To help companies reduce the cost of applying the accounting standard - will standard-setters simplify the CECL standards for non-financial-institution private companies?

At this point, almost all companies have adopted ASC 326 Current Expected Credit Losses (CECL) for estimating a company's reserve for bad debt expense. While the standard was developed as a response to the reserve estimation practices of lending institutions prior to the 2008 Financial Crisis, its principles —which focus on identifying risk pools, developing loss rates, and utilizing forward-looking economic data— are applied to all types of companies. 

Awkward attempts at applying the CECL standard

For most companies with receivables that are predominantly comprised of trade accounts receivable —companies that sell goods or services and bill customers regularly— the application of the CECL standard may have felt like fitting a square peg in a round hole. While these companies spent a great deal of time and cost building risk pools, scrubbing data to build loss rates, and documenting a whole new process to apply the standard, the financial statement impact in most cases was rather immaterial. 

On the agenda: Simplifying the standard for private companies

In recognition of this pattern, the Private Company Council (PCC), which is a subcommittee under the FASB, has added a project to their agenda to research the simplification of this standard for private companies and how it is applied to “short-term receivables” (e.g. trade A/R) in an effort to help companies reduce associated costs. 

While this effort will not provide relief for the upcoming financial reporting season, companies can hope that factors such as: 

• the general homogeneous nature of most trade A/R, 
• the efficacy of considering aging in establishing a reserve, and 
• the relative cost/benefit of applying the standard 

will be considered by the FASB in developing a solution for private companies. 

Considerations for companies with plans to go public

As part of its research, the PCC should also consider how it may create transition guidance for companies that go public such that they do not have to incur significant incremental costs to transition from a private company CECL model to a public company CECL model when the results are immaterially different from a more simplified approach. To date, there have not been such accommodations in other private company accounting alternatives, like goodwill amortization, but without such considerations, private company controllers typically have to make cost-focused short-term elections that may later put even more pressure on them to unwind if they enter a capital markets process.