Asu 2010 20 loan and allowance for loan loss disclosures - webinar 111511
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Transcript of Asu 2010 20 loan and allowance for loan loss disclosures - webinar 111511
ASU 2010-20 – LOAN AND ALLOWANCE FOR LOAN LOSSES DISCLOSURESWebinar November 15, 2011 noon – 1pm EST
DeLeon & Stang, CPAs and Advisors
Allen P. DeLeon, CPA
Credit Union Services Partner
(301)948-9825
Speaker biography – Allen P. DeLeon, CPA
Partner with DeLeon & Stang, CPAs and Advisors
Over 25 years credit union auditing experience
Member of the AICPA Credit Union Practitioners committee and conference planning committee
Chair of the Maryland Association of CPAs
Speaker biography – Lutamila Sallu, CPA
Over 15 years experience auditing credit unions
Certified fraud examiner and internal auditors Expert on allowance for loan loss issues,
including TDR’s.
Speaker biography – Kevin Madden, CPA
Over seven years experience auditing credit unions
Experienced with both certified audits and internal audits
Expert with ACH, OFAC and BSA audits.
Agenda
Introduction Overview of credit loss disclosures NCUA Regulatory & Call Reporting
Considerations Samples of new disclosure requirements
BACKGROUND
ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables, was issued in July 2010
The ASU is intended to provide greater transparency about credit risk disclosures and the adequacy of the allowance for credit losses
More detailed information will now be required to help users better understand the credit risk inherent in the loan portfolio
Information is required to be disclosed about how credit risk is analyzed and assessed in determining the adequacy of the allowance for loan losses
EFFECTIVE DATE
Effective for financial statement years ending on or after December 15, 2010
For calendar year entities: Public entities – 2010 Non public entities - 2011
WHAT IS THE IMPACT?
CREDIT INFORMATION WILL NOW BE REQUIRED ABOUT: Impaired loans Delinquency aging Roll forward information required separately
by portfolio or loan class Disclosures required in footnotes to audited
financial statements Reporting will be required in NCUA call
reports
WHAT IS THE SCOPE?
Applies to all entities, public and private that have financing receivables, including: Loans and notes receivable Trade receivables exceeding one year Lessor’s receivables for direct finance and
sales type Lessor’s receivables for leveraged leases
WHAT IS THE SCOPE? (CONTINUED)
Scope excludes: Short-term receivables arising from sale of
goods or services Receivables or loans measured at the lower of
cost or market (LOCOM) or fair value Debt securities and beneficial interests in
securitizations Unconditional promises to give.
TERMINOLOGY
Portfolio segment – the level at which a creditor develops and documents a systematic methodology to determine its allowance for credit losses, for example: Commercial vs. consumer loans A portfolio segment will generally have more
than one class Additional disclosure required for loans
evaluated collectively vs. individually
TERMINOLOGY (CONTINUED)
Credit quality indicator – a statistic about the credit quality of financing receivables, for example: Delinquency status FICO scores Loan-to-value ratios
TERMINOLOGY (CONTINUED)
Class of financing receivables – level of information that enables user of the financial statements to understand the nature and extent of exposure to credit risk arising from financing receivables: Classes must segregate financing receivables on the
basis of measurement attributes (amortized cost, LOCOM, fair value)
Classes must then disaggregate to the level management uses to assess and monitor risk and performance of the portfolio
For example: product type of loans (auto, residential mortgage etc..)
NEW DISCLOSURE REQUIREMENTS
Category Portfolio segment Class
Roll-forward of allowance for loan
losses
Credit Quality information
Non-accrual and past due loans
Impaired loans (individually evaluated)
Modifications (for both portfolio segment and
class levels)
ALLOWANCE FOR LOAN LOSSES – PORTFOILIO SEGEMNT
Previous requirements New requirements
Accounting policies related to the allowance for loan losses
Accounting policies regarding the allowance for loan losses methodology by portfolio segment•Description of factors that influence managements judgment including historical losses and existing economic conditions•Discussion of risk characteristics relevant to each portfolio segment•Identification of any changes from prior periods and rationale
Roll-forward of total allowance for loan losses
Roll-forward is required by portfolio segment; additional disclosures:•Quantitative effect and rationale for changes in ALLL methodology on current provision•Amount of significant loan purchases, sales or reclasses•Balance in ALLL disaggregated on basis of impairment method (general vs. specific reserves)
Recorded investment in financing receivables
Recorded investment in financing receivables by portfolio segment and disaggregated on the basis of impairment method
CREDIT QUALITY INDICATORS - BY CLASS
Previous requirement New requirement
None By class of financing receivables:•Description of the credit quality indicator•The recorded investment in loans by credit quality indicator•How internal risk ratings relate to the likelihood of loss (qualitative)
NONACCRUAL AND PAST DUE LOANS – BY CLASS
Previous requirement New Requirement
Accounting policies for financing receivables:•Placing receivables on nonaccrual•Recording payments received on nonaccrual receivables•Resuming accrual of interest•Charging off uncollectible receivables•Determining past due or delinquent rates
Same disclosures required by class of financing receivables except that the disclosures of the accounting policy for charging off uncollectible receivables is required by portfolio segment
Recorded investment in receivables on nonaccrual status
Now required by class of financing receivables
Recorded investment in receivables past due by 90 days or more and still accruing
Now required by class of financing receivables
None An entity shall provide, by class of financing receivables, an analysis of the age of the recorded investment in loans that are past due at the end of the reporting period.
IMPAIRED LOANS – BY CLASS
Previous requirement New requirement
For individually-evaluated impaired loans accounted for under ASC 310-10-35 (formerly FAS 114):•The rerecorded investment in impaired loans•The amount for which there is an allowance•The amount for which there is no allowance•Accounting policy for recognizing interest income, including how cash receipts are recorded•The average recorded investment•The related interest income recognized when loans were impaired•The amount of interest income recognized on the cash basis
Same disclosure, but require by class of financing receivables
Additionally, the following new disclosures are also required by class:•The accounting for impaired loans•The amount of impaired loans•The total unpaid principal of impaired loans•The entity's policy for determining which loans it assess for impairment on an individual basis•The factors considered in determining that the loan is impaired.
TROUBLED DEBT RESTRUCTURINGS
Previous requirement New Requirement
GAAP required minimal disclosures of loans modified in TDR’s
NCUA requires the following is call reporting:•Page 8 –Additional Delinquency Information for Modified Loans•Page 9 - Loan Charge & Recoveries for Modified Loans•Page 15 – Schedule A, Specialized Lending, Section 5 – Modified Loans•Report as delinquent until six consecutive payments have been made
Modified Loans – “…all loans and leases whose terms have been modified because of a deterioration in the financial condition of the borrower, whether or not such modified loans are trouble debt restructurings under GAAP.” the modified terms offered the borrower could include an increased term, a reduction in interest rate or principal, or other concession.”
By class:•Qualitative and quantitative information about the nature of modifications and related impact on the allowance for loan lossesBy portfolio segment:•Qualitative information about how TDR’s and TDR re-defaults are factored into the determination of the allowance for loan losses•Disclosures about loans modified as TDR’s within the previous 12 months for which there was a payment default during the current periodBy Class of Financing Receivables:•Qualitative and quantitative information about the type and amount of TDR’s that defaulted on their modified terms during the current period
TROUBLED DEBT RESTRUCTURINGS (CONTINUED)
Consider the interaction of these new disclosure requirements with the clarifications to the TDR definition in ASU no. 2011-12
To determine if a loan restructuring is a TDR, credit unions should conclude that both of the following exist: The restructuring constitutes a concession The debtor is experiencing financial difficulties
TROUBLED DEBT RESTRUCTURINGS (CONTINUED)
Concession means: No access to funds at market rates If new interest rate is below market Delay in payments is generally not a concession,
unless significantFinancial difficulties means:Default is not required if future default is probable,
without a modification
NCUA REGULATORY AND CALL REPORTING CONSIDERATIONS
There are no immediate plans to add data collections to the Call Report to parallel this disclosure rule.
Generally the Call Report conforms to recognition and measurement GAAP; NCUA does not necessary collect all disclosure information nor conform in presentation.
NCUA will continue to evaluate the usefulness of the additional disclosures and monitor Call Report users needs, both inside and outside the agency, for conforming changes.
IMPACT ON FINANCIAL RATIOS
Profitability – impact on net income Liquidity – None Capital adequacy – capital ratio Asset quality – loan ratios
IMPLEMENTATION CONSIDERATIONS
Step 1 – Gather information Compare existing requirements with new and identify if your
systems will be able to compile the information. Consider NCUA call reporting requirements.
Step 2 – Identify judgment areas identify judgment areas early in the process Portfolio segment definition Loan class definition Credit quality indicator definition Past due aggregation TDR information – how to collect information
IMPLEMENTATION CONSIDERATIONS (CONTINUED)
Identify data sources Most critical step in the process NCUA call report gathering may help Reports from credit union processing systems may not be
available Some data may have to be collected manually on spreadsheets
Test data Perform a test early in the year so problems don’t arise for year
end audit Create an audit trail so you know where the numbers and
information is gathered from
QUESTIONS