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What is CECL, and How Will It Affect Nonprofit Organizations?


Over the past four years, nonprofit organizations (NFPs) have faced a steady stream of new Accounting Standard Updates (ASUs) to adopt. Every organization, to some degree, has been forced to expend energy on preparing for and implementing the various standards, including the new NFP financial reporting model, revenue recognition, grants and contracts, disclosure requirements for in-kind contributions, and, most recently, the operating lease standard.


CECL on Deck

Looking ahead, thankfully, there appears to be a bit of a let-up in terms of the quantity and potential impact of new accounting pronouncements and projects.

One new standard that is coming, which we predict will have the potential to impact a variety of NFP organizations, is Financial Accounting Standards Board (FASBASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. At first glance, one can be forgiven for assuming that this will have minimal impact on NFPs and instead be aimed at banks. However, while the new current expected credit loss (CECL) model will impact financial institutions more heavily, NFPs are certainly within the scope of the ASU. CECL will apply to any entity that holds financial assets, which includes receivables, loans, and even some investments. Many NFPs will be affected.


What Is Changing Under the New Standard

The easiest way to understand CECL is that it replaces the current “incurred loss” model with a new “expected loss” model. Under an “incurred loss” model, losses were measured at the reporting date. Impairment was recognized when it was probable that a loss event had occurred. The incurred model used historical loss rates adjusted for current conditions. Under an “expected loss” model, losses are measured over the contractual life of the asset. There is no recognition threshold for when an impairment amount should be recognized. All probabilities of losses must be considered, no matter how small. The expected loss model uses the past (historical data), present (current conditions), and future (reasonable and supportable forecasts) to estimate losses.

The goal of the CECL model is to be more proactive as opposed to reactive in recognizing credit losses and to present the net amount expected to be collected via the use of a contra-asset known as an allowance for credit losses (“ACL”). Therefore, the ACL is the amount the entity does not expect to collect of the amortized cost of the asset during the asset’s contractual life.



The scope of CECL is broad and includes most financial assets that are not valued at fair value through net income.  This could include trade receivables that result from reciprocal-type revenue transactions, held-to-maturity debt securities within an investment portfolio, notes receivable, other loan commitments, and lease receivables recognized by a lessor.

One very important exclusion from CECL relevant to nonprofit organizations is that promises to give (pledges) are not included. Our experience is that significant credit risk for NFPs is often with pledges receivable, and the new guidance will not change the accounting treatment for these. Also excluded are loans and other receivables between related entities under common ownership, and defined contribution employee benefit plan loans.


How to Prepare

CECL will be effective for fiscal year ends after December 15, 2023. It is important for organizations to be proactive in preparing for the implementation of CECL. To prepare, nonprofit organizations should take an inventory of their financial assets to determine which will potentially fall under the scope of CECL. NFPs should begin to think about the potential impairment of these assets under the expected loss model. We believe that the concept of materiality could be significantly in play in analyzing these items from an auditing standpoint, and management can certainly think in those terms as well. Preparation for this matter is a good topic to discuss with your independent auditors.

For more information or questions about this article, or to find out how Windes can assist, please contact Michael Barloewen at or 844.4WINDES (844.494.6337).


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