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August 2010

New FASB Standard Makes Significant Changes to Loan-Loss
Disclosures

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Doug Bennett
On July 21, 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The ASU includes significant additional disclosures about the allowance for loan losses, which will require institutions to gather that data and potentially modify information technology (IT) systems to support the effort.

The ASU’s objective is to require institutions to provide disclosures that facilitate users’ evaluation of:

  • The nature of credit risk inherent in the portfolio
  • How that risk is analyzed and assessed in determining allowance for credit losses
  • The changes and reasons for those changes in the allowance for credit losses

Requirements

Click below to view the example disclosures.

The ASU requires expanded disclosures on a disaggregated basis, based on portfolio segment and class. A portfolio segment is defined as the level at which an institution develops and documents its method for determining allowance for loan losses. Classes are generally a disaggregation of portfolio segments. Common portfolio segments might include commercial loans, commercial real estate loans, residential, lease financing and consumer loans. Commercial real estate loans might be divided into the “construction” and “other” classes. Segments and classes will be entity-specific, depending on how each institution evaluates its allowance for loan losses.

Existing disclosure requirements are amended to require the following on a disaggregated basis:

  • A roll-forward schedule of the allowance for loan losses for the period on a portfolio segment basis, with the ending balance further disaggregated between the allowance allocated to loans individually evaluated for impairment, loans evaluated collectively for impairment and loans acquired with evidence of credit deterioration at the time of acquisition
  • For each disaggregated ending balance above, the related recorded investment in loans
  • Nonaccrual loans by class
  • Impaired loans by class

The following additional disclosures are required by the ASU on a disaggregated basis:

  • Credit-quality indicators of loans as of each balance sheet date, presented by class
  • The aging of past-due loans at the end of the period by class
  • The nature and extent of troubled debt restructurings that occurred during the period by class and their effect on the allowance for loan losses
  • The nature and extent of loans modified as troubled debt restructurings within the previous 12 months that defaulted during the period by class and their effect on allowance for loan losses
  • Significant purchase and sale of loans during the period, disaggregated by portfolio segment

Interim Reporting

The disclosure requirements for condensed interim financial statements in ASU 270-10 are amended to generally require all of the disclosures discussed above each quarter.

Effective Date

For public institutions, end-of-period disclosures are required for interim and annual periods ending on or after December 15, 2010. The disclosures about activity are required for interim and annual periods beginning on or after December 15, 2010.

For nonpublic institutions, all ASU disclosures are required for annual periods ending on or after December 15, 2011.

Comparative disclosures for periods prior to the effective date may be presented voluntarily.

Summary

Additional disclosures required by the ASU will require additional time and resources. You should begin planning how to develop the required data now, as systems changes may be necessary.

Click on the thumbnail above to view examples of the major disclosure changes from previous requirements. Please note that these examples do not present all of the disclosures required regarding credit quality and allowance for loan losses, and examples must be tailored to each entity’s unique circumstances.

Contact your BKD advisor for help interpreting the new requirements or to discuss how to develop the required data.

This article is property of BKD, LLP and is copyright protected. It may not be republished or reproduced without permission. To view BKD’s Terms of Use, click here. To inquire further about reusing this article, contact Matt Wagner at 417.831.7283 or mpwagner@bkd.com.