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One important key to successfully making the transition to the Current Expected Credit Loss (CECL) model from the incurred-loss model will be the increased involvement by credit risk management in developing accounting estimates used for the allowance for loan and lease losses (ALLL).

Many banks and credit unions test loans for impairment in order to decide whether they belong within the ASC 30-10-35 (FAS 114) category, then move them back within their homogeneous pools under ASC 450-20 (FAS 5) if zero impairment is found. This practice is flawed in that a loan is still considered impaired if it meets the criteria of an impaired loan and should remain under ASC 30-10-10-35, regardless of whether zero impairment is found once evaluated using one of the three valuation methods.

Better credit conditions have prompted more frequent discussions about what to do with loans to borrowers who struggled earlier, but for whom the outlook and financial performance have since improved. Must troubled debt restructurings, or TDRs, always remain on non-accrual status, or can they be returned to accrual status at some point? Todd Sprang, principal at CliftonLarsonAllen provides insight.

Some banking industry experts expect M&A activity will pick up in the coming months, making it critical financial institutions have a solid grasp of acquisition accounting. David Heneke, principal in CliftonLarsonAllen LLP’s financial institutions practice, describes the importance of properly accounting for purchased loans and addresses some of the related challenges.

Continued low commodity prices are leading to higher loan-loss provisions and weaker earnings by the national Farm Credit System, a network of 80 financial cooperatives providing loans to agricultural and other rural borrowers.

For most financial institutions, a primary source of feedback on their stability and back-end processes comes from their respective regulatory agencies. Annual exams are an important gauge for banks and credit unions on their effectiveness in running a sound institution – from lending decisions to risk management and compliance.

These exams are an important source of information, but institutions can also benefit substantially from learning from their peers. While not necessarily direct feedback like that from an examiner, peer data and information on how similar institutions do something are often-overlooked learning opportunities.

According to the 2015 Abrigo Bank & Credit Union Examination survey, roughly 1 of every 6 institutions polled was criticized by examiners for the ALLL calculation process, including banks or credit unions that were required to take action as a result of the review.

Although many institutions believe “impaired” and “impairment” are one and the same, they in fact have very different meanings within the allowance for loan and lease losses (ALLL) calculation. Understanding the distinction is best accomplished by dissecting the two words in accordance with guidance from the regulating bodies.

Bankers worry that the CECL model, the proposed FASB change to estimating credit losses, will force them to hold additional reserves for acquired loans.

The change from an incurred loss model to an expected loss model is a drastic one, and one that has far reaching implications on various aspects of how a financial institution approaches its risk management processes. The ABA's Mike Gullette recognizes this and offers up a few of his concerns to both the FASB regarding the CECL model and the US regulatory agencies with respect to the BCBS's consultative document on accounting for expected credit losses.

Although following the financial crisis, many believed the IASB and FASB would converge to create a universal accounting standard, the two standard setting bodies could not agree on fundamental principles of accounting for credit losses. As a result, each body set out to create its own standard; the IASB released IFRS 9 Financial Instruments in July of 2014, whereas the FASB is expected to release its CECL model later this year. This article provides an overview of each model and offers insight into one expert's opinion.

Qualitative and environmental factors have long been a paint point for bankers within the ALLL calculation. Due to their subjective nature, Q factors can be a focal point for examiner criticism if the bank's methodology and assumptions are not extensively documented. This article provides resources to help bankers arrive at objective and defensible levels within the qualitative component of the ALLL.