PHOENIX — Estimating an appropriate allowance for loan and leaselosses an NCUA examiner will accept is a “never-ending cat and mouse gamewhere you're always trying to chase the right answer,” CPA BartFerrin said during a breakout session Monday at the CUNA CFOCouncil conference.

Ferrin is the principal at Ferrin & Company, a Salt LakeCity-based CPA firm that serves credit union

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To prepare for an exam, Ferrin said, CFOs should refer to FASBguidance and an NCUA accounting bulletin from 2006 titled“Interagency Policy Statement on Allowance for Loan and LeaseLosses”.

That document, Ferrin said, states that an ALLL estimate shouldbe based on comprehensive, well-documented and consistently appliedanalysis of the loan portfolio, and should take into account allavailable information existing as of the financial statement date,including environmental factors like economic, industry,geographical and political factors.

“Examiners have their own personal attitudes and something thatcan play into what they want you to do,” he said. “As a creditunion, you can turn that back around and say, 'Here are the ruleswe're playing by, and the rules you're supposed to be playingby'.”

Credit unions should complete four key steps in the ALLL processwhen preparing for an exam, Ferrin said.

They include establishing an appropriate pooling process, anappropriate individual loan identification process, an appropriatequalitative and environmental analysis process and the preparationof a final management and discussion analysis.

“Think of your exam as a playing field,” the Utah accountantsaid. “You want to narrow it, so by doing these four steps, yourexaminer knows where the out-of-bounds lines are.”

A quick show of hands revealed that most CFOs in the room feltthey were being asked to allocate too much to loan losses. Manyagreed that examiners were not allowing them to decrease ALLL topre-recession levels, even if loan losses have fallenaccordingly.

While Ferrin agreed funding ALLL is difficult, particularly intoday's low margin environment, pending changes to FASB standards will require allocations to double oreven triple.

Although FASB has not yet finalized a standard, despite missingan initial April 30 deadline, Ferrin said, the changes, which willreplace funding for incurred losses with expected losses, would beeven more difficult to absorb if the ALLL was decreased.

“The current one-year funding requirement we're currentlyoperating under is really underfunding, if you really think aboutit,” he said. “It really should be two years. So from that point ofview, it makes sense to have more in there. But, that doesn't makeit hurt any less.”