3. What’s Changed?
F or the past few years, the Financial Accounting Standards Board (FASB)
has been discussing the adoption of the “expected loss model” for the
Allowance for Loan and Lease Losses (ALLL). On December 20, 2012,
FASB issued a Proposed Accounting Standards Update that finally defines the
actual accounting framework and clearly differentiates this proposal from the
current accounting standard. The proposal calls for an entity to recognize an
allowance for credit losses based on supportable forecasts of contractual cash
flows not expected to be collected.
Under the “incurred loss” model presently employed, a loss is not recorded
until it is probable that a loss event has occurred. This model has been
criticized for a number of reasons but primarily since the loss is recorded too
late in the credit cycle.
The FASB’s proposed model eliminates any threshold required to record a
credit loss and allows entities to consider a broader information set when
establishing their allowance for loan losses. In addition, the model aims to
simplify current practice by replacing today’s multiple impairment models
with one model that applies to all debt instruments.
5565 Centerview Drive | Raleigh, NC 27606 | 866.603.7029 | www.sageworksinc.com 3
4. What is The Potential Impact?
It is very likely that this proposed standard will have a profound impact on
financial institutions. Below you will find a few possible impacts of these new
standards.
1. ALLL levels may rise significantly as loss measurements would be
measured over the life of the loan rather than on only losses that have been
incurred as of the balance sheet date.
2. The result of increased ALLL balances would inversely reduce net
income levels.
3. The “probable loss” threshold will be removed, and estimates will be
based on “possible” estimates.
4. Financial institutions will need to implement revised calculation
methodology that will be scrutinized and presumably challenged by your
auditors and examiners.
5. Significant changes to required disclosures.
6. Removal of SOP 03-3 accounting requirements.
5565 Centerview Drive | Raleigh, NC 27606 | 866.603.7029 | www.sageworksinc.com 4
5. What does this MEan for ME?
Will this impact me?
All entities that hold financial assets subject to credit losses will be affected by
the FASB’s proposed model.
When will this take effect?
The FASB board plans to consider various alternatives for an effective date as
well as providing different effective dates for public versus non-public entities
and regulated versus non-regulated entities.
What steps can I take now?
The primary steps to take right now are ones that should be consistently
applied on an ongoing basis regardless of any upcoming changes.
- Review effective loan review systems and controls.
- Ensure the current ALLL evaluation process is acceptable.
- Properly document support for all assumptions, valuations and judgments.
- Take steps to reduce the manual risk potential in the ALLL process.
What should I do?
Comments on the FASB’s proposal are due April 30, 2013. Make sure someone
at your institution makes your comments and thoughts heard. We plan to issue
an update in the coming weeks/months that will provide more information
and our insights on the proposal as issues become clearer.
5565 Centerview Drive | Raleigh, NC 27606 | 866.603.7029 | www.sageworksinc.com 5
6. additional resources
What if I have questions?
Sageworks Surety clients who have questions about this brief should contact
their account manager at 866.603.7029.
FASB. “Disclosures about Credit Quality and the Allowance for Credit Losses.”
FASB.org.
http://www.fasb.org/.
“Challenges in the Estimation of the ALLL.” SageworksAnalyst.com.
http://web.sageworksinc.com/alll-challenges-whitepaper/.
“Qualitative Risk Factors: How to Add Objectivity to an Otherwise Subjective
Task.” SageworksAnalyst.com.
http://web.sageworksinc.com/qualitative-risk-factors/.
Sacher, Michael. “The Possible Impacts of FASB’s Proposed Update To ALL
Accounting.” CreditUnions.com. 26 Dec. 2012. Web. 05 Jan. 2013.
http://www.creditunions.com/blogs/op-ed/the-possible-impacts-of-
fasbs-proposed-update-to-all-accounting--/#ixzz2HJuVOx2L.
5565 Centerview Drive | Raleigh, NC 27606 | 866.603.7029 | www.sageworksinc.com 6
7. About Sageworks
Sageworks, the leader in the financial analysis of privately
held companies, works with financial institutions,
accountants, and private company executives across
North America to collect and interpret financial
information. Sageworks’ data, the largest database of
real time private company financial information in the
U.S., grows as more than one thousand reports are run
each day, and the new data is screened and anonymously
incorporated into our industry statistics. We incorporate
this data into our risk management products for financial
institutions including credit analysis, stress testing, and
ALLL estimation solutions.
5565 Centerview Drive | Raleigh, NC 27606 | 866.603.7029 | www.sageworksinc.com 7