– Alrighty, let’s talk about a new area called credit losses, and it kinda takes something that we dealt with for a long time, that debt expense for example, and we’re renaming it to credit losses. And this is an area called current expected credit loss, or CECL, so current expected credit loss, or I’ll refer to a CECL. And basically, the CECL model is a credit loss accounting standard that was issued by the feds, being it came about because of the global financial crisis of 2008. 2007, 2008 there was a whole big mess. And what happened is under the old rules, banks would loan out money. So they go sure, we’ll loan you some money, you need some money, not a problem, we’ll grant everybody credit.

So they would loan a lot of money. They would set up an allowance for bad loans, or amounts that were not expected to be collected. And they did this when it was probable that a credit loss had been incurred. So one of the old rules, they wouldn’t allow you to book it until they had occurred. However, banks really weren’t forward thinking enough to see that there was an upcoming economic downturn. So what happened is receivables were going up, but the loan loss reserve, or their un-collectable allowance wasn’t increasing at the same rate as their outstanding receivables went up. Because of this, companies like Lehman Brothers went bankrupt. Other companies like Merrill Lynch and AIG, Freddie Mac, Fannie Mae, all of those had to be rescued and bailed out by the government. So losses were recorded too late.

So it’s kind of like saying a little bit too, a little too late, huh, a little too little too late. So now, under the new rules, CECL, which is the current expected credit loss, the banks need to go and they need to estimate the expected credit loss of an instrument over its entire lifetime. So we’re looking at the future potential losses. In the olden days, it was just what had occurred, or what had been incurred. Now we’re saying, okay, let’s look ahead and say, oh, here’s 100% receivable, we only think 85% may be collected by the end, therefore we need to set up that credit loss for the other 15% now, or 15% now. So we’re gonna set this up when the asset is either acquired or originated. So if I loan you money, that’s when it’s originated. If I’m purchasing it, and we’ll talk about a purchase credit loss later on. If you’re purchasing it, then it would be when acquired, even if the risk of loss is remote. Now, in the olden days we said not if it’s remote, only when it’s incurred. Now we say even if it’s remote, we’re still gonna recognize it.

So now we’re gonna recognize a credit loss on the assets that don’t even have evidence of a credit deterioration. So it hasn’t yet deteriorated, we don’t know if it’s gonna deteriorate, but we’re gonna forecast looking way out into the future. So with CECL, current expected credit loss, it allows better transparency of the credit risk that exists in the bank’s assets. It also went in and added many, many more disclosure requirements. When we talk about disclosing in the financial statements. Whose statements are these? Management’s, right? We’re gonna disclose it here, and it also has more of a forward-looking view of the real or true credit risk. That way, the banks can set aside enough capital to cover the potential future losses.

So basically, the banks can loan you money, they’re gonna have a receivable, they’re gonna book those future estimated losses, and we’re gonna be booking those now, so our caring value or amortized cost to the receivable is at a lower amount. So that way, our allowance is sufficient enough to cover the losses. So, you can think of it this way. In the old rules, it was recorded as incurred. So we recorded the incurred loss in the portfolio, that was called the incurred loss model, again, it was based on the loss. The new rules under CECL, it records the risk in the portfolio, so that’s gonna be called the current expected credit loss model. So instead of the incurred loss model, it’s the current expected credit loss model. So again, CECL is forward looking, it considers the entire lifetime of the loan, even if it’s remote. It results in earlier recognition, and it also may result in recognition where in the past, none of it would’ve been made. So in other words, we may not have booked a loss in the olden days, where in the new days, we will. Since receivables, we’re looking at accounts receivable, notes receivable, long term receivables as well, such as receivables that are current with respect to their payment terms. So in other words, we may have a receivable where everyone’s current with their payment terms, it doesn’t look like a problem. But we’re having to be forward looking and say well, what do we think’s gonna happen in the future?

Now, to calculate the allowance, we can use historical information pass, current conditions present, or terms they call reasonable and supportable forecasts. So that’s gonna be for the future. So again, it’s kinda called the predictive model. And we’ll look at that a little bit later. So if you come on over here, come on down, we’re looking at the current expected credit loss model, or CECL, right, CECL. So that’s the current expected credit loss model. We’re estimating the expected credit loss over the entire lifetime, and that’s whether when you acquire it or when it’s originated, originated, I originate the loan, I acquired it, I went out and purchased it for you. We’re gonna look at historical information to figure out a valuation allowance, and this is just a quick overview of where we’re gonna go. We’re gonna look at current information, but also reasonable and supportable forecasts. So looking out into the future, that’s what we’re gonna be looking at to see if, in fact, it makes sense. If, in fact, the information is reasonable, all right?

Now, our goal is to book the net amount expected to be collected, the net amount, and we’re gonna book that on the assets, and we’re going to look at the assets that are either measured at amortized cost, which we’ll talk about, amortized cost, kinda like your caring value. Or some other asset. So for example, we’re gonna talk about AFS, available for sale debt securities. That’s another area where we’re gonna look at setting up these credit losses, but we’re gonna talk about that in a different section, we’ll talk about that in the investment section, so we’re not worried about AFS debt securities today. We’re gonna be looking at amortized cost first, kinda get the understanding, and then throughout the course, you’ll see where we had to make adjustments or updates for this credit loss standard.

So for example, I loan you money or I have an account receivable, and you know we’re not gonna collect all of it. What they’re saying is we’re gonna hit the credit loss now, right? We’re going to expense it now, and we’re gonna set up an allowance account as well. So basically, the journal entry would be, and I’ll put it right here. Basically we’re gonna debit credit loss expense, right? And that’s an expense, that goes to the income statement. And we’re gonna credit allowance for credit loss expense, and that goes on the balance sheet. So notice, we’ve got our debit to expense, which goes to the income statement. We’ve got an allowance. It used to be called allowance for doubtful accounts for accounts receivable, so allowance for doubtful accounts to get it to the NRB, now we call it allowance for credit loss expense. It’s the allowance, it goes to the balance sheet. It is a contra to the receivable. So if we have a receivable here, some kind of AR, we’re setting up an allowance, which is gonna be the credit here. That’s gonna be basically the net value. That’s gonna be the amortized cost. That’s gonna be how much we think we’re going to get at the time that we’re gonna collect it. What we used to do is we didn’t hit this until it was incurred generally. We’d do some estimation techniques and hit it.

Now what they’re saying is look at how much you think you’re gonna collect at the very end, potential future. Reasonable and supportable forecasts. Hit that, and then we’re gonna hit that now. So that’s basically what we’re talking about. So again, we’re hitting this debit to expense, similar. We’re hitting an allowance account. The allowance is basically a contra or a reduction of this, so it’s a contra asset or evaluation allowance to the receivable. This could be an account receivable, note receivable, whatever kind of receivable it is, we want to account for that credit loss now. Now the caring value is measured as I said, amortized cost, using the effective interest rate at inception of the interest at the instrument. And it’s reduced by the allowance for credit losses. Now on each reporting day, what we’re gonna do is we’re going to adjust the allowance either up, increasing it, that way, it will equal, the net amount equals what management expects to collect. So what we’re gonna do is every year, we’re gonna say, okay, how much should this be? So let’s say this is 100 and this is five. So the net is 95. Then at the end of the next year we go, you know what? We have new information, the market’s changed. We only think that we’re going to collect 25, so 100 minus 25, we think that’s gonna be 75. Therefore, we need to hit this for another 20, another 20. So basically what we’re doing is, we set it up in inception, and then we’re going to adjust it at every reporting date. So whether it’s 1231 financial statements, we’re gonna adjust it up or down to adjust it accordingly. If we’re gonna increase the allowance, then basically it’s gonna be credit loss expense and your allowance for credit loss. If it’s a decrease, let’s say now instead of 25, we wanna go down to 15, then we flip this. Debit allowance for credit loss expense. So we’re reducing it by whatever, let’s say 10. What that’s going to be is a reversal of the credit loss expense. And that would be for 10 as well. So that’s called a reversal, we would just be reversing it out.

So again, we’re, it’s a similar concept that’s existed since you were an itty bitty kiddy in a cribby. What we’re doing here is we’re just making some adjustments to it, so that way the concepts make sense. So the goal on the balance sheet is to reflect the net amount expected to be collected. So, we’re gonna have, let’s say, the receivable. So let me clean this up a little bit here. So we have the receivable, let’s try it in black, and let’s say the receivable is gonna be at the amortized cost. That’s over 100. Then we’re going to set up the allowance for the credit loss. And let’s say the allowance is 15, 100 minus 15, that’s 85. So we’re gonna have it at the, basically the amount we expect to collect, kinda like your NRV for receivables. So that’s what we’re looking at as far as how we want it to be on the balance sheet. So we’re going to adjust that again. It’s basically what some people have said is the amount is the same, it’s just the timing of when you’re gonna book it that is kinda different. All right, so if you look in your notes, you’ll see that it applies to a variety of assets, and it applies to a variety of assets that are measured at amortized cost. And some other assets, and again, the other assets we’ll talk about a little bit later in other sections. Like I said, AFS debt securities available for sale. And held the maturity debt, securities we’ll talk about in the investment section.

So in your notes, there are a variety of assets, what are some of the assets? Trade accounts receivable, so that would be a receivable from the normal course of business. Financing receivables, and a financing receivable is basically defined as a contractual right to receive money on demand or on fixed or determinable dates. And which is recognized in the balance sheet. So some financing receivables might be a loan receivable, accounts receivable, notes receivable. So it’s any kind of financing receivable that we’re acquiring. And remember, we talked about either when it’s acquired or when it originated. Held the maturity debt securities, and again, in another section, we’ll talk about trading securities, available for sale, held and maturity. So held to maturity debt securities, available for sale debt securities, other assets, like a lessors net investment in the lease.

So these other assets, that would be a receivable. So we have a lease receivable account and we’re looking at this from the lessor’s standpoint. We’ll talk about lessor/lessee. This would be a non-operating lease from a lessor, like a sales type, a direct financing lease. So that’s what we’re looking at from the lessor standpoint. It might be a financing lease to the lessee, but a non-operating lease to the lessor. So that’ll make more sense after covering the lease section. Also, certain things like certain types of guarantees. In the notes, you’ll see a list of exclusions, and these are financial assets that are not subject to credit losses. Things like equity securities, right? Stocks, and you may recall earlier, we talked about the fair value model. Well, we’re gonna measure securities at fair value, right? And changes already go to your income statement. So for example, you buy Apple stock worth two, three, $400, I put it in there at fair value and then I just adjust it. And in the previous section, we talked about the fair value model, fair value measurement. That was over here, that was different ways to measure fair value, what’s considered fair value, what isn’t? So that was equity securities, for example. Trading debt securities that are also carried at fair value with the changes going into net income. Operating lease receivables, those are things that are non-operating.

So non-operating leases are included, operating lease receivables are not. And we’ll talk about that more in leases. Related party loans or related party receivables because if they are under a common control of the same company, then that’s not included, kinda like a related party transaction. Other types of loans, you’ll see them listed in the book. Those are certain things that are excluded. Now, there isn’t a specific credit loss estimation method, and that’s what’s kinda unique. In the olden days, we said here’s the method to use, here’s how you’re gonna calculate it and so on. Now what they’re saying is look, you use your judgment to determine the most appropriate method for you, for the industry, for the business that you’re in. So it could be based on the holdings, whatever that receivable consists of. Or some loss experience that you’ve had in the past. In the past, 3% is usually un-collectable, maybe that’s what I’ll use. So whatever best relates to the company. Whatever best relates to the asset. Let’s say I have a group or a pool of these receivables, well there’s also a lot of flexibility on how to account for the pool of financial assets. If they share similar risk characteristics, and those risk, and again, that’s what we’re measuring. Remember in the old days, we measured the loss, now we’re measuring the risk. We’re saying what’s the future risk, what’s gonna happen down the road?

So, risk characteristics can include things like risk ratings, the financial asset types that we’re looking at. It could be collateral types, the size, geographical location, the customer types. In other words, I’m making sales, are they sales to wholesalers, are they sales to retailers? What kind of client am I selling these things to? What we need to do is we need to pull these together on what we call a collective basis. Then what we’re gonna do is recheck them each measurement date. If they’re not similar, then we can evaluate ’em on an individual asset basis. But again, we’re concerned with what we call the risk characteristic. So that’ll tell us how to kind of pull these assets together as to how we should account for ’em. And then at the end of the year, if that pool has gone up or gone down, then we will set up the allowance again to allow for your credit loss, all right? So again, we hit credit loss expense, allowance for credit loss expense. So again, there’s a lot of judgment here in how you’re gonna do it. There’s judgment here in how you’re gonna pull them together. You’re gonna do what’s best and most fairly states your company’s financial statements. Also as I mentioned earlier, to calculate the actual allowance, it is going, and that’s what we’re calculating, the estimate of expected credit loss, we can use historical information, current condition, or reasonable and supportable forecasts.

Now, if you look over here, what we’re looking at as I mentioned earlier, I’ll show you again. We can base it on historical. Again, looking back, we say ah well, historically, 70, 97% are what we’re gonna collect. Okay, then that’s what I’m gonna hit. Current conditions saying wow, the economy’s kinda suckin’ lately, maybe collectability’s gonna drop because more people are gonna go into default. And again, the olden rule is what was incurred, that way was more conservative and, well, let’s say it was less conservative because we weren’t booking enough, and then that’s what happened in the 2008 financial crisis. Now they’re saying we don’t want that, we wanna make sure companies have enough of an allowance for bad debts for credit loss. That way their net caring amount will be lower. Reasonable and supportable forecasts. Again, those are the things that we’re looking at. So when doing so in your notes, you’ll see a list of different methods to help calculate that allowance. And there’s no one method that you have to use. There’s one there, the first one mentioned is discounted cashflow method, DCF, discounted cashflow method. And the discounted cashflow method, it says losses are estimated by comparing the asset’s amortized cost to the present value of estimated future cash flows. So we’re gonna look at, okay, what is our amortized cost, what is it in our books for, versus how much do we think we’re gonna get? If we think we’re gonna get less than what we have it in our books for, we better write it down. Now this one’s widely used, and a lot of people think, oh, you’re required to use present value discounted cash flows, you’re not. You don’t have to use this, you’re gonna use whatever is best for your business. Another option is loss rate method, and that’s where losses are estimated as a percentage of total exposure.

So we’ll take our estimated loss rate times the amortized cost. So for example, this might be receivables and you say okay, here is total credit sales, not total sales, but credit sales, ’cause if it’s a cash sale, what’s the probability of collecting it? 100%, if it’s a credit sale, well maybe not. So that’s where you say, based on past experience, historical, current, future, I think 15% will not be collected, then let’s hit that now. Roll rate method, that’s where expected losses are projected using historical trends. And we’re looking at the credit quality indicators. So for example, we might be looking back and saying okay, what are the delinquency rates? Let’s take that and kind of roll it forward. Probability of default method, that’s where losses are estimated by multiplying the likelihood that an instrument will default by the balance. So that might be a percentage where you say, okay, here’s this balance outstanding, here is how much. Here’s another balance outstanding, here’s how much. Then we have an aging method, which is kinda like what we’ve used for receivables for years. That’s where the impairment is calculated based on how long a receivable has been outstanding. So we might say something like okay, we have these receivables. Let’s see how long they’ve been outstanding, because that might help us to determine the likelihood of collecting it. So, if it’s zero to 30 days, 2%’s un-collectable, 30 to 60 days, 5%’s un-collectable. 60 to 120 days, 10%. And then you’ll multiply that times the balance, and that’ll give you what your target amount is, that’s how much my credit loss balance allowance should be. What do I have, the difference would be the adjustment. So again, we’re trying to figure out how much we’re gonna need in order to account for that difference.

Now the first one I mentioned was the discounted cashflow. When you’re using the discounted cashflow method, we’re gonna look at the expected future cash receipts. And the expected future cash receipts are required to be discounted or present value using the effective interest rate of the instrument. The valuation account will then equal the difference between the amortized cost or your book value, and the present value of the future payments expected to be collected. That way, we’re gonna say oh, I don’t think I’m gonna collect as much as it’s in my books for. I better set up an allowance account and set up an expense today in order to account for the balance, we’re gonna do this every reporting period.

Now I talk about present value and the discount and future cash flows, and using the effective interest rate, and you’re going well what does that mean? Don’t worry about it yet, because we’re gonna hit an area called bonds. Not bondage, but bonds, right? One might be more fun, but not as practical to become a CPA, yes sirry Bob unless you’re watching the show Billions, and there’s a lot of stuff going on there. That’s another thing, don’t watch TV until after the exam, right? No TV, no social life, no personal life, no fun, nothing until after the exam. Once you pass the exam, send me a case of Mountain Dew. Mm, mm. I gotta keep this energy goin’. So in bonds, we’re gonna learn about discounts, premium, amortization, effective interest methods, stated rate, effective rate, market rate, yields, all that stuff, don’t worry about it. So we’re kind of sprinkling that knowledge now, we’ll get more into it later. You’ll see some other issues in your notes, off balance sheet risk. Off balance sheet risk needs to be reported where? In the financial statements. Let’s say for example, I guarantee your obligation, right? So I’m guaranteeing your obligation. So I’m guaranteeing the credit loss of another company, a guarantor. Well that’s a credit loss that is required to be reported on the company’s financial statements in the liability section. So that’s kind of an off balance sheet risk because I may not owe it if you pay it, but if you don’t pay it, I’m gonna owe it, we’ll set it up as a liability. Credit enhancements or a letter of credit. That’s if you guarantee my debt, well, it may reduce my exposure to credit losses, it’ll affect the estimate of my credit losses if it’s not free-standing.

So, if it’s embedded in the financial instrument versus free-standing, don’t worry about it at this point. Those are some other off balance sheet risks that we need to note. There’s something called purchased financial assets with credit deterioration. These are called PCD Assets. And basically what that is, is it’s called a purchased credit deteriorated asset. And it’s basically, you’re acquiring or buying this asset that has credit risk, right? Because it’s deteriorated as far as the likelihood of collecting. So it says in your notes, PCD assets are a new term under ASC 326, which is CECL, current expected credit loss. Basically when you acquire a financial asset that’s experienced more than insignificant deterioration and credit quality. So in other words, it’s not just deteriorated, but it is more than an insignificant deterioration in credit quality. You purchase it at a larger discount because of the potential for credit loss. As a result, the discount is based on two risks. So I’m buying this financial asset, a receivable, I’m buying this receivable that has credit deterioration called a purchased credit deteriorated asset. What happens is, it has more deterioration than is considered insignificant. So it has a fair amount. What it says is when I buy it, I’m gonna want a discount, right? ‘Cause I’m not gonna get $100 for the whole asset, I’m gonna get less, so maybe I only wanna pay 80 bucks for it.

So I’m getting some kind of discount of 20 bucks. What we need to do is say okay, what is this discount based on? Because the discount could be based on one of two things. The discount could be based on what we call market risk, or it could be based on what we call credit risk, so it could be market risk or credit risk. That’s what that 20-dollar discount is based on. The market risk is the difference between the instrument’s stated rate and a comparable market rate. So what happens is, and we’ll learn this in bonds, where you’ve got a stated rate of 8%, but you wanna earn 10%. If I wanna earn more, you better discount it. So let’s say in today’s market, I could earn 6% on this bond, would I like to earn 6%? Yeah, ’cause my money in the bank’s earning half a quarter of 1/10 of 1%. So I go sure, I want 6%. And you go no, I’m gonna charge you a premium because I wanna take the 6% down to 4%. Or let’s say it’s paying 6%, but I could go invest something for 8%. Well why am I gonna buy your stupid 6% when I could earn eight? You better charge me less up front, a discount, and so that’s what we’re talking about. So that’s called the market risk. The difference between that is going to be considered an adjustment to the caring value of the instrument, and it’s amortized under the effective interest method, which affects interest income. So this difference, if it’s market risk, affects interest income. So you’re gonna take that difference and amortize it out as we would with bonds. Again, once I teach you bonds, it’ll make more sense, right? And I’m just tryin’ to get you some theory. The credit risk, this is the risk that the person will not come through, they have bad credit, right? So this is the risk, they’re not gonna come through. They’re not gonna pay, they have credit risk. So that’s gonna be the credit risk, which increases my risk for their credit quality, which says that there’s a deterioration, I may not collect the money. With credit risk, it is not recognized and advertised in relation to interest expense. Instead, what we’re gonna do is the initial amount is added to the cost of the investment and accounted for in the same manner as credit loss.

So here, this becomes a credit loss. So, the two differences here, market risk, credit risk. Market risk says, why am I getting it at a discount, for example? Well maybe because it’s paying 6%, but I could earn 8%, then I’m gonna pay you less. That difference would be amortized out as interest income. The other amount is because they’re not credit worthy, right? Reminds me of Seinfeld, you’re not sponge-worthy. But you’re not creditworthy. You’re not creditworthy, then what we’re gonna do is we’re gonna add that cost to the investment, right? So instead of just setting it up as an expense, we’re gonna add it to the investment, and what we’re gonna do is amortize that out. But, or we’re gonna take that out, but we’re gonna hit it as a credit loss. So, at the acquisition, we’re gonna estimate and record an initial allowance for the credit loss, right? For the credit loss, that’s for the credit risk. This amount is then added to the purchase price as opposed to reporting it as a credit loss expense. So, when you acquire this asset for example, okay? So we’re buying this PCD asset, all right? So with this PCD asset, what we’re doing is we’re setting this asset up, and we’re acquiring this purchased credit deteriorated asset. We’re gonna debit the asset. We’re gonna credit your allowance for credit loss. And whatever you paid for it, okay? Let’s say I paid, here is the 80. Let’s say this is 20, and so on. So that’s what I would normally do.

Now, normally what I would do is hit this for the debit, but I would also hit allowance for, I’m sorry not allowance, I would hit credit loss expense at the time that I buy it. So normally you would have some kind of allowance and credit loss expense. What they’re saying is no, don’t do that, add it to this price. So you’re putting it in there. Then as it changes each year, we’re gonna do the normal entry for additional credit loss expense or reversal of credit loss expense. So I’ll either increase it by debiting expense and credit allowance, or we’ll have a recovery and I’ll hit allowance and credit recovery, all right? So that’s the big difference. So again, for the market risk, that is your interest income. For the credit risk, that’s gonna be credit loss. But when you acquire the PCD asset, we’re adding that amount that you normally would’ve debited expense and credit allowance to get it to what we thought we were gonna collect in the future. Instead, you’re gonna add that immediately right into the asset itself.

Now the portion again, associated with market risk, that’s the difference between the stated and the market rate, that is considered interest income for the PCD assets, and that’s gonna be recognized by the effective interest method which becomes part of the calculation to the discount that’s embedded in the purchase price. And that’s what we’re gonna be looking at more in the bond section. The other part is added into the acquisition price and that’s going to be hit as a credit loss. So every year when your asset, you think you’re gonna collect less, you’ll expense more, set up more allowance. So that’s basically what we’re going to be doing. Now, how do we report this at the end of the year? At year end, we’re gonna estimate the expected loss, and we adjust the allowance accordingly. Again, increasing it, decreasing it, and so on. But when you recover it, remember you recover and hit the allowance. As far as collateral, many assets are secure by collateral. If it becomes probable or likely that the financial asset’s gonna be settled by foreclosing on the collateral, then report the financial asset at either the fair value of the collateral minus the cost to sell. So basically what we’re doing is we’re adjusting downward, setting up the allowance for credit loss for the difference between the amortized cost and the fair value of the collateral. So basically what we’re saying is I secured it, I loaned you money, I secured it with collateral, I think I’m not gonna collect it all, so I’ll write it down to the value of the collateral. Writing off financial assets, so the financial asset becomes un-collectable, then what do we do? We write it off. So basically you just reverse the entry, right? Credit the asset, debit your allowance, write it off. On the financial statement presentations, how is this presented in the statements? Well the allowance for credit loss is reported separately from the amortized cost of the financial asset. So don’t net ’em, you’re gonna show the asset, you’re gonna show the allowance, and then here is kinda what we call the caring value, the book value, the amortized cost. Off balance sheet credit risk, that’s the guarantor. That, as I said earlier, is reported in the liabilities section. As far as your income statement, you’re gonna have their changes in the present value of the financial asset from one year to the next.

So it may result from the passage of time, right? So maybe there’s a change in rates. Or changes in estimates of the timing of the amounts of future cash flows to be received. When credit losses are measured using the discounted cashflow approach, the company can either report the entire change as a credit loss expense, or recognize a portion of it that’s attributable to this, to interest versus credit loss expense. If there’s changes in the fair value of the collateral, then we’re gonna report it as a credit loss expense for decreases on the income statement. And then reversal of credit loss expense as an increase in income statement. So if you have a reversal, it’s reducing your expense, so it’s increasing income. If it’s a credit loss expense, expenses reduce your income. As far as disclosures, companies are required to disclose information that will help the users understand the company’s methods and relevant information that was used to develop the allowance for credit loss, so that includes about the forecast, the estimated methods and so on, ’cause remember over here what we say. Over here we said that we’re gonna estimate the expected credit loss, right? The CECL current expected credit loss method. But what we’re doing is to calculate your percentage, either use historical, current, or reasonable supportable forecasts, well that needs to be disclosed. We talked about it applies to receivables, financial receivables and so on. The estimation methods, discounted, loss rate, roll rate, probability, aging. These are all okay methods to use, but this needs to be disclosed in the financial statement. So it makes sense, there’s a lot of variables here, there’s a lot of judgment that you can use. That’s why the new rules say hey, there’s a lot of flexibility here, we want you to be conservative, we want you to hit enough, we don’t want you to wait till it’s incurred, we want you to forecast in the future so your lost reserves, your allowance are large enough so that your carrying value is down low enough so we’re not overstating our receivables, because that’s what happened in the financial crisis of 2007 and ‘8, is we had too many receivables, not enough allowance, and companies had a lot of trouble. Some of the other disclosures, the credit risk associated with it. How management monitors the credit quality and assesses the risk.

So I have a receivable, how do we check the quality of that receivable and assessing the risk? Qualitative and quantitative aspects of credit quality, disclosures by class of financial receivables. For the estimate of credit losses, how the expected losses are developed, accounting policies for the estimation of the allowance for credit loss, the characteristics of the portfolios, changes in the factors, changes to relevant accounting policies and methods. The grouping of it, right? What’s included in the group of those receivables? Reasons for the changes or write-offs if any? The reversion method applied for periods too distant to enable reasonable supportable forecasted. So we’re tryin’ to go out and say okay, what are the different judgmental methods we can use, that needs to be disclosed, so they can make purchases of financial assets that occurred during the period and amount of significant sales and reclassifications. You’ll see all these disclosures in your notes, but I just kinda want you to understand how it’s coming about. Now what about the changes in the allowance for credit losses, the estimate, right? Debit expense, credit allowance.

So what do we have in the allowance? The beginning balance plus current provisions. We’re gonna add any amounts initially recognized in the allowance for the PCD assets, ’cause remember, PCD assets, that was, that allowance amount was added to the asset, so that would be an increase in your allowance. Write-offs during the year, any kind of recoveries, and we’ll talk about that in the receivables section, and that should give you the ending balance. So you’ll see that kind of makeup in your notes about how we’re going from beginning to end. Beginning plus current, plus any PCDs minus any write-offs, plus any recoveries, or minus any recoveries, and then gives you the ending balance. So that’s kind of what we’re looking at as far as the ending balance. If financial assets with credit deterioration were purchased during the year, what do we have to disclose? So with the PCD assets, that’s the purchased credit deteriorated assets, again, you’re buying an asset, which has more deterioration than normal. The difference between the par value and their purchase price should be reconciled showing the purchase price. The acquiring entities assessment supporting the allowance for credit losses. Any discount or premium attributable, and that we’ll talk about in bonds as far as how to amortize it. Any kind of par value that goes along with it. Also disclose information about the financial assets that are collateral dependent, or any off balance sheet exposures, which we mentioned earlier. Collateral dependent, if there’s collateral and you think you’re only getting collateral, we have to make an adjustment off the balance sheet because you’re guaranteed. Those are the kinds of things that we have to disclose as well, all right? So again, this is a relatively new area, current expected credit loss. It goes hand in hand with things that you’ve probably studied in school before with bad debt expense for receivables, but now we’re gonna call it current expected credit loss or CECL, and again CECL is forward looking, it considers the entire lifetime of the loan that’s often using things like discounted cash flows for valuation, but it doesn’t have to be discounted, it could be aging, rolling method, percentage of sales or percentage of some other method. All of these are different methods you can use for valuing it. What are we looking at? We’re looking at valuing assets that are held at what? At amortized cost, all right? So again, a lot of meat there. I went pretty quickly, but if you read through it, go through all the different questions and suddenly it’ll make sense, all right? Thanks again, study hard.