Key characteristics of FAS 5

In a recent webinar on How to Calculate Your FAS 5 Reserves, Sageworks consultants discussed key quantitative and qualitative characteristics of FAS 5 (ASC 450-20). 

From the video

Tell us more about the key characteristics of the FAS 5 – or the quantitative and qualitative factors? 

Again, we have already identified those loans that are not impaired; that we do not need to go through the cumbersome process of looking at each loan individually. So, what we’ve done is we’ve grouped them into homogenous pools. From there, ultimately what we are trying to do is anticipate what we expect future losses to be. One of the greatest ways that we do that – that we anticipate future losses – is to see the future as a repetition of the past. Taking that into consideration under the current incurred loss model, we basically are saying, “let’s look at historical loss rates on a similar group of loans, and let’s apply that loss rate against that respective homogeneous pool in order to determine an appropriate reserve.”

From there, we then acknowledge the fact that while the future may be a repetition of the past, it is not a direct replication. There are certain qualitative and environmental factors that change or adjust over time that we consequently need to account for. Fortunately, the 2006 inter-agency policy statement defines nine different qualitative factors or variations thereof. They are basically saying, “consider these factors and consider these things in making adjustments to your historical loss rate in order to reflect changes that have happened or that are anticipated on happening that may differ from your standard historical loss rate.”

For more detailed instructions and information about how to classify loans as either FAS 5 or FAS 114, ways to segment the portfolio into homogenous pools and how to document loss rates and qualitative adjustments, download the whitepaper titled How to Calculate Your FAS 5 Reserves.