BEYOND THE CURRENTEXPECTED CREDIT LOSSProviding smart, proactive solutions across the CECL implementation life cycle

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Internal Controls

Model Development & Validation

Internal Audit

Financial Reporting

CECL Program Governance

CECLImplementation

The global financial crisis highlighted the need for timely response to, and financial reporting of, credit losses on loans and other financial instruments. Many believed the incurred loss approach identified losses “too little and too late” and suggested a more forward-looking “expected loss” approach for recognizing and reporting credit losses sooner, and thus the need for a more forward-looking approach.

In June 2016, the Financial Accounting Standards Board (FASB) published ASC 326, Financial Instruments – Credit Losses, through ASU 2016-16 that defines the new CECL requirements. Under the new requirements, credit losses under GAAP move from an “incurred” measurement to a lifetime “expected” loss measurement. While current rules generally observe a 12- to 36-month loss horizon for “probable” credit losses, CECL removes the “probable” loss threshold and requires a “lifetime credit loss” allowance to be established on day one.

Current Expected Credit Loss (CECL)

CECL Implementation 4

Entities holding financial assets and net investments in leases that are not accounted for at fair value through net income including:

Who does it apply to?

When does it apply?

• Loans

• (AFS) Debts Securities

• Trade Receivables

• Net Investments

• Off-Balance SheetCredit Exposures

• ReinsuranceReceivables

2018

After 12/15/2018 all entities may early

adopt, including interim periods within those

fiscal years

2019

After 12/15/19 for public business entities that are SEC

filers, excluding smaller reporting companies, including

interim periods within those fiscal years

2022After 12/15/22 for all other entities, and

interim periods within fiscal years beginning

after 12/15/22

CECLImplementation

Protiviti helps clients throughout the CECL implementation lifecycle, with expertise in PMO, methodology design and implementation, data remediation, documentation of processes, policies and procedures, model development and validation, SOX Controls design and internal audit assurance.

CECL Implementation 5

Protiviti CECL Implementation Framework

CECL Program Governance

Key CECL Implementation Considerations

AssuranceExternal Audit & Regulator CoordinationInternal Audit

Assurance Assessment & Approach

Policy & Procedure AccuracyAppropriateness &

Effectiveness of Controls

Quality & Accuracy of Data Reasonable & Supportable Forecasts

1. Develop CECL Methodology• IT-Data sourcing & remediation• Economic forecast

• Quantitative models• Qualitative factor framework

• Reserve aggregation

2. Document Key Assumptions• Methodology • Models • Accounting policy • Whitepapers

3. Document End-to-End Process• Process flows/policies & procedures • Financial reporting process

4. Develop SOX Internal Controls• Design, document, and test internal controls

5. Model Validation• Governance & controls

6. Parallel Run + Impact Analysis• Iterative feedback loop to implement enhancements

7. Develop Disclosure Templates• Pre-Implementation • Post-Implementation

• Oversight• Project management

• Cross-functional coordination• Risk management

• Implementation &documentation support

CECLImplementation

CECL Program Management: Enabling Timely and Successful Implementation

CECL Program Governance 6

Protiviti’s CECL Project Management Office (PMO) offering enables the management of critical inter-dependencies and results in effective CECL implementation. We’ll partner with you to deliver a timely and successful implementation through the following core principles:

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2

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5

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VENDOR MANAGEMENT

CECLPMO

CROSS-FUNCTIONAL

COMMUNICATION

PROJECT ROADMAP

DOCUMENT PROTOCOL

RISK MANAGEMENT

CHANGE CONTROL

ISSUE MANAGEMENT

CECL Program Governance

CECL Program Governance 7

1. CROSS-FUNCTIONAL COMMUNICATION

• Implement structure to connect the different functions impacted by CECL implementation: financial reporting, accounting, finance, credit, risk, modeling data, technology, etc.

2. PROJECT ROADMAP

• Build and communicate CECL implementation project plan to stakeholders

• Manage and see to completion all implementation activities

• Identify and track upstream and downstream dependencies

3. CHANGE CONTROL

• Implement change control process for requesting, assessing, tracking, and approving changes to the implementation

• Plan and monitor execution of the parallel run process

• Build and operationalize training strategy to support organizational change management

• Escalate potential barriers and present alternative solutions

4. ISSUE MANAGEMENT

• Build processes to identify, assess, prioritize, track and report implementation issues

• Identify and manage critical inter-dependencies across the CECL program

5. RISK MANAGEMENT

• Build processes to identify, assess, prioritize, track and report implementation risks

• Aggregate risk information to identify hot spots across the CECL implementation program

• Embed risk management across the implementation program

6. DOCUMENT PROTOCOL

• Implement procedures to document, review, and validate all key CECL assumptions

• Embed QA and validation processes into implementation

• Monitor CECL production process and quality through meaningful metrics

7. VENDOR MANAGEMENT

• Implement centralized management and tracking of CECL vendors

• Coordinate across vendors

• Monitor project budgets

CECL Program Governance

Financial Reporting 8

CECL Financial Reporting Assistance

Protiviti partners with clients to ensure financial reporting processes meet CECL requirements by 1) evaluating and documenting key CECL decisions and policy elections, 2) determining the end-to-end allowance for the credit loss process and capital impact estimation, and 3) developing pre and post implementation financial statement disclosures.

KEY METHODOLOGY DECISIONS AND POLICY ELECTIONS

Protiviti advises clients on making key CECL methodology decisions and policy elections on numerous factors that contribute to the ACL determination. Examples include modeling and methodology design choices, cohort selection, methodology adopted, qualitative factors, treatment of Purchase Credit Impaired (PCI) and Purchase Credit Deteriorated (PCD) assets existing at transition.

WHITEPAPERS

Protiviti assists with documenting key decisions and policy elections in

whitepapers and accounting memoranda. As this documentation will be

reviewed by internal audit, external auditors, and regulators, it must be robust

and completed with sufficient lead time for review, discussion and revision.

Financial Reporting

Financial Reporting 9

PRE-IMPLEMENTATION IMPACT DISCLOSURE

Protiviti performs assessments of the potential impact of CECL on earnings and

capital, which is then disclosed in quarterly footnotes prior to implementation.

POST-IMPLEMENTATION DISCLOSURES

Protiviti assists with data sourcing, documentation and template design for

post-implementation disclosures which are greatly expanded under ASC 326,

requiring expanded data and analysis to facilitate investor understanding of

credit risk and CECL model design.

Financial Reporting

Managing the CECL Internal Controls Environment

Internal Controls 10

Protiviti helps our clients build and manage robust internal control environments from risk and control identification through to building an overall control testing program.

CECLRISKS &

INTERNAL CONTROLS

AREAS

ALLOWANCE CALCULATION FOR

CREDIT LOSSGOVERNANCE

FORWARD LOOKING ECONOMIC FORECAST

FINANCIAL DISCLOSURES

PROCESS DOCUMENTATION

Protiviti helps update process documentation to reflect the CECL control environment

CONTROL IDENTIFICATION

Protiviti assists to define and identify the relevant CECL controls and how they will be evidenced, including controls around transition

CONTROL TESTING

Protiviti performs initial testing of controls

REMEDIATION

Protiviti assists to remediate identified control gaps

PROGRAM IMPLEMENTATION

Protiviti builds overall control testing programs to ensure sustained compliance with CECL requirements

Internal Controls

CECL Model Development and Validation 11

CECL Model Development and Validation

Protiviti’s CECL model offerings range from developing GAAP compliant CECL models and methodology, to model validation, and finally to providing assurance over model processes and controls. We’ll partner with you across the life cycle of model risk management — from development through assurance.

LINE OF BUSINESS & MODEL RISK MANAGEMENT

Protiviti develops and implements models and creates model documentation.

• Aligned with CECL accounting guidance and regulatory SR 11-7 MRM principles

• Macroeconomic forecast scenarios

• Reasonable & supportable period, mean reversion period

MODEL GOVERNANCE & VALIDATION

Protiviti provides independent model validation and develops and implements model governance programs to establish controls for model risk management.

• Manage the soundness, appropriateness, accuracy, and usefulness of models

• Governance and controls over a significant accounting estimate for financialreporting purposes

INTERNAL AUDIT

Protiviti’s internal audit quantitative subject matter experts provide assurance over model processes and controls and evaluate adherence to internal policies and regulatory expectations by the first and second lines.

• Internal Audit of CECL implementation readiness and CECL model alignmentwith accounting and regulatory guidance

• Governance and controls over key CECL models and process components

Model Development & Validation

Internal Audit 12

CECL Internal Audit Assessment & Approach

Protiviti’s CECL internal audit methodology includes five key areas that are critical for the CECL process. We help our clients address these areas by performing CECL pre-implementation audits and advising on clients’ CECL internal audit assessment and approach.

ACCURACY OF POLICY AND PROCEDURES & COMPLIANCE WITH NEW ACCOUNTING GUIDANCE

Protiviti subject matter experts understand the accounting requirements under CECL and help client internal audit teams verify that policies and procedures are complete, accurately and consistently applied and periodically updated by management and staff.

APPROPRIATENESS AND EFFECTIVENESS OF THE PROCESS AND CONTROLS

Protiviti works with clients to obtain an understanding of management’s processes, procedures and related internal controls to design tests that effectively assess the effectiveness of the controls and risks of material misstatement.

QUALITY AND ACCURACY OF DATA & INFORMATION SYSTEMS

Protiviti provides assessments and expertise to ensure data and information systems capture, house and enable analysis of data needed both to estimate expected losses and to prepare the disclosures required under CECL. Protiviti also performs testing of information systems and interfaces to ensure the data flowing through the process is both accurate and complete.

Internal Audit

Internal Audit 13

REASONABLE & SUPPORTABLE FORECASTS AND PORTFOLIO SEGMENTATION

Protiviti’s subject matter experts can evaluate and challenge the reasonableness of management’s modeling choices and judgement in estimating CECL.

FINANCIAL STATEMENT DISCLOSURES

Protiviti assesses the completeness of management’s financial statement disclosures, ensuring disclosures align with CECL accounting standard requirements and provide clear information on the key components of the estimation process and detail on credit quality required under CECL.

Internal Audit

CONTACTS

Ariste RenoManaging Director+1.312.476.6398ariste.reno@protiviti.com

Todd PleuneManaging Director+1.312.476.6455todd.pleune@protiviti.com

Bill ByrnesManaging Director+1.312.476.6387bill.byrnes@protiviti.com

Charlie SorannoManaging Director+1.732.326.4518charles.soranno@protiviti.com

ABOUT PROTIVITI

Protiviti is a global consulting firm that delivers deep expertise, objective insights, a tailored approach and unparalleled collaboration to help leaders confidently face the future. Protiviti and our independently owned Member Firms provide consulting solutions in finance, technology, operations, data, analytics, governance, risk and internal audit to our clients through our network of more than 75 offices in over 20 countries.

We have served more than 60 percent of Fortune 1000® and 35 percent of Fortune Global 500® companies. We also work with smaller, growing companies, including those looking to go public, as well as with government agencies. Protiviti is a wholly owned subsidiary of Robert Half (NYSE: RHI). Founded in 1948, Robert Half is a member of the S&P 500 index.

Charlie AndersonManaging Director+1.312.364.4922charlie.anderson@protiviti.com

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© 2019 Protiviti Inc. An Equal Opportunity Employer M/F/Disability/Veterans. PRO-0319-100031 Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services.

© 2019 Protiviti Inc. An Equal Opportunity Employer M/F/Disability/Veterans. PRO-0319-101116 Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services.

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CHINABeijingHong KongShanghaiShenzhen

INDIA*BengaluruHyderabadKolkataMumbaiNew Delhi

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