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October 2009

FASB proposes increased disclosures for the ALLL

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Brian J. Mischel

The Financial Accounting Standards Board (FASB) has proposed to significantly increase the disclosures required by institutions with respect to the allowance for loan and lease losses (ALLL) and credit quality. This proposed statement, which applies to both public and nonpublic institutions, provides enhanced disaggregated disclosures designed to improve the transparency of financial reporting.

Levels of disaggregation

The proposed statement defines two levels of disaggregation—1) portfolio segment and 2) class of financing receivable, which includes both loans and leases.  A portfolio segment is the level at which an institution develops and documents a method to determine its ALLL.  An example of a portfolio segment would be the type of financing receivable, such as commercial, commercial real estate, residential real estate and consumer.  A class of financing receivable is defined as a level of information that allows users of financial statements to evaluate the nature and extent of exposure to credit risk.  Classes must be disaggregated to the level management uses when assessing and monitoring the portfolio.  For example, the residential real estate portfolio segment could include classes such as 1-4 family, junior lien mortgages and home equity.

Enhanced disclosures

Some of the proposed disclosures are to be presented by portfolio segment, while others are presented by class.  Significant, enhanced disclosures in the proposed statement include:

  1. A rollforward schedule of the ALLL from the beginning to the end of the reporting period on a portfolio segment basis for both the allowance for individually impaired financing receivables under Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of Loan and the allowance for collectively evaluated impaired financing receivables under SFAS No. 5, Accounting for Contingencies
  2. A rollforward schedule of the financing receivables corresponding to (1) above from the beginning to the end of the reporting period on a portfolio segment basis
  3. The fair value of loans at the end of the reporting period on a portfolio segment basis
  4. The credit quality of financing receivables at the end of the reporting period by class, including providing information on finance receivables by internal risk rating (grade)
  5. The aging of past due financing receivables at the end of the reporting period by class
  6. The nonaccrual status and impaired financing receivables at the end of the reporting period by class

    7. Effective Date

    The deadline for comments on the exposure draft was August 24, 2009. The final statement is expected to be issued in the fourth quarter of 2009 and would be effective for financial statements beginning with the first interim or annual reporting period ending after December 15, 2009