Question

11. Define the CECL model for accounts receivable. On what does It base the estimate of the allowance for uncollectible accounts?

12. Define the ECL model for accounts receivable. How does it differ from the CECL model?

13. Is restricted cash include in the reconciliation of cash balances on statement cash of flows? Explain.

Answer 1

CECL ( Current expected credit losses) - It’s the new methodology for estimating allowances for credit losses issued by the Financial Accounting Standards Board (FASB). The FASB’s update now mandates that companies include forward-looking, or predictive, information in calculations of bad debt. The financial crisis of 2007-2008 demonstrated that the Allowance for Loan and Lease Losses (ALLL) accounting standard does not allow for timely adjustment of reserve levels based on reasonable expectation of future conditions. It relies on losses that are incurred but not realized, i.e., when it is known with some certainty that future cash flows will not be collected. During the crisis, negative outlook of the economy was not taken into account for losses calculations. As a result, reserves were not adjusted for future expected losses. The FASB reviewed the standard and replaced it with CECL. CECL requires expected losses to be estimated over the remaining life of the loans, as opposed to incurred losses of the current standard.

ECL (Expected Credit Loss)- It is the probability-weighted estimate of credit losses (i.e., the present value of all cash shortfalls) over the expected life of a Financial Instrument. The concept is particularly important in the context of IFRS 9. A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract (scheduled or contractual cashflows) and the cash flows that the entity expects to receive (actual expected cashflows). Because expected credit losses consider the amount and timing of payments, a credit loss arises even if the entity expects to be paid in full but later than when contractually due.ECL can be measured either at an individual exposure level or a collective portfolio level (grouped exposures based on shared credit risk characteristics). Under the new impairment approach introduced by IFRS 9 it is no longer necessary for a credit event to have occurred before credit losses are recognised (as with the previous incurred loss accounting approach). Instead, an entity always accounts for expected credit losses, and also changes in those expected credit losses.The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition and, consequently, more timely information is provided about expected credit losses.

How ECL differs from CECL -

The ECL and CECL approaches differ in several respects. The main difference is the fact that while the CECL approach mandates the calculation of lifetime expected credit losses for all financial assets under its scope since their inception, the ECL approach in IFRS 9 introduces a dual credit loss measurement approach whereby the loss allowance is measured at an amount equal to either the 12-month expected credit losses2 for those financial assets classified in stage 1 or the lifetime expected credit losses for those assets classified in stages 2 (financial assets with a “significant increase in credit risk”) and 3 (“impaired financial assets”). Among the many other differences, it is worth referring to the consideration of financial assets at fair value through other comprehensive income (excluded in CECL) and to the treatment of loan commitments (more prudent in ECL).

Is restricted cash include in the reconciliation of cash balances on statement cash of flows?

In Novrember 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows.