A bank’s allowance for loan and lease losses (ALLL) is one of the most significant estimates on the institution’s financial statements. As a result, it is often one of the biggest areas of exam-time scrutiny.
Common challenges with the ALLL methodology include:
- Staying abreast of regulatory and accounting changes (such as the CECL model) to the ALLL and their impact on the reserve.
- Evaluating impaired loans according to ASC 310-10-35 and applying the correct impairment analysis.
- Ensuring an appropriate ASC 450-20 methodology, with accurate loss rates and qualitative factor adjustments for each pool.
- Providing adequate documentation and satisfying ASU 2010-20 disclosure reporting requirements.
- Gathering data from disconnected sources or spreadsheets through sometimes labor-intensive, time-consuming processes.