What is the 'current expected credit loss' ('CECL') model that Canopy Lawn Care adopted?
Canopy_Lawn_Care Franchise · 2025 FDDAnswer from 2025 FDD Document
Effective October 1, 2023, the Company adopted the requirements of ASU 2013-03, Financial Instruments – Credit Losses. This ASU introduces a "current expected credit loss" ("CECL") model which requires all expected credit losses for financial instruments held at the reporting date to be based on historical experience, current conditions, and reasonable supportable forecasts. The CECL model replaces the existing incurred loss method and is applicable to the measurement of credit losses of financial assets. Under the standard, disclosures are required to provide users of the consolidated financial statements with useful information in analyzing an entity's exposure to credit risk and the measurement of credit losses. Financial assets held by the Company that are subject to the guidance in FASB Accounting Standards Codification ("ASC") 326 were royalty and accounts receivable, rebates receivable, and notes receivable. There was no material impact to the consolidated financial statements or footnotes upon adoption of this new accounting policy.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 55)
What This Means (2025 FDD)
According to the 2025 FDD, Canopy Lawn Care adopted the Accounting Standards Update (ASU) 2013-03, Financial Instruments – Credit Losses, effective October 1, 2023. This update introduces a "current expected credit loss" (CECL) model. This model requires that all expected credit losses for financial instruments held at the reporting date be based on historical experience, current conditions, and reasonable supportable forecasts. The CECL model replaces the existing incurred loss method and applies to measuring credit losses of financial assets.
For Canopy Lawn Care, financial assets subject to FASB Accounting Standards Codification (ASC) 326 included royalty and accounts receivable, rebates receivable, and notes receivable. The adoption of this new accounting policy had no material impact on the consolidated financial statements or footnotes. The standard also requires disclosures to provide users of the consolidated financial statements with useful information for analyzing the entity's exposure to credit risk and the measurement of credit losses.
In simpler terms, Canopy Lawn Care now estimates potential credit losses on its financial assets (like accounts receivable) by considering past payment behavior, current economic conditions, and future forecasts. This prospective approach aims to provide a more accurate and timely assessment of potential losses compared to the previous method, which only recognized losses when they were likely to occur. This change ensures that Canopy Lawn Care's financial statements offer a clearer picture of its financial health and risk exposure to potential investors and franchisees.