For the past few years, FASB has been discussing the adoption of the "expected loss model" for the Allowance for Loan Losses. In past articles and webinars, we’ve discussed this concept in general and the implications of such a model on credit unions. On December 20, 2012 FASB issued a Proposed Accounting Standards Update on this topic which finally defines the actual accounting framework and clearly differentiates this proposal from the current accounting standard.

It is very likely that this proposed standard will have a profound impact on credit unions. The following illustrate just a few of these impacts.

1. Undoubtedly, ALL levels will rise by very significant amounts as loss measurements would now be measured over the life of the loan rather than on only losses that have been incurred as of the balance sheet date.
2. As a result of increased ALL balances, net worth levels will be reduced by potentially significant amounts.
3. The "probable loss" threshold has been removed, and now estimates are based on "possible" estimates.
4. Not only will past and current events have to be evaluated, but consideration will have to be given to "reasonable and supportable" forecasts that affect the expected collectability of the loans remaining contractual cash flows.
5. Credit unions will need to implement revised calculation methodology that will be scrutinized and presumably challenged by your auditors and examiners.
6. Significant new disclosures are likely.

Credit Union CFOs should carefully review the proposed standard which can be obtained at www.fasb.org. The document is lengthy (154 pages) and contains illustrations on various loan portfolio segments. Importantly, FASB has raised 24 questions within the document and will be accepting responses and comments from the public until April 30, 2013.

Join Mike Sacher and Callahan & Associates on January 16, 2013 for a detailed analysis of this proposed standard as well as an overview of other allowance related matters.