I want to bring to your attention a new FASB Update titled “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” that will be effective for most credit unions’ December 31, 2011 year ends. In case you haven’t been able to read the 92 page update, which can be found here, I’ve taken the liberty of compiling some key items that might interest you.
The FASB has defined two levels of reporting. The first is Portfolio Segment (e.g. commercial, residential, consumer). You should be used to reporting at this level. What you may not be used to is disclosing your allowance for credit losses by Portfolio Segment, which is now required. You also need to disclose how the risk characteristics of your portfolio, historical losses and economic conditions have affected your judgment in estimating your allowance.
The second level of reporting is Class of Financing Receivable which goes a step further (Credit Card, Auto, Residential – Prime, Residential – Subprime). You are required to disclose your impaired loans, loans that have been moved to non-accrual status and loan modifications by class. As would be expected, you need to disclose how loans are deemed to be impaired and/or placed on non-accrual status as well as the ways in which the loans were modified. You also need to disclose how the loan modifications are factored into your allowance calculation by Segment.
Potentially the most daunting new requirement, and probably the reason why the standard is not required to be applied retroactively, is a disclosure of credit quality information (risk) by Class (e.g. Low Risk, Medium Risk, High Risk). You must also disclose a description of the credit quality indicator(s) used by the institution in assessing the credit quality of its loans (e.g. credit scores, loan to value, etc…) and the date or range of dates in which the information was updated.
To summarize the key reporting requirements of the standard, the FASB is looking for you to show the readers of your financial statements: 1. Our loan portfolio historically loses $X dollars, 2. The risk of our portfolio has changed because…, 3. Economic conditions effected our portfolio by… , 4. As a result, management has deemed the change in allowance for credit losses to be adequate for the portfolio.
Unfortunately, this standard is probably going to give you a headache. I would tell you to start preparing for this early; consider getting in touch with your auditor to make sure they are prepared to deal with the standard and brainstorm ways to obtain and present this information.
–Dan Price, CPA
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