May 21, 2013

Proposed Rule Change for Estimating the Allowance for Loan and Lease Losses

The Financial Accounting Standards Board ( FASB ) has released Proposed Accounting Standards Update ( PASU ), Financial Instruments-Credit Losses (Subtopic 825-15). The guidance in this PASU is intended to establish a forward-looking process for estimating reserves for credit losses associated with financial instruments. The amendments proposed in this PASU are driven by the global financial crisis that began in 2008, which was partially attributable to the overstatement of assets due to the delay in recognition of credit losses associated with loans. Currently, generally accepted accounting principles in the United States allow the delay of a recognized loss on a loan until the loss is considered probable or has already occurred. The guidance in this PASU would do away with this probability threshold, thus expediting the recognition of credit losses.

Additional proposed guidance in the PASU follows:

  • In addition to current and historical information, reasonable and supportable forecasted information is to be utilized in the methodology for calculating reserves.
  • A lender would be required, by the first reporting period following the loan s origination, to establish a reserve for a loan that reflects the lender s current estimate of contractual cash flows not expected to be collected on the respective loan through maturity. This amount is to be immediately recognized in the lender s statement of operations as a provision for expected credit losses.
  • To promote transparency in the proposed reserve estimation process, the FASB is recommending the implementation of expanded disclosures, which will document certain detailed information about the policies and processes utilized by the respective lender in its reserve methodology.

The original comment period for this PASU has been extended from its original deadline of April 30, 2013, to May 31, 2013, due to the substantial amount of feedback already received from respondents. The FASB also has released a 16-page Frequently Asked Questions document ( FAQs ) that addresses some of the more common questions received from respondents.

The proposed amendments are to be applied through a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. An effective date has yet to be established.

For additional commentary on the proposed amendments, view PYA s summary of the PASU here. To discuss the information above, please contact the expert listed below at PYA, (800) 270-9629.

Recommended Links:

View the FASB Proposed Accounting Standards Update

View the FASB Frequently Asked Questions document

Learn more about PYA’s Financial Institutions Advisory Services and Financial Institutions Audit & Accounting Services

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