This document summarizes a presentation given by Ed Bayer and Mike Lubansky of Sageworks, a financial information company that provides credit risk management solutions. It discusses the development of accounting standards by FASB and IASB, including their differing approaches to credit loss models. The CECL model proposed by FASB requires lifetime expected losses be recognized immediately, likely increasing allowance levels significantly. IASB's credit deterioration model focuses on losses from credit-impaired loans and may increase allowance levels less than CECL. The document compares the two approaches and their impacts on calculating loan loss allowances.

1. Presented by:
Ed Bayer, Senior Risk Management Consultant
Mike Lubansky, Director of Consulting Services

2. 
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Financial information company that provides
credit and risk management solutions to
financial institutions
Data and applications used by thousands of
financial institutions and accounting firms
across North America
Awards
◦ Named to Inc. 500 list of fastest growing privately
held companies in the U.S.
◦ Named to Deloitte’s Technology Fast 500

3. 
Ed Bayer
◦ Ed Bayer is a senior risk management consultant at
Sageworks, where he serves as a specialist in assisting
financial institutions with accurately interpreting and
applying federal accounting guidance.
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Mike Lubansky
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Mike Lubansky is a director of consulting services at
Sageworks and serves as the in-house ALLL expert. He has
led the implementation of an automated ALLL solution for
more than 70 financial institutions ranging in size from $37
million to $20 billion in assets.

4. 
FASB = Financial Accounting Standards Board
◦ Since 1973, the designated organization in the
private sector for establishing standards of financial
accounting that govern the preparation of financial
reports by nongovernmental entities.
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IASB = International Accounting Standards
Board
◦ The independent standard-setting body of the
International Financial Reporting Standards (IFRS)
Foundation.

5. 
October 2002: Norwalk Agreement
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Joint projects
Short-term convergence project
IASB member on site at FASB offices
FASB monitoring of IASB projects
Convergence research project
Consideration of convergence potential in all Board agenda
decisions
Previous joint proposals

6. 
July 2012: The boards split on the
impairment model for loan losses
◦ According to FASB Chair Leslie Seidman, “..we believe it is
essential that we address the questions that have been
raised in the U.S. before moving forward with an exposure
draft..”
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FASB’s CECL Model vs. IASB’s Credit
Deterioration Model

7. 
Exposure draft issued December 2012
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Accounting Standards Update (ASU) Financial
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CECL = Current Expected Credit Losses
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Comment period extended to May 31, 2013
Instruments-Credit Losses (Subtopic 825-15)

8. 
Forward-looking requirements
“Probable” threshold removed
Longer loss horizon
Time value of money plays a role
Collateral definitions
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Impact on ALLL:
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◦ Speculation that it may increase 10 to 50 percent
◦ Could lead to one-time adjustment

9. 
Issued March 2013
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Exposure Draft (ED) Financial Instruments:
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Comment period ends July 5, 2013
Expected Credit Losses

10. 
Amount
◦ Bucket 1: Financial instruments whose credit quality
has not significantly deteriorated since initial
recognition
◦ Bucket 2: Financial instruments whose credit quality
has significantly deteriorated since initial
recognition
◦ Bucket 3: Financial instruments for which there is
objective evidence of an impairment as of the
reporting date
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Recognition

13. 
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Interest changes
Purchased or originated credit-impaired
financial assets
Simplified approach for trade and lease
receivables
New disclosures – incl. reconciliation and
explanation of assumptions
Impact on ALLL:
◦ Likely would cause an increase, probably less than
CECL model

14. 
CECL Model:
◦ Forward-looking
◦ Immediate write-offs
◦ Improved definitions on interest income, collateral
dependent, etc.
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Credit Deterioration Model:
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Also forward-looking
Immediate write-offs
Not requiring lifetime losses for pass-rated loans
Includes financial guarantee contracts

15. 
CECL Model
◦ How to calculate future expected losses
◦ Large, immediate increase in ALLL
◦ IASB feels this approach states originated assets as
below fair value
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Credit Deterioration Model
◦ How to calculate future expected losses
◦ Ambiguity surrounding Stage 2 classification
◦ CECL Model seems to be clearer in terms of PCI

16. 
Data requirements
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New disclosures
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Assumptions

17. 
Will there be a re-convergence?
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Timeline/Expectations

18. 
Sageworks’ Risk Management Consultants
◦ 919-851-7474
◦ surety@sageworks.com
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Future ALLL Webinars
Whitepaper on FASB vs. IASB will be available
Sageworks Blog
◦ How the CECL model could affect allowance levels
◦ What are financial institutions saying about FASB’s
CECL model?