Why some lenders are breaking up with CECL and what they’re choosing instead

In the wake of the full implementation of the Current Expected Credit Losses (CECL) model, many financial institutions are settling into their new frameworks. However, not all are staying the course. A growing number of specialty finance firms are reconsidering their approach, and some are now electing fair value accounting instead.

While CECL adoption has largely stabilized across the industry, many specialty finance firms are revisiting their approach to credit loss modeling. For some, this means refining their Allowance for Credit Losses (ACL) methods. For others, it means opting out of CECL for specific financial instruments by electing the Fair Value Option (FVO). This move is influencing how lenders handle risk, revenue, and regulatory reporting.

For further reading, see our related articles on CECL Model Validation Challenges and Best Practices and Post-Implementation CECL Compliance.

Why CECL is Under Pressure

CECL’s forward-looking framework is conceptually sound, but its practical application remains complex. One ongoing issue is how to include qualitative factors (subjective inputs that capture economic nuance but are hard to standardize). This has created friction in model validation, audit readiness, and regulatory compliance.

CECL also introduces an initial operational lift. Institutions often need to update systems, train staff, and adjust audit procedures. While these burdens may taper off over time, they are significant during the early stages.

FVO isn’t necessarily easier. It carries its own intricacies, particularly by adding variables to financial modeling. However, many organizations find strategic value in how the income fair value method enables current expected credit losses to be offset against expected revenues at the portfolio level. This alignment of inflows and outflows offers a more dynamic view of performance than CECL, making FVO a complementary approach rather than a straightforward alternative. While FVO enables real-time recognition of gains and losses, this benefit depends on the institution’s modeling and risk profile and is not guaranteed.

Recent moves by the Financial Accounting Standards Board (FASB) to simplify CECL treatment for purchased financial assets signal that even regulators recognize the need for refinement.

The Fair Value Election

Under Generally Accepted Accounting Principles (GAAP), the FVO allows reporting entities to measure certain financial instruments at fair value. This election is made on an instrument-by-instrument basis (each individual loan or asset is evaluated separately) and is permanent for that instrument, though it does not apply to the entire portfolio. As a result, two identical loans can be accounted for differently depending on whether FVO is elected.

For specialty finance lenders, particularly those offering installment loans or serving underbanked communities, this option is increasingly attractive. CECL requires that all losses be forecasted and recognized at origination. FVO, by contrast, allows companies to match those forecasted losses with forecasted revenues, offering a more balanced view of financial performance.

The fair value election is becoming more common across the industry, especially among non-depository lenders who operate outside traditional regulatory frameworks.

Strategic Implications of Switching to Fair Value Accounting

Choosing FVO affects how institutions engage with investors, regulators, and auditors. It introduces new modeling variables and changes how performance is reported.

Institutions must be prepared to explain their rationale, document assumptions, and build models that reflect their business. This includes running sensitivity tests, reviewing historical data, and updating governance practices.

Making the Change from CECL TO FVO

Transitioning from CECL to fair value accounting requires several considerations:

• Legacy Portfolio Runoff ─ Financial assets originally accounted for under CECL do not automatically convert to FVO. Instead, they run off over time, meaning they continue to be accounted for under CECL until they mature, are sold, or otherwise derecognized.
• System Updates ─ Accounting systems must be reconfigured to handle the unique demands of fair value measurement, impacting nearly every aspect of financial reporting infrastructure.
• Policy Revisions ─ Internal policies across multiple departments must be revised to reflect the new framework.
• Stakeholder Communication ─ Auditors, regulators, investors, and internal stakeholders should be informed early and educated about how the changes will affect financial reporting, valuation methodologies, earnings volatility, and disclosure practices.
• Disclosure Requirements ─ Financial disclosures must be updated to reflect the new set of financial reporting obligations.

We Can Help

CECL isn’t broken, but it may not be the best fit for every institution. At Elliott Davis, we help financial institutions evaluate their risk profile, reporting needs, and long-term strategy to determine whether CECL or FVO is the right path forward.

Whether you’re refining your CECL model or considering a fair value election, our Financial Services Group is here to help. We’ll work with you to model the impact and guide you toward a well-informed decision.

Contact us today to get started.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.