Understanding the Accounting for Credit Loss Disclosure
Executive Summary
The recent changes in disclosure requirements for financing receivables and the allowance for credit losses become effective this year for public entities and next year for nonpublic companies. These changes are applicable for all entities with long-term financing receivables. At first glance the disclosure seems to be a straightforward expansion of current requirements. However, upon further review, there are many details to be addressed before a well thought out plan can be implemented.
Nonpublic companies may be thinking, "We don’t have to deal with this until next year." However, at the end of next year, roll forward information is required for both public and nonpublic institutions for activity in 2011. Accordingly, in order to prevent a painful fire drill for both public and nonpublic entities, we recommend focusing attention and allocating resources to this matter in advance of January 1, 2011.
The new standard requires expanded disclosures focused around "segments" and "classes" of financing receivables. After initial discussion with some clients, it was clear that there were many possible answers, but no clear cut answers.
On a positive note, some of this data is similar to a board report or call report data which is causing some of our clients to say, "This is great, we have a head start!" However, what is the documentation expectation for the board reports and call reports? As a friendly reminder, please remember to consider your auditor when compiling the necessary information as it will be audited. The more documentation you have to support your numbers, the easier it will be on both parties.
Finally, our recommendations are clear. Don’t wait too far past December 1, 2010, to address:
- What are our segments?
- What are our classes?
- Does our system have sufficient coding to extract data easily?
- Are we sure the coding in our system is correct?
- Who is compiling the data (accounting, lending, etc.)?
- Who is writing the new credit quality narrative and policy disclosures?
- Are our internal milestones in place to begin tracking effective January 1, 2011?
- Can the data be audited easily?!
Access Understanding the New Disclosures for the Allowance for Credit Losses
