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.

Elements of ALLL summary to be reported in financial statements

Submitted by sevans on Thu, 11/13/2014 - 3:10pm

To verify that ALLL balances are presented fairly in accordance with GAAP and are auditable, management should prepare a document that summarizes the amount to be reported in the financial statements for the ALLL. The board of directors should review and approve this summary.

Common elements in such summaries include:

(1) An estimate of the probable loss or range of loss incurred for each category evaluated (e.g., individually evaluated impaired loans, homogeneous pools, and other groups of loans that are collectively evaluated for impairment);

Allowance estimates should be based on a comprehensive, well-documented, and consistently applied analysis of the loan portfolio, and should take into consideration all available information existing as of the financial statement date, including environmental factors such as industry, geographical, economic, and political factors.

ALLL is a range of estimated losses

Submitted by sevans on Thu, 11/13/2014 - 2:29pm

Arriving at an appropriate allowance involves a high degree of management judgment, is inevitably imprecise, and results in a range of estimated losses

Prudent and conservative, but not excessive, loan loss allowances that fall within an acceptable range of estimated losses are appropriate.

The foundation for any loan review system is accurate and timely loan classification or credit grading, which involves an assessment of credit quality and leads to the identification of problem loans. An effective loan classification or credit grading system provides important information on the collectibility of the portfolio for use in the determination of an appropriate level for the ALLL.

Institutions are also encouraged to use ratio analysis as a supplemental tool for evaluating the overall reasonableness of the ALLL. Ratio analysis can be useful in identifying divergent trends (compared with an institution’s peer group and its own historical experience) in the relationship of the ALLL to adversely classified or graded loans, past due and nonaccrual loans, total loans, and historical gross and net charge-offs.

To distribute an interagency advisory (the Advisory) addressing the allowance for loan and lease losses (ALLL) that reiterates key concepts and requirements included in generally accepted accounting principles (GAAP) and existing ALLL supervisory guidance. This Advisory updates a 1993 policy statement issued by the banking agencies that described the responsibilities of the boards of directors and management of banks and savings associations and of examiners regarding the ALLL. This revision replaces the 1993 policy statement and it also applies to credit unions.

For loans within the scope of FAS 114 that are individually evaluated and found to be impaired, the associated ALLL should be based upon one of the three impairment measurement methods specified in FAS 114.


For all other loans, including individually evaluated loans determined not to be impaired under FAS 114, the associated ALLL should be measured under FAS 5 and should provide for all estimated credit losses that have been incurred on groups of loans with similar risk characteristics.