The 715.7 10 regulations and guidelines primarily focus on the supervisory committee’s role in ensuring the financial integrity of credit unions, especially in the context of the required audits under NCUA (National Credit Union Administration) regulations.
This article explores the audit procedures for credit unions, particularly focusing on the modifications made under recent accounting standards, including the shift to Current Expected Credit Losses (CECL) methodology.
Overview of 715.7 10 Guidelines
The Other Supervisory Committee Audit is a mandatory process for credit unions to verify their financial statements, complying with NCUA regulations. The procedures outlined under 715.7 10 are designed to ensure that these audits meet the required standards.
These procedures involve an evaluation of financial accounts, focusing on allowances for credit losses, investment securities, and loans.
Recent updates to these procedures stem from the changes introduced by the Accounting Standard Codification (ASC) No. 326, particularly regarding the CECL methodology.
This change mandates credit unions to adopt a more proactive approach to recognizing and estimating credit losses on loans and investments, which significantly impacts how the supervisory committee performs its audit.
The Role of the Supervisory Committee
The supervisory committee plays a pivotal role in determining the scope and depth of the audit process. They are responsible for ensuring that the audit procedures are not only sufficient but also aligned with the specific risk profile of the credit union.
The procedures outlined in the guide are intended as the minimum requirements for credit unions to follow.
However, the committee must use its judgment to determine if further testing or additional procedures are necessary. These additional steps may be needed depending on the credit union’s portfolio, products, services, and risk exposure.
CECL: A Major Shift in Accounting Practices
Under the CECL standard, credit unions are required to recognize credit losses over the expected life of a loan, rather than waiting until a loss is incurred. This requires credit unions with assets greater than $10 million to adopt the CECL methodology by December 15, 2022.
The CECL model incorporates more forward-looking factors, such as forecasted economic conditions, which require credit unions to adjust their allowances for loan and lease losses (ALLL).
This methodology also applies to debt securities and necessitates a change in how impairment and credit loss are calculated on various financial instruments.
For credit unions that are below the $10 million asset threshold, the incurred loss methodology remains in place, allowing them to estimate losses based on past experiences rather than expected future losses.
Key Audit Procedures under 715.7 10
The supervisory committee is responsible for ensuring that testing and verification of the following elements are thoroughly conducted:
Allowance for Credit Losses on Loans
- The supervisory committee must confirm that the methodology used for estimating credit losses complies with the new CECL requirements.
- The allowance schedule must be reviewed to ensure it accurately reflects all loan losses and recoveries.
- Additional verification includes ensuring that loans are evaluated correctly using the discounted cash flow method or by assessing collateral value.
Investments: AFS and HTM Debt Securities
- The committee must review how credit losses on Available-for-Sale (AFS) and Held-to-Maturity (HTM) securities are calculated.
- If a credit loss event is identified, it must be calculated using an impaired securities methodology, which typically involves discounted cash flows.
CECL Model Implementation
- The committee should verify the accuracy of any Simplified CECL Tool or internally developed models used for estimating credit losses. For internally developed models, the committee must ensure that an independent validation has been performed.
- Key procedures include checking for errors in input data and ensuring that qualitative adjustments (e.g., economic forecasts) have been documented.
Allowance for Credit Losses on Investments
- Investments in debt securities must be evaluated for impairment based on current market conditions. The allowance for credit losses on investments must be reviewed to ensure it accurately reflects expected losses.
Challenges and Considerations
While the 715.7 10 guidelines provide a structured approach for the supervisory committee’s audit procedures, there are challenges, particularly with CECL implementation.
For many credit unions, especially those with smaller asset sizes, the transition to this new methodology can be complex. The supervisory committee must be prepared to manage these changes by ensuring proper documentation and validation of the procedures used.
Moreover, the committee must stay updated on any further regulatory changes and adopt any new methodologies required to stay compliant.
Conclusion
The 715.7 10 guidelines are designed to ensure the integrity of the supervisory committee’s audit processes, providing a clear framework for credit unions to follow.
The shift to CECL adds a layer of complexity to these procedures, but with careful implementation and adherence to the new rules, credit unions can ensure they meet the necessary audit standards.
The role of the supervisory committee remains crucial in navigating these updates and maintaining the financial health of the credit union.
FAQs
What are the consequences for non-compliance with 715.7 10 guidelines?
Failure to follow the guidelines may result in regulatory penalties or damage to the credit union’s reputation.
How often should the supervisory committee conduct audits under 715.7 10?
The frequency of audits under 715.7 10 depends on the credit union’s size and risk profile, but annual audits are typically required.
What are the financial impacts of adopting CECL for smaller credit unions?
Smaller credit unions may face increased administrative costs and the need for more complex data modeling and forecasting.
What tools can help credit unions implement the CECL model?
Credit unions can use simplified CECL tools or internally developed models, but these need independent validation.
How does CECL affect the allowance for credit losses on loans?
CECL requires credit unions to estimate future losses over the loan’s life, impacting how loan loss provisions are calculated.
What happens if a credit union does not meet the 715.7 10 guidelines or CECL standards?
Non-compliance with the 715.7 10 guidelines or CECL standards can result in regulatory scrutiny, fines, and the need to make significant adjustments to financial statements.
How can credit unions ensure the accuracy of their credit loss estimates?
Regular reviews and validation of models, data, and assumptions can help maintain accuracy in credit loss estimates.
Are there resources available to assist credit unions with CECL implementation?
Yes, there are resources like guidance from the NCUA, third-party software, and professional services to assist with CECL transition.
