The Financial Accounting Standards Board has proposed major revisions to the accounting standards for credit losses. If adopted, the proposals would replace the existing "incurred loss" model with an "expected loss" model that requires companies to recognize losses earlier in the credit cycle based on forecasts of future cash flows. This is expected to significantly impact financial institutions by increasing allowance for loan and lease loss balances and reducing reported income levels. Financial institutions would need to implement new calculation methodologies and enhanced loan loss disclosures if the proposals are finalized.
Credit Risk Losses | Real Losses Are they inconsistent?László Árvai
Focusing on:
• Contracting a new deal
• Good and properous customer relationship
• To have nice conversation
• Learn all the needs of his client
• Write a loan application
• Fill in the forms of the system
• Cope with all the compliance „handicaps“
• Analyse the business plan, the forecast, …
How and where to find Open Educational Resoures (OER)ROER4D
How and Where to find Open Educational Resources (OER)
Presentation by Henry Trotter
Delivered at the University of South Africa (UNISA) on 18 March 2015
Credit Risk Losses | Real Losses Are they inconsistent?László Árvai
Focusing on:
• Contracting a new deal
• Good and properous customer relationship
• To have nice conversation
• Learn all the needs of his client
• Write a loan application
• Fill in the forms of the system
• Cope with all the compliance „handicaps“
• Analyse the business plan, the forecast, …
How and where to find Open Educational Resoures (OER)ROER4D
How and Where to find Open Educational Resources (OER)
Presentation by Henry Trotter
Delivered at the University of South Africa (UNISA) on 18 March 2015
Market Practice Series (Credit Losses Modeling)Yahya Kamel
The Central Bank of Egypt “CBE” has adopted IFRS in year 2008. In specific IAS 39 has a discussion about implementing a model that can derive the incurred credit losses for a pool of receivables/ loans, which was quite open for market development & practical initiatives.
From the part of the CBE, it has adopted same approach, which led to some wide different market practices, logic, and interpretations, which sometimes have been questionable on a wide scale basis!
So, I've thought to develop some sort of materials that can serve as a practical guidance for quantifying the credit risk, using different simple models, based on Basel II definitions of the risk components.
The intended users of this material are the credit risk professionals who conduct risk analysis, implement risk management policies, or/and are in charge of quantifying the credit risk for a loan portfolio (corporate & retail).
Also, other professionals or officers complying with IFRS, or CBE GAAP.
Since the precipice of the financial crisis, the Financial Accounting Standards Board (FASB) has been considering changes to the allowance
model, due to criticisms that the current model does not adequately estimate losses until it is too late.
Responding to those concerns and in an attempt to simplify impairment guidance for financial institutions,
FASB has issued several exposure drafts of proposed models to take into account “expected losses” rather than the current “incurred loss” model. On December 20, 2012, FASB issued a new version of an exposure draft
outlining a new “Current Expected Credit Losses” model with its Accounting Standards Update (ASU) Financial Instruments—Credit Losses (Subtopic 825-15).
In the aftermath of the 2008 financial crisis, regulators have made the Allowance for Loan and Lease Losses a point of emphasis, as a signal to indicate a financial institution’s ability to withstand and absorb the losses that have ensued. With over 400 bank failures since 2009, regulators interpret an inadequate
ALLL as a key barometer of financial health, and as a result, they have been placing more pressure on surviving institutions to appropriately calculate
adequate ALLL provisions.
Credit Unions will have to alter they way they account for credit losses as part of their allowance for loan and lease losses, assuming the FASB finalizes the CECL accounting standard in Q1 of 2016. In this presentation, learn what is changing for credit unions' ALLL and how to prepare.
The FASB is expected to release its CECL or Current Expected Credit Losses Model in Q1 of 2016. The new accounting standard will impact the way banks calculate their allowance for loan and lease losses, forcing institutions to make some procedural changes to the way they account for credit risk.
Qualitative Risk Factors: How to Add Objectivity to an Otherwise Subjective Taskvimster
These qualitative adjustments are a challenge because they are inherently subjective in nature. The 2006 Interagency Policy Statement on the ALLL provides little direction on how these determinations should be made, advising only that “management should consider those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the group's historical loss experience.” It further vaguely explains that these determinations are to be “based on a comprehensive, well-documented and consistently applied analysis of its loan portfolio.”
Turn the STRESS in Stress Testing (Bank Loan Portfolios) into an Empowering E...Gateway Asset Management
Sponsored by Gateway Asset Management, this webinar document covers:
> Stress vs. Empowerment
> Primary Regulatory and Accounting Catalysts
> CECL- Current Expected Credit Loss Model/ALLL
> Stress Testing – Loan Portfolios
> Why Prepare for CECL and Stress Testing At The Same Time?
> Life-of-Loan "Base Case" & Stress Testing - Foundation - Building Blocks
> Models – Different sources and levels of sophistication
> Use of Models - Regulatory Guidance
> Why Start Preparing for CECL and Stress Testing Now?
CECL Methodology Series for Consumer Loan PoolsLibby Bierman
Recording: http://web.sageworks.com/cecl-methodology-webinar-series/
In this webinar series, Sageworks consultants review the different loss rate methodologies that will be available for banks and credit unions under CECL and their applicability for different loan segments. In this session, they look at consumer loan pools and accounting for them under CECL.
•Gain an understanding of the CECL model and impact on the Allowance for Loan Losses calculation.
•Understand the potential impact of the CECL on Credit Union financial statements upon adoption.
•Understand the differences between the current allowance for loan losses accounting model and the proposed CECL model.
Risk Rating Improvements for the ALLL in Banks and Credit UnionsLibby Bierman
Risk Ratings will play a pivotal role under CECL at banks and credit unions. In this presentation, find out how to improve risk rating systems, including PD/LGD or Probability of Default as well as internal matrices.
During this webinar, Rob Ashbaugh, senior risk management consultant at Sageworks, walked through how to perform ALLL scenario building and where it can help, including when altering look-back periods in the allowance calculation, changing loss methodologies and preparing for the FASB's CECL model.
The SAFe 5.0 white paper provides an overview of the Framework, the Big Picture graphic, the seven core competencies, and the values, mindset, principles, and practices that guide teams to more effectively build solutions in a far leaner—and more Agile—fashion.
Market Practice Series (Credit Losses Modeling)Yahya Kamel
The Central Bank of Egypt “CBE” has adopted IFRS in year 2008. In specific IAS 39 has a discussion about implementing a model that can derive the incurred credit losses for a pool of receivables/ loans, which was quite open for market development & practical initiatives.
From the part of the CBE, it has adopted same approach, which led to some wide different market practices, logic, and interpretations, which sometimes have been questionable on a wide scale basis!
So, I've thought to develop some sort of materials that can serve as a practical guidance for quantifying the credit risk, using different simple models, based on Basel II definitions of the risk components.
The intended users of this material are the credit risk professionals who conduct risk analysis, implement risk management policies, or/and are in charge of quantifying the credit risk for a loan portfolio (corporate & retail).
Also, other professionals or officers complying with IFRS, or CBE GAAP.
Since the precipice of the financial crisis, the Financial Accounting Standards Board (FASB) has been considering changes to the allowance
model, due to criticisms that the current model does not adequately estimate losses until it is too late.
Responding to those concerns and in an attempt to simplify impairment guidance for financial institutions,
FASB has issued several exposure drafts of proposed models to take into account “expected losses” rather than the current “incurred loss” model. On December 20, 2012, FASB issued a new version of an exposure draft
outlining a new “Current Expected Credit Losses” model with its Accounting Standards Update (ASU) Financial Instruments—Credit Losses (Subtopic 825-15).
In the aftermath of the 2008 financial crisis, regulators have made the Allowance for Loan and Lease Losses a point of emphasis, as a signal to indicate a financial institution’s ability to withstand and absorb the losses that have ensued. With over 400 bank failures since 2009, regulators interpret an inadequate
ALLL as a key barometer of financial health, and as a result, they have been placing more pressure on surviving institutions to appropriately calculate
adequate ALLL provisions.
Credit Unions will have to alter they way they account for credit losses as part of their allowance for loan and lease losses, assuming the FASB finalizes the CECL accounting standard in Q1 of 2016. In this presentation, learn what is changing for credit unions' ALLL and how to prepare.
The FASB is expected to release its CECL or Current Expected Credit Losses Model in Q1 of 2016. The new accounting standard will impact the way banks calculate their allowance for loan and lease losses, forcing institutions to make some procedural changes to the way they account for credit risk.
Qualitative Risk Factors: How to Add Objectivity to an Otherwise Subjective Taskvimster
These qualitative adjustments are a challenge because they are inherently subjective in nature. The 2006 Interagency Policy Statement on the ALLL provides little direction on how these determinations should be made, advising only that “management should consider those current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the group's historical loss experience.” It further vaguely explains that these determinations are to be “based on a comprehensive, well-documented and consistently applied analysis of its loan portfolio.”
Turn the STRESS in Stress Testing (Bank Loan Portfolios) into an Empowering E...Gateway Asset Management
Sponsored by Gateway Asset Management, this webinar document covers:
> Stress vs. Empowerment
> Primary Regulatory and Accounting Catalysts
> CECL- Current Expected Credit Loss Model/ALLL
> Stress Testing – Loan Portfolios
> Why Prepare for CECL and Stress Testing At The Same Time?
> Life-of-Loan "Base Case" & Stress Testing - Foundation - Building Blocks
> Models – Different sources and levels of sophistication
> Use of Models - Regulatory Guidance
> Why Start Preparing for CECL and Stress Testing Now?
CECL Methodology Series for Consumer Loan PoolsLibby Bierman
Recording: http://web.sageworks.com/cecl-methodology-webinar-series/
In this webinar series, Sageworks consultants review the different loss rate methodologies that will be available for banks and credit unions under CECL and their applicability for different loan segments. In this session, they look at consumer loan pools and accounting for them under CECL.
•Gain an understanding of the CECL model and impact on the Allowance for Loan Losses calculation.
•Understand the potential impact of the CECL on Credit Union financial statements upon adoption.
•Understand the differences between the current allowance for loan losses accounting model and the proposed CECL model.
Risk Rating Improvements for the ALLL in Banks and Credit UnionsLibby Bierman
Risk Ratings will play a pivotal role under CECL at banks and credit unions. In this presentation, find out how to improve risk rating systems, including PD/LGD or Probability of Default as well as internal matrices.
During this webinar, Rob Ashbaugh, senior risk management consultant at Sageworks, walked through how to perform ALLL scenario building and where it can help, including when altering look-back periods in the allowance calculation, changing loss methodologies and preparing for the FASB's CECL model.
The SAFe 5.0 white paper provides an overview of the Framework, the Big Picture graphic, the seven core competencies, and the values, mindset, principles, and practices that guide teams to more effectively build solutions in a far leaner—and more Agile—fashion.
The Impact of Recent Supervisory Guidance on Capital Planning by Kosoff and B...Jacob Kosoff
The Federal Reserve has tailored capital planning management expectations in certain areas for financial institutions with assets between $50bn and $250bn, while the Federal Reserve has heightened expectations in other areas including ongoing monitoring, firm-wide sensitivity analysis, change management, internal controls and board reporting. Written by Jacob Kosoff and Rachel Bryant.
CUSO vs. In-House: Growing Your Member Business Lending PortfolioLibby Bierman
In recent years, an increasing number of credit unions are starting, or expanding, their Member Business Lending (MBL) portfolios. This presents a number of challenges, including having the proper systems in place. And a decision must be made to outsource the function to a Credit Union Service Organization (CUSO), build it internally, or some combination of the two. In this webinar, Ancin Cooley, principal of Synergy Credit Union Consulting, and Mike Ford, director at Sageworks, discussed the growth in MBL, benefits and challenges of both CUSOs and internal departments, and provide recommendations for continued growth.
Similar to FASB Proposal - Major Revisions to Accounting for Credit Losses (20)
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.
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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.
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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