FAS 5 vs FAS 114 recognition of losses

Submitted by sevans on Tue, 11/18/2014 - 4:16pm

If the specific characteristics of the individually evaluated loan that is not impaired indicate that it is probable that there would be an incurred loss in a group of loans with those characteristics, then the loan should be included in the assessment of the ALLL for that group of loans under FAS 5. Institutions should measure estimated credit losses under FAS 114 only for loans individually evaluated and determined to be impaired.

Examiners should assess the credit quality of an institution’s loan portfolio, the appropriateness of its ALLL methodology and documentation, and the appropriateness of the reported ALLL in the institution’s regulatory reports. In their review and classification or grading of the loan portfolio, examiners should consider all significant factors that affect the collectibility of the portfolio, including the value of any collateral. In reviewing the appropriateness of the ALLL, examiners should: 

Difference between FAS 5 and FAS 114 in defining “impaired”

Submitted by sevans on Tue, 11/18/2014 - 4:02pm

FAS 5 requires the accrual of a loss contingency when information available prior to the issuance of the financial statements indicates it is probable that an asset has been impaired at the date of the financial statements and the amount of loss can be reasonably estimated. These conditions may be considered in relation to individual loans or in relation to groups of similar types of loans. If the conditions are met, accrual should be made even though the particular loans that are uncollectible may not be identifiable.

An ALLL methodology is a system designed and implemented by the credit union to reasonably estimate loan and lease losses as of the financial statement date. ALLL methodologies should incorporate management’s current judgment about the loan portfolio’s credit quality through a disciplined and consistently applied process. A credit union’s size, organizational structure, business environment and strategy, management style, loan portfolio characteristics, loan procedures, field of membership, and management information systems influence its ALLL methodology.

It is inappropriate to use a “standard percentage” as the sole determinant for the amount to be reported as the ALLL on the balance sheet. Moreover, an institution should not simply default to a peer ratio or a “standard percentage” after determining an appropriate level of ALLL under its methodology. However, there may be circumstances when an institution’s ALLL methodology and credit risk identification systems are not reliable.

Annual charge-off rates are calculated over specific time

Submitted by sevans on Mon, 11/17/2014 - 3:44pm

Annual charge-off rates are calculated over a specified time period (e.g., three years or five years), which can vary based on a number of factors including the relevance of past periods’ experience to the current period or point in the credit cycle.

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