New Disclosure Requirements for Loans and the Allowance For Loan Losses

9/30/2010

By Daniel C. Dibella, CPA

Accounting Standards Update 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, amends Topic 310 of the Accounting Standards Codification and substantially expands the financial statement disclosures relative to loans and the allowance for loan losses. Under the “old” standard, financial statement disclosures relative to loans and the allowance for loan losses were presented in the aggregate - for example, a rollforward of allowance for loan loss activity or disclosure of total nonaccrual loans. Under the “new” standard, disclosures are disaggregated and presented by either portfolio segment or portfolio class – for example, a rollforward of allowance for loan loss activity by portfolio segment or disclosure of nonaccrual loans by portfolio class. Segments are the broad loan categories for which an allowance for loan losses is calculated – for example, C&I, CRE, Residential RE, Consumer. Classes are meaningful subtypes within a segment that share common risk characteristics - for example, a CRE segment may be composed of loans related to owner-occupied properties and loans related to non owner-occupied properties. The loan portfolio should be disaggregated into segments and classes that enable financial statement users to clearly assess the risk characteristics of various types of loans, but should not be disaggregated to the point that detail is excessive or provided for insignificant items. Segments and classes should be identified using a principles-based approach, and banks should identify meaningful segments based on the nature, volume and risk characteristics of the loan portfolio.

Accounting Standards Update 2010-20 requires the following quantitative disclosures:

• Rollforward of allowance for loan loss activity, by portfolio segment.
• Ending balance of the allowance for loan losses, by portfolio segment, allocated to impaired loans (presented separately for loans individually evaluated for impairment and collectively evaluated for impairment).
• Ending balance of loans, by portfolio segment.
• Ending balance of impaired loans, by portfolio segment (presented separately for loans individually evaluated for impairment and collectively evaluated for impairment).
• Aging analysis, by portfolio class, that includes the following: loans 30-59 days past due, loans 60-89 days past due, loans greater than 90 days past due, total loans past due, total current loans, total loans, total loans past due greater than 90 days and accruing.
• Ending balance of nonaccrual loans, by portfolio class.
• Impaired loan analysis, by portfolio class, that includes the following: ending balance of impaired loans, amount of the allowance for loan losses allocated to impaired loans, average recorded investment in impaired loans, total interest income recognized on impaired loans, cash basis interest income recognized on impaired loans (if practicable). The analysis should also present data separately for impaired loans with a valuation allowance and impaired loan with no valuation allowance.
• Credit quality analysis, by portfolio class (for example, internal loan grades).
• For troubled debt restructurings, the financial effects of the modifications, by portfolio class.

Accounting Standards Update 2010-20 also requires various qualitative disclosures about risk characteristics of the loan portfolio, allowance for loan loss methodology and credit evaluation procedures.

While many of the new disclosures are similar to data reported in schedules RI-B, RC-C and RC-N of the Call Report, the disclosure requirements are more extensive and more detailed than those required for the Call Report. Banks will need to evaluate their allowance for loan loss mechanics and methodology, and the format of various loan and credit quality reports, to ensure that the capture, calculation and assembly of data meets the new disclosure requirements. For banks that currently calculate the allowance for loan losses on an aggregate basis, and assemble loan and credit quality data on an aggregate basis, major changes in mechanics and methodology may be needed to disaggregate data into appropriate portfolio segments and classes.

For non-public entities, all disclosures are effective for interim and annual reporting periods ending on or after December 15, 2011. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010, and the disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 31, 2010. Although non-public entities do not have to provide disclosures as of December 31, 2010, allowance for loan loss mechanics and methodology may still have to be adjusted as of December 31, 2010, in order to provide the opening balance of the allowance for loan losses, by portfolio segment, for the purpose of the 2011 allowance for loan losses activity rollforward.

Accounting Standards Update 2010-20 is available for download on the website of the Financial Accounting Standards Board, and should be read in detail by personnel responsible for financial reporting and for credit reporting.  As banks begin the process of implementing the accounting standard changes, they should consult their accountants and advisors.