In a webinar on, How to Calculate Your FAS 5 Reserves, Abrigo consultants discussed the difference between FAS 5 (ASC 450-20) and FAS 114 (ASC-310-35) loans.
From the video:
What is the difference between FAS 5 and FAS 114 loans?
In order to understand FAS 5, it is important to understand what it is not, as well. FAS 5 and FAS 114 are the two underlying accounting guidance factoring into your ALLL calculation. Where FAS 5 is homogenous pools, FAS 114 in contrast is individual loans. So in FAS 5, we are grouping together loans that are deemed non-impaired. We are going to put them into buckets of similar type loans. In FAS 114 we are going to separate out those loans that we deem impaired, and we are going to look at those individually (as opposed to applying a standard loss rate across a homogenous pool).
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As far as the next line item - the general reserve versus the specific reserve - the FAS 5 is a general reserve. We are basically saying that we are not going to look at each one of these non-impaired loans individually - basically substandard or greater typically - we are going to just group them into homogenous pools, we are going to look at a historical loss rate, and we are going to apply it against those homogenous pools in order to determine a general reserve.
