One of the biggest costs that all businesses need to manage is credit loss. While a business can sell a lot of products, they still need to actually collect on revenue. Recently, the way that credit loss is calculated has changed dramatically. This has had a big impact on the profit and loss statements of a business and could even change the way that they manage their company.
CECL is the New Standard
One of the main ways that credit loss has changed is that there is a whole new system involved. While companies used to be able to estimate credit loss based on historical figures, the process has changed dramatically. Today, the new standard is CECL. With this change, a business will need to be able to predict their credit losses based on a more standardized approach.
How it Works
If you are trying to estimate your credit loss, CECL is an important concept to understand. For someone that is trying to understand it, the basis revolves around understanding how to calculate the predicted loss. The amount that you will predict will be more defined than it was in the past. As opposed to having to make subjective estimates, it will instead rely more on the amount of potential revenue and prescribed losses set forth by accounting practices and principles. While this may make you think that it’s impossible to have specific circumstances taken into account, individual review does still apply in a CECL world. This will help to ensure that you have the right CECL prediction for your business.
Benefits of CECL
While CECL is new and something that all people will need to get used to, there are benefits that go along with it. One of the main benefits is that it will lead to standardization and an apples-to-apples comparison. Since there was so much subjective opinion in the past when it came to calculating credit loss, the new CECL model will ensure an even playing field. Since there are defined principles involved, it will also allow for easier overall compliance.
When you are looking to better understand how CECL works, it is important to speak with an accountant to learn more about it. This will help to ensure that you understand all of the changes that are required and how to incorporate them into the practices of your organization.
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