Are recognized expected credit losses decision-useful and new to investors? Evidence from CECL adoption

The Financial Accounting Standards Board (FASB) recently replaced the “incurred loss” (IL) model of credit loss recognition with the “current expected credit loss” (CECL) model to improve the timeliness of credit loss information for financial statement users. CECL requires entities to recognize estimated lifetime expected credit losses upon loan origination, which is timelier than the IL model but potentially less accurate. Using the incremental credit loss allowances that banks recognized upon day one of CECL implementation (i.e., the CECL day-1 impact), we find that CECL improves the value relevance of credit loss allowances and their ability to predict future credit losses, regardless of bank size, suggesting that CECL allowances are decision-useful for investors. We also find that CECL allowances provide new information about credit losses to investors, but only for smaller banks not previously releasing analogous information through stress testing.