Guest Opinion: Loan and Lease Loss Challenges
The estimation of the allowance for loan and lease Losses has been a part of the financial institution’s accounting processes for years, but it has taken on increased importance over the last several years.
Between increased regulatory scrutiny and the challenges of documenting and defending the allowance estimation to multiple constituencies including the regulators, external auditors and the board, many financial institutions find themselves overwhelmed with the process of estimating and documenting the ALLL on a monthly or quarterly basis.
Additional reporting and disclosure requirements as well as increased scrutiny on the assumptions used to determine the ASC 450-20 (FAS 5) reserves. In recent years, FASB has continued to issue new requirements through its Accounting Standards Updates. While this often consists of simple reports and aggregation of data that is already being used, it can be time-consuming and places additional strain on limited resources.
Increased scrutiny on the assumptions used to determine the ASC 450-20 (FAS 5) reserves. This can include questions around the how to appropriately segment the ASC 450-20 (FAS 5) pools, assumptions used for the number of periods of historical data to include for establishment of the historical loss reserve portion of the ASC 450-20 (FAS 5) reserves, and the judgment and defense of qualitative factor adjustments in the assessment of the ASC 450-20 reserves.