Case Study: Learn how Solaris helped a local real estate and affordable housing company

Learn how Solaris helped a local real estate and affordable housing company adopt ASC 326 Current Expected Credit Losses.

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Context:

The entity had not yet adopted - ASC 326 Current expected credit loss (CECL) model for measuring credit losses, which is effective for fiscal years beginning after Dec. 15, 2022 (e.g., calendar year 2023).  For the year ended December 31, 2023, Solaris was therefore tasked with establishing an implementation plan and application of the standard for OppCo Group of companies. 

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Solutions:

The Financial Accounting Standards Board (FASB) has a modified approach for credit losses. Historic approach has been “reactive” rather than “proactive” resulting in delayed recognition of impairment resulting in financial losses. 

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In line with the requirements of the ASC 326 - CECL model, all entities would require to conform with the following:

• Entities estimate losses over the life of a pool of financial assets using pool-based assumptions to capture the risk of loss, even if remote,
• Incorporate credit loss estimates derived from reasonable and supportable forecasts reflective of assumed future economic conditions.

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In line with the requirements of ASC 326 - CECL model, Solaris performed the following: 

1. Conducted thorough research on the requirements of ASC 326 - CECL model and established the scope inclusions and exclusions. 
2. Based on the scope, assessed the applicability of the standard on the client and its group of companies. 
3. For our respective client, the scope inclusions related majorly to accounts receivables and notes receivables from third parties, while major exclusions were related party receivables (due to the parent company having a controlling interest for these related parties).  
4. For the respective scope inclusions, on a line-by-line basis we reviewed year ended December 31, 2023 aging analysis and subsequent aging as of March 31, 2024 to assess the collectability of outstanding AR and Notes receivables. 

Result:

1. The short-listed balances were presented for management discussion to establish year-end CECL as of December 31, 2023. 
2. The implementation of CECL was summarized in a technical accounting memo and shared with the executive management along with the external auditors. No corrective action suggested by either of the stakeholders.

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