CECL Standard’s Significant Impact on Financing and Trade Accounts Receivable

AAFCPAs Provides Business Guidance on FASB’S New CECL Model

Guidance May Have a Significant Financial Reporting Impact on Financing and Trade Accounts Receivable

The long-awaited Current Expected Credit Losses (CECL) Standard, Accounting Standards Update 2016-13 – Financial Instruments-Credit Losses (Topic 326) will be effective for nonpublic business entities and not-for-profit entities for fiscal years beginning after December 15, 2022. This means CECL will be effective for the calendar year 2023 reporting period and fiscal year 2024 for off year end entities (e.g., June fiscal years).

The most significant change from current accounting guidance is the change from the incurred loss model to the expected loss model. Under the new CECL model, an entity will recognize the estimated expected loss over the lifetime of the financial asset at the origination date and subsequently adjusted at the end of each reporting period.


Two factors that make CECL different from the legacy incurred-loss model are:

  1. Expected Losses Versus Incurred Losses
    CECL requires an entity to estimate expected future credit losses based on information about past events, current conditions, and reasonable and supportable forecasts of future conditions.
  2. Estimates Represent Lifetime Losses
    Expected credit losses over the contractual life of a financial asset must be recorded at origination rather than waiting until a loss event has occurred.


The evaluation of expected financial asset losses should be performed on a collective (pool) basis where similar risk characteristics exist (e.g., the type of financial asset, such as a loan, a receivable, etc.).  For assets that do not fall into a collective group with similar risk characteristics, the entity must evaluate the financial asset on an individual basis.

Below are the main criteria used to estimate the expected credit loss:

  1. Historical Credit Loss Experience*
  2. Current Conditions
  3. Reasonable and Supportable Forecasts

*An entity shall consider adjustments to historical loss information for differences in current asset specific characteristics and consider both qualitative and quantitative factors in the assessment.


Under the CECL guidance, there is no specific method to estimate and measure credit losses but rather what economic events most closely align to management’s expectations of expected credit losses for that financial asset or the collective group of financial assets.

Below are some relevant and cited methods for consideration:

  1. Discounted Cash Flow Method
  2. Loss Rate Method
  3. Roll Rate Method
  4. Probability–of–Default Method
  5. Aging Schedule


The CECL standard applies to several commonly held financial assets, thus many entities will find that they have financial assets which fall within the scope of the new standard:

  • Financing receivables (i.e., loans, trade accounts receivable, notes receivable, credit cards, lease receivable arising from sales type or direct financing leases)
  • Held-to-maturity debt securities
  • Receivables that result from revenue transactions within the scope of Topic 606 on revenue from contracts with customers and Topic 610 on other income (i.e., contract assets)
  • Receivables from Topic 860 repurchase and securities lending agreements
  • Net investments in leases recognized by lessor (Topic 842)
  • Off-balance-sheet credit exposures (guarantees, loan commitments)
  • Reinsurance recoverable (Topic 944)
  • Programmatic loans

Financial assets excluded from the scope of this new standard include:

  • Promises to give (pledges receivable)
  • Loans and receivables between entities under common control
  • Loans issued under defined contribution employee benefit plans
  • Receivables arising from operating leases under Topic 842

This standard is complex and careful analysis is necessary to determine whether the entity’s assets are within scope and then to determine the impact to the entity. If you have questions about how this ASU impacts you, please contact Aaron Diamond, CPA at 774.512.4182 or adiamond@nullaafcpa.comJeffrey Mead, CPA, CGMA at 774.512.4131 or jmead@nullaafcpa.com—or your AAFCPAs partner.

About the Authors

Aaron is responsible for planning and executing financial statement attestations for privately held and private-equity (PE) group managed companies, including manufacturers & distributors, retailers, cannabis operators, high-tech/software developers, and professional services firms. He also has extensive experience serving private schools and higher education institutions. He advises emerging start-ups as well as mature companies well-established in their industries.
Jeff Mead, Audit Partner
Jeffrey is a Partner and leader of AAFCPAs’ Commercial Practice, providing proactive audit/assurance, tax, and advisory solutions for closely-held and privately-owned businesses. His diverse commercial client base includes: professional service firms, technology companies, publishers, and manufacturers/distributors.