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2018-11-08 Are You Ready for the New Credit Loss Accounting Standard for BHPH Receivables?

By Kenneth Shilson, CPA       

President, Subprime Analytics


     The AICPA passed a new credit loss measurement standard which requires implementation starting in 2020 by private companies who carry financial instruments (receivables).  Public companies must implement the standard a year earlier.  The new requirement was issued in Accounting Standards Update 2016 – 13 – Financial Instruments – Credit Losses (Topic 326).  This new standard applies whether the financial instruments (like buy here, pay here contracts) including leases, are either carried on or off the balance sheet.  Under current generally accepted accounting standards (GAAP) credit losses must be recognized when it is probable a loss has been incurred.  The new standard requires credit losses on receivables to also include expected credit losses in the future, which changes the approach under which they are recognized and measured.  Another significant change under the new standard is that future loss estimates must be based upon reasonable and supportable forecasts over the entire life of the receivables (including expected repayments).  In the deep subprime auto finance industry this means using historical static pool, loss liquidation, and default data to support such estimates.

     I recently participated in training hosted by the international CPA firm of PWC which covered all the latest updates and challenges in applying this new credit loss standard.  The training emphasized that companies should start now to comply and develop a strategic approach which requires them to identify and assess data sources and technology, data aggregation, and whether their current data can support the estimate requirements under the new standard.  The PWC recommendation – “To implement the new accounting standard companies should collect data to support estimates of expected credit losses in a way that aligns with the method that will be used to estimate their allowance for credit losses.  Depending on the method selected, companies may need to capture additional data.  Companies also may need to retain data longer than they have in the past on loans that have been paid off of charged off.”

     BHPH operators should begin immediately to develop the data needed to comply.  It will impact their future borrowing relationships, loan covenants, and financial results when GAAP basis financials are presented.  An increase in the allowance for credit losses from adopting the new standard will initially result in a reduction of equity and is not deductible for income tax purposes.  In comparative financial statements, the 2019 impact should also be determined.

     Companies who do not currently have historical metrics, like static pool, loss liquidation and default rate calculations, should determine if such underlying data is available from their DMS provider.  A variety of modeling approaches are possible but discounted cash flow, receivable roll rates, and portfolio vintage models are the most commonly used in the BHPH industry.  Regardless of the chosen method, a range of data will be required including contract terms, interest, and amortization schedules, together with risk attributes and collateral information.  The contractual data and underlying risk attributes are the primary data requirements.  In addition, the aforementioned attributes need to be supplemented with economic forecasting information.  The historical data utilized may have to be sourced for or created to support the modeling approach.

     In summary, companies are urged to contact their financial advisors or CPA, and their DMS provider to begin the process immediately.  Companies are also advised to discuss compliance and the financial impact with their lender to avoid future surprises!

     In summary, here are six suggested steps to comply:

1.       Consult with your financial advisor and DMS provider.


2.       Calculate the impact in your financial statements.


3.       Determine how to implement the new standard with the least detrimental impact.


4.       Use historical data and loss metrics in the calculations.


5.       Determine how this may affect your loan covenants and borrowing relationship.


6.       Conduct proactive discussions with your lender to avoid surprises.


     Although implementation of the new standards appears burdensome, the information you will gain can help you make better financial and risk management decisions.  Good luck!


Kenneth Shilson is President of Subprime Analytics ( which provides computerized subprime auto portfolio analysis using proprietary data mining technology.  To date, the company has analyzed over 2 million subprime auto deals aggregating $22 billion.  The company provides portfolio analysis, profit and cash flow enhancement and other consulting services to operators and capital providers nationwide.  Mr. Shilson is the President and Founder of NABD, which merged with NIADA on January 1, 2018.