Disclosure reporting for ALLL

With the release of the July 2010 FASB Accounting Standards Update 2010-20, banks were required to increase transparency pertaining to financial reporting. Robert H. Herz, the FASB chairman, stated: “The global financial crisis highlighted the need for additional information about a company’s financial instruments, including loans and other financing receivables. This Update proves greater transparency for investors and other users of financial statements by requiring more information from companies about credit risk exposure for financing receivables and the related credit reserves.”

The additional disclosure reports required for financing receivables are as follows:

       * Aging of past due receivables
       * Credit quality indicators
       * The landscape and extent of troubled debt restructurings and its impact on the allowance for credit losses
       * Significant purchases and sales of financing receivables

Under the  guidance, banks need to disaggregate new and existing disclosures based on how the bank develops its allowance for credit and losses, as well as how it manages credit risk. As of December 15, 2010, public banks were required to follow the new disclosure reporting standards while private banks had until December 15, 2011. Furthermore, public banks are expected to provide interim and year-end disclosures whereas private banks need only to generate disclosure reports on an annual basis. For private banks, this has become a tedious and cumbersome process due to the necessary loan-level detail and trends required, and banks may struggle with retaining, storing and documenting critical information since it is only being required on a yearly basis. For example, banks will need to deliver an in-depth Troubled Debt Restructuring (TDR) report by loan class as well as a report for any TDR defaults in the past 12 months and its impact on the ALLL reserve. If private banks are not taking the initiative to keep thorough and detailed records throughout the course of the year, constructing disclosure reports can be extremely burdensome.

Accommodating disclosure requirements may not be easy for banks and credit unions, due to limited resources and feedback regarding how to construct the new reports based on the institution’s methodology and loan portfolio. It is recommended that institutions seek assistance from external expertise, such as auditors and loan review firms. Many third-party companies provide users with pre-built templates within an automated solution to expedite the process of generating disclosure reports. This will help lighten the workload as well as provide the necessary transparency and documentation for requirements surrounding the ALLL calculation.

For more information about prudent data collection for the ALLL, disclosure reporting and how to bring consistency in methodology, download the whitepaper ALLL: 3 Ways to Prepare for Year-End.