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Does Current Expected Credit Loss Accounting Reflect A Best Estimate? Time Series Evidence From Credit Loss Reporting

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  • Arianna Spina Pinello
  • Ernest Lee Puschaver

Abstract

The current expected credit losses (CECL) accounting model became effective January 1, 2020. This paper examines the relationship between actual loan losses, allowances for credit losses (ACLs), and provisions for credit losses (PCLs) reported by three of the largest U.S. banks for the three years pre-CECL-adoption and the three years post-CECL-adoption. Data was obtained from the banks’ filings with the Securities & Exchange Commission on Forms 10-K and 10-Q, including disclosure commentaries by management, as well as earnings releases and transcripts from earnings conference calls with analysts. Our results indicate that CECL has generated faster and greater responses to the macroeconomic environment. However, there has also arisen greater complexity and apparent instances of management control over the estimatingprocess through model input assumptions and the weighting of various forecast scenarios, such that at times, the ACL levels being established appear inconsistent with the related management disclosures about economic outlook. Further, by utilizing analytics with different scenarios and assigning variable weightingof importance, a resulting ACL may not represent management’s “best estimate†but instead may reflect “contingency†considerations for relatively improbable adverse economic developments.

Suggested Citation

  • Arianna Spina Pinello & Ernest Lee Puschaver, 2023. "Does Current Expected Credit Loss Accounting Reflect A Best Estimate? Time Series Evidence From Credit Loss Reporting," Accounting & Taxation, The Institute for Business and Finance Research, vol. 15(1), pages 83-103.
    • Handle: RePEc:ibf:acttax:v:15:y:2023:i:1:p:83-103
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    References listed on IDEAS

    as
    1. Germán López‐Espinosa & Gaizka Ormazabal & Yuki Sakasai, 2021. "Switching from Incurred to Expected Loan Loss Provisioning: Early Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 59(3), pages 757-804, June.
    2. Michael Jacobs, 2019. "An Analysis of the Impact of Modeling Assumptions in the Current Expected Credit Loss (CECL) Framework on the Provisioning for Credit Loss," Journal of Risk & Control, Risk Market Journals, vol. 6(1), pages 65-112.
    3. Arianna Pinello & Lee Puschaver & Ara Volkan, 2020. "The Relationship Between Critical Accounting Estimates And Critical Audit Matters," Accounting & Taxation, The Institute for Business and Finance Research, vol. 12(1), pages 23-33.
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    More about this item

    Keywords

    CECL; Credit Losses; PCL; ACL; Provision for Credit Losses; Allowance for Credit Losses;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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