This article contributes to the assessment of those judgments and perceived weaknesses in CECL so that future Boards can continue the iterative process of improving U.S. GAAP. Some stakeholders assert that there are weaknesses because they believe CECL (a) will change how banks are managed; (b) may reduce the lending products provided; (c) necessitates a need for banks to raise capital; (d) would create widespread confusion among investors; and (e) could reduce the availability of credit. Now that CECL is effective for of the entire banking industry, the author believes the Financial Accounting Standards Board (FASB) and public policy-makers will benefit from rigorous academic research to help understand whether CECL met its main objective of providing more decision-useful information about expected credit losses. To achieve this objective, CECL strived to better align measurement of the allowance for credit losses (a valuation account) with changes in credit risk and to require consideration of a broader range of information. This article explores the relevant accounting issues and early financial reporting results to pique the interest of academic researchers.