Securities designated “Trading” are accounted for monthly on a mark to market basis and the adjustment in value is recorded to income. Credit losses are accounted for immediately. CECL does not impact securities designated “Trading.”

HTM securities accounting is performed monthly on a book basis. Valuation changes are not recorded to income or equity. Currently, losses or Other Than Temporary Impairment are recorded to income when it is determined that a loss has or will soon occur. HTM is primarily used to reduce volatility to equity. HTM securities will be subject to CECL. CECL will require an allowance on these HTM debt securities for lifetime expected credit losses, determined by adjusting historical loss information for current conditions and reasonable and supportable forecasts. The forward-looking evaluation of lifetime expected losses will be performed on a pooled basis for bonds that share similar risk characteristics. These allowances for expected losses must be made by the holder of the HTM debt security when the security is purchased. So, when credit unions buy HTM securities, they will be required to look in the rear-view mirror and also squint down the road through the windshield to determine whether the new security will encounter trouble. If so, the expected trouble must be accounted for at the time of purchase.

AFS securities accounting is performed monthly on a book basis. Valuation change is not recorded to income but is recorded to equity in the form of Other Comprehensive Income. Currently, losses or OTTI are recorded to income when it is determined that a loss has or will occur. The income adjustment is recorded as a reduction in the security's cost basis. Recovery of a previously recognized impairment is recorded in interest income prospectively over time. The FASB decided that CECL should not apply to AFS debt securities. Instead, targeted amendments were made to the existing AFS debt security model. Under the new guidance, an allowance will be recognized for credit losses rather than as a reduction in the cost basis of the security. Subsequent improvements in credit quality, or reductions in estimated credit losses, will be recognized immediately as a reversal of the previously recorded allowance, which aligns the income statement recognition of credit losses with the reporting period in which changes occur. Consequently, the guidance eliminates the theory of OTTI, and instead emphasizes determining whether an unrealized loss is credit-related, or due to other factors. Specifically, the length of time the security has been in an unrealized loss position will no longer be used to determine whether a credit loss exists. Impairment must be evaluated at the individual security level, at each reporting period, through a comparison of the present value of expected cash flows from the security with the amortized cost basis of the security.

In addition to most existing disclosure requirements, disclosure of an allowance roll-forward, by major security type, for both HTM and AFS debt securities will be required. For HTM debt securities, by major security type, disclosure of credit quality information and allowance for credit losses and management's estimation process will be required. Also, for AFS debt securities, disclosure of the accounting policy for recognizing write-offs will be required.

Although CECL may not inspire us to whistle while we work, we can take heart in the words of Disney's Mary Poppins who sang, “In every job that must be done there is an element of fun.”

Heather A. Funsch, CPA is Principal for Rehmann. She can be contacted at 989-797-8393 or [email protected].

David G. Barnes is Chairman, President/CEO for Heber Fuger Wendin, Investment Advisors. He can be contacted at 248-258-6866 or [email protected].