Chair: Eric Twombly, Devon Solutions LLC
In 2016, FASB issued its ASU2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement Of Credit Losses On Financial Instruments, which changes the way credit losses on financial assets are realized for financial statement reporting purposes from a realized loss model to a “Current Expected Credit Loss” model. ASU2016-13 is going into effect for all US GAAP financial statements for FY 2020. This follows similar provisions adopted by IASB, in IFRS 9 - Financial Instruments, which went into effect for FY2019 for financial statements under IFRS. Although ASU2016-13 was primarily enacted for bank loans, it affects many assets on energy company balance sheets including most notably, trade accounts receivable.
Current Expected Credit Loss (“CECL”) will materially change the role of the credit function for companies within the energy industry. CECL encompasses a forward looking view of potential credit losses rather than specific provisions and tallying realized collection losses under the old model. The estimation of credit risk exposure under a CECL model will now directly impact each period’s financial results. For instance, a deterioration in credit quality of a company’s customers may negatively impact current reported earnings without any change in collection experience during the accounting period. Auditors will increasingly scrutinize how credit risk is estimated and attributed to financial results under CECL models. Senior managers will be much more likely to be involved in credit risk management.
In order to prepare for this sea change in credit risk estimation and management, the IECA is forming a working group to discuss the issues surrounding CECL, including but not limited to: calculation methodology, models and financial result attribution, accounting policies and documentation, audit support, internal management reporting and changes in stakeholder management more generally.
If you are interested in joining the CECL Working Group or learning more, please contact Eric Twombly at email@example.com.