By Mary Dolan, CPA, MAcc and Todd Swisher, CPA

In 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updated (ASU) 2016-13 which implements a new credit impairment model for financial assets based on current expected credit loss (CECL) with an effective date for nonpublic entities for fiscal years beginning after December 15, 2022.

The new guidance no longer focuses on incurred losses but takes a more forward-looking approach.

Although financial institutions will feel the greatest impact of this new guidance, CECL does apply to private clubs. In this article, we explore the specific impacts of CECL on the private club industry, benefits of proper CECL modeling, and potential next steps for private club management.

What is CECL?

CECL is the measurement of expected loss on credit arising from current economic conditions, reasonable forecasts and historical loss experience. The objective of CECL is to provide readers of the financial statements with an estimate of the net amount the Club expects to collect on assets over the entire life of the asset.

Impacts of CECL on the Private Club Industry

Now that the focus has shifted from an incurred loss model to a more forward-looking approach, private clubs must reassess credit risk exposure.

Every club, of course, is different and will be impacted by CECL differently. Two common financial assets to consider include:

Initiation Fee & Trade Receivables

Trade receivables typically include charges for membership dues, food and beverage purchases, merchandise sales, lesson fees, etc.  Commonly, these types of receivables are due within 30 days, with interest and/or penalties to membership status after 60-90 days.  Conversely, initiation fee receivables are often paid over a number of years, thus being a sort of note or loan by the member.  With such differences in terms, the risk characteristics can vary and as such, CECL requires losses on these two assets to be evaluated separately.

When considering expected losses, Clubs must consider how the economy could impact the collectability. With such a short life trade receivables may be easier to assess as they are more predictable.  Initiation fees dues over several years can be tricky to anticipate. Both assets must be evaluated at initial recognition and the entire term of the receivable should also be considered.

Other considerations of risk include historical member experiences. Private clubs are always competing for leisure funds. Family commitments like sports, camp, and investments in vacation homes compete for this funding. Whenever economic conditions tighten, club membership is usually high on the list of items to be considered in the context of a family’s budget.

As we saw in 2008, when economic conditions tighten, disposable income dwindles for all but a very small percentage of people, prompting families to reconsider joining or maintaining membership in a private club. Potential contraction in membership could then impact initiation fees, if financed, and dues revenue and introduce a new layer of complexity in estimating credit losses related to initiation fee and trade receivables.

Even for clubs with historically minimal write offs, line items like initiation fee receivables and trade AR still give rise to potential for loss and therefore risk to the sustained future operations of the club.

Benefits for Private Clubs of Proper CECL Modeling

CECL presents an opportunity for clubs to reevaluate an allowance methodology that may have been developed many years ago.  Now is the time to define the factors (past, present and future) to include in, and the procedures for, analyzing your current expected credit losses. This can help clubs make better informed decisions for the future.

Proper CECL modeling can enable clubs to better forecast results and:

  • Avoid operating deficits that erode member goodwill. Operating deficits can require a cash infusion that potentially involves increasing individual assessments. Such a situation that can erode goodwill of current members and turn away prospective members.
  • Obtain funding for construction projects. Proper CECL modeling can help clubs exploring expansion or other construction projects that involve securing loans. A proactive approach strengthens the club’s position when engaging with lenders and increases the likelihood of securing necessary funding for construction initiatives.
  • Create opportunities that spur momentum for the club. The capital needs of any private club are constant. Ongoing replacement and improvements are always just around the corner. Properly projected CECL enables a club to confidently make funding decisions that fuel the membership experience and grow the membership itself. This creates a cycle that enables the club to reinvest in itself every year.

Even clubs who have never historically had to write off large amounts receivables should proactively take steps to ensure CECL is properly modeled.

CECL Next Steps for Clubs

Club management next steps with regard to CECL should include:

  • Documenting and deploying procedures to periodically evaluate CECL with a forward-looking perspective
  • Developing models to project credit losses over the life of their receivables
  • Explore other proactive measures that mitigate the impact of membership contraction or credit loss.

In conjunction with CECL, clubs can also solidify financial sustainability through flexible membership structures, targeted marketing efforts, and enhanced member engagement initiatives.