Pub. 2 2011 Issue 3

www.wvbankers.org 18 A s the end of the third quarter of 2011 quickly approaches, banks should be ensuring they have devoted sufficient resources to address 2010 modifications to an accounting standard that will have a significant impact on the financial statement disclosures about their loan portfolio and the related allowance for loan losses valuation account. On July 21, 2010 the Financial Ac- counting Standards Board issued Accounting Standards Update (ASU) No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses , which amends Accounting Standards Codification Topic 310, Receivables , by requiring more robust and disaggregat- ed disclosure about the credit quality of a bank’s loans and its allowance for loan losses. These new disclosures will significantly expand the existing requirements and are focused on pro- viding transparency regarding a bank’s exposure to loan losses. A significant change from the cur- rent disclosure requirements will be the requirement to provide informa- tion on the loan portfolio and the related allowance for loan losses on a disaggregated basis. These levels are referred to as “portfolio segment” and “class of financing receivables”. A class of financing receivables is generally a further disaggregation of a portfolio segment. In other words, you will need to provide a more de- tailed picture of your loan portfolio composition in the bank’s financial statement footnotes. The objective of the amendments in the ASU is for a bank to provide disclosures that facilitate financial statement users’ evaluation of: (a) the nature of credit risk inherent in the bank’s loan portfolio; (b) how that risk is analyzed and assessed in arriving at the allowance for loan losses; and (c) the changes and reasons for those changes in the allowance for loan losses. As such, a bank is required to provide the following existing dis- closures about its loan portfolio on a disaggregated basis: • A schedule of the activity in the allowance for loan losses from the beginning of the reporting period to the end of the reporting period on a portfolio segment basis (the level at which a bank develops and documents a systematic method for determining its allowance for loan losses), with the ending balance further disaggregated on the basis of the impairment method. • For each disaggregated ending balance, the related recorded investment in loans. • The nonaccrual status of loans by class (a disaggregation of portfolio segment based on initial measurement attribute, risk characteristics, and a bank’s method for monitoring and assessing credit risk). • Impaired loans by class. Is Your Bank Ready for Accounting Standards Update No. 2010-20 – The New Credit Quality Disclosures? By Christopher S. Nice, CPA, CISA, P.L.L.C. Member Arnett & Foster, P.L.L.C. Q Accounting Standards — continued on page 19