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Survey: Banks not prepared for new
accounting standards ahead
A survey report from Sageworks
Raleigh, N.C., August 12, 2014 – Despite accounting standard changes on the horizon later this year, the majority of
banks are not currently prepared to meet the requirements of the proposed model, which will mandate how banks
calculate their allowance for loan and lease losses (ALLL). This insight is derived from a survey sponsored by
Sageworks, a financial information company, regarding financial institutions’ plans and their current process for
calculating the ALLL, a balance-sheet reserve for expected credit losses.
The survey uncovered three primary findings that shed light on financial institutions’ readiness for the impending
changes:



Manual processes, which may be insufficient for handling the complexity of the new model, are prevalent in
current calculations of the ALLL.
A significant share of credit risk managers indicated little to no familiarity with the model expected to be
adopted by the Financial Accounting Standards Board (FASB).
Many banks are awaiting the finalization of the FASB’s Current Expected Credit Loss (CECL) model before
making substantial modifications to their current processes.
The recent study surveyed executives in credit risk management at U.S. banks and credit unions.
The proposed FASB CECL model takes a “life of loan” approach to the ALLL calculation, requiring banks to book loan
losses for the entire duration of the loan at origination. This is expected to increase banks’ reserve levels by 30 to 50
percent from the current standards. Additionally, the new model could require 1,000 times more data, increasing the
difficulty and complexity of the calculation. Sageworks’ survey found that many institutions are currently using
processes that may be unable to accommodate the increasing data requirements and complexity.
When asked their current
method for calculating their
financial institution’s ALLL
reserve, nearly two-thirds – 65
percent – of respondents said
they used spreadsheets.
Spreadsheets are prone to
errors and are often sources of
problems when examiners are
present.
Which of the following best describes your institution's
6% 2% current process for calculating its ALLL reserve?
Spreadsheets/Excel
11%
External software
16%
65%
Proprietary software developed inhouse
Don't know
Consulting firm
Sageworks | 5565 Centerview Drive | Raleigh, NC 27606 | 919.851.7474 x596 | www.sageworks.com
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How familar are you personally with the
Financial Accounting Standard Board's
(FASB) proposed Current Expected Credit
Loss (CECL) model?
While it may not come as a surprise that many
financial institutions are not prepared to manage the
influx of data that will be necessary to adequately
calculate their reserves under the FASB’s CECL
model, it is perhaps more surprising that 37 percent
of those surveyed are not familiar with the model
itself. Over one-third indicated they had little to no
familiarity with FASB’s CECL model, consequently
confirming a lack of preparation and understanding
of how the plan would impact their current method
of determining the reserve.
37%
63%
Familiar
Unfamiliar
In late July, the International Accounting Standards Board (IASB) instituted reform to its previous incurred loss model.
European banks and other banks outside the U.S. will have to record expected losses for all loans in the first twelve
months, and will have to account for losses over the life of the loan if a credit impairment is probable. The release of
the CECL model was previously met with skepticism by some U.S. banks, but the passing of the IASB’s IFRS 9 Financial
Instruments leaves the reality of the CECL model nearly indisputable.
To the best of your knowledge, when would your institution be most likely to
acquire ALLL software to comply with the FASB CECL model requirements?
34%
When the CECL proposal is finalized
21%
Prior to the model enforcement
19%
Don't know
12%
Already have software
8%
By the end of 2014
After our first exam
Never
6%
0%
Among respondents familiar with the expected accounting standards changes, more than one-third – 34 percent -noted that their institutions would wait until the CECL model is finalized before implementing an automated solution.
Only 12 percent already have software compliant with the new model’s proposed requirements.
Ed Bayer, managing director, financial institutions division at Sageworks, commented, "With the impending changes all
but imminent, banks should be upgrading their processes and practices to capture a vast amount of data at the loan
level. Capturing this data dynamically, archiving the data at each month’s end and making it accessible, will be crucial
for defensibility and to limit subjectivity under the new model."
Sageworks | 5565 Centerview Drive | Raleigh, NC 27606 | 919.851.7474 x596 | www.sageworks.com
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About the Survey
SourceMedia Research conducted the online survey on behalf of Sageworks during the months of June and July 2014,
collecting responses from 236 banking and credit union executives with a role in credit risk management. The poll’s
respondents were all involved in calculating the ALLL reserve or were decision makers for credit risk management
software. The sample was drawn from American Banker subscribers.
About Sageworks
Sageworks is a financial information company and the leader in the analysis of privately held companies. The
company provides risk-management solutions to financial institutions and financial analysis and benchmarking
applications to accounting firms and private companies. Sageworks’ data and applications are used by thousands of
accounting firms and financial institutions across North America and internationally.
Contact
Sageworks Data & Research Team
Email: research@sageworks.com
Phone: 919-851-7474 ext. 596
Twitter: @sageworks
Sageworks | 5565 Centerview Drive | Raleigh, NC 27606 | 919.851.7474 x596 | www.sageworks.com
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