Current Bookkeeping Issues Phone Class September 24, 2008.


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Current Bookkeeping Issues Phone Course September 24, 2008 Robert Storch Boss Bookkeeper Division of Supervision and Customer Security Government Store Protection Company Washington, DC Current Bookkeeping Issues Stipend for Advance and Rent Misfortunes Agitated Obligation Restructurings
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Slide 1

Current Accounting Issues Telephone Seminar September 24, 2008 Robert Storch Chief Accountant Division of Supervision and Consumer Protection Federal Deposit Insurance Corporation Washington, DC

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Current Accounting Issues Allowance for Loan and Lease Losses Troubled Debt Restructurings Foreclosed Real Estate Impairment of Securities Transfers of Financial Assets

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Allowance for Loan and Lease Losses Each organization must keep up a stipend for advance and lease misfortunes (ALLL) at a level that is fitting and decided as per GAAP, its expressed approaches and strategies, management’s best judgment, and pertinent supervisory direction Applicable GAAP guidelines for the ALLL FAS 114, Accounting by Creditors for Impairment of a Loan , as revised (1993) FAS 5, Accounting for Contingencies , as corrected (1975) Follow a “incurred loss” as opposed to a “expected loss” model

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Allowance for Loan and Lease Losses Supervisory direction incorporates ALLL arrangement proclamations issued in 2006 and 2001 http://www.fdic.gov/news/news/budgetary/2006/fil06105.html http://www.fdic.gov/news/news/monetary/2001/fil0163.html An ALLL that is at a suitable level as per GAAP spreads assessed credit misfortunes on separately assessed advances that are weakened (FAS 114) and evaluated credit misfortunes inborn in the rest of the portfolio (FAS 5) Estimated credit misfortunes implies an assessment of the measure of advances it is plausible the bank will be not able to gather given current truths and circumstances

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Allowance for Loan and Lease Losses Represents net charge-offs prone to be acknowledged for an advance or gathering of advances as of the ALLL assessment date A “unallocated” advance misfortune recompense is suitable when it mirrors an assessment of plausible misfortunes, decided as per GAAP, and is legitimately upheld Process for deciding a fitting ALLL level ought to be founded on a thorough, very much archived and reliably connected investigation of the advance portfolio Analysis ought to consider management’s current judgments about portfolio credit quality, including all huge subjective elements that influence collectibility

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Allowance for Loan and Lease Losses Evaluating individual advances secured by land for disability under FAS 114 An advance is not hindered singularly on the grounds that the reasonable estimation of the guarantee is not exactly the loan’s recorded speculation An advance is impeded when, in light of current data and occasions, it is plausible that a leaser will be not able to gather all sums due as per the contractual terms of the advance understanding This determination does not consider security assurance

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Allowance for Loan and Lease Losses A disabled land advance is not insurance subordinate exclusively on the grounds that the reasonable estimation of the security is not exactly the loan’s recorded venture An advance is insurance subordinate if reimbursement is required to be given exclusively by the basic guarantee If there are other accessible and solid wellsprings of reimbursement other than the security, the advance would not be insurance ward Measure hindrance on an independently debilitated advance that is not guarantee ward taking into account the present estimation of the normal future money streams reduced at the loan’s viable premium rate

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Allowance for Loan and Lease Losses If an independently debilitated advance is security indigent, saving money agencies’ administrative reporting strategies oblige weakness to be measured in view of the reasonable estimation of the security (less expenses to offer, if proper), paying little mind to whether dispossession is plausible Factors to be considered when assessing reasonable worth incorporate, however are not restricted to Timing and unwavering quality of examination or other valuation Timing of latest examination of security Volatility of the reasonable estimation of the security Confidence in the bank’s lien on the insurance Historical misfortunes on comparative advances

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Allowance for Loan and Lease Losses If the measure of the disabled advance is not exactly its recorded speculation, perceive the disability by making a FAS 114 remittance for the advance or modifying the loan’s existing FAS 114 recompense If the measure of the disabled advance is more prominent than its recorded venture, the measure of disability is zero In this circumstance, it is not likely that a charge-off would be acknowledged on the advance given certainties and circumstances as of the ALLL assessment date No FAS 114 recompense ought to be set up No extra misfortune acknowledgment is proper for the weakened advance under FAS 5

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Allowance for Loan and Lease Losses Before administration infers that no recompense is required, it ought to focus and record that its estimation procedure was suitable and that all accessible and important data was viewed as The bank’s appraisal of reasonable quality (less expenses to offer) is liable to survey by analysts If management’s estimation procedure was not fitting or its suppositions, valuations, and judgments were not sensible and legitimately bolstered, inspectors ought to reestimate reasonable worth (less expenses to offer) utilizing suspicions, valuations, and judgments that they can bolster

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Allowance for Loan and Lease Losses When there are concerns and instability about the impact of conceivable future occasions on the advance\'s collectibility portfolio, e.g., further decreases in the estimation of land guarantee after the ALLL assessment date Address these worries by guaranteeing that value capital (and subsequently administrative capital) is kept up at a suitably abnormal state that will bolster the dangers to which the bank is uncovered, incorporating in the advance portfolio Do not self-assertively build the ALLL in overabundance of sums that can be bolstered under GAAP

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Allowance for Loan and Lease Losses Changes in an institution’s ALLL level ought to be directionally predictable with changes in the components, taken overall, that proof credit misfortunes, considering the attributes of the institution’s advance portfolio If declining credit quality patterns significant to an institution’s portfolio are clear, as is as of now the case for some banks, the ALLL level as a rate of advances ought to for the most part expand If enhancing credit quality patterns are obvious, the ALLL level as a rate of advances ought to for the most part lessening

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Allowance for Loan and Lease Losses FAS 141(R), Business Combinations, produces results in 2009 Under FAS 141(R), gained advance portfolios must be recorded at reasonable worth at the obtaining date FAS 141(R) forbids a procuring foundation from extending the procured institution’s ALLL when it records the advances obtained in a merger or procurement, which, by and large, is the present bookkeeping practice An obtained foundation that must apply push down bookkeeping will have no ALLL as of its obtaining date Establish an ALLL for gained advances that reflects just those credit misfortunes caused after obtaining Will entangle examinations of ALLL levels at organizations that have had huge mergers and obtaining

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Troubled Debt Restructurings Applicable Accounting Standards FAS 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings , as altered (1977) FAS 114, Accounting by Creditors for Impairment of a Loan , as corrected (1993) EITF 02-4, Determining Whether a Debtor’s Modification or Exchange of Debt Instruments Is inside of the Scope of FASB Statement No. 15

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Troubled Debt Restructurings A rebuilding constitutes a “troubled obligation restructuring” if the lender for monetary or legitimate reasons identified with the debtor’s money related challenges gives an admission to the account holder that it would not generally consider A vexed obligation rebuilding may incorporate An exchange from the borrower to the bank (counting by means of abandonment or repossession) of land or different resources, A credit\'s alteration terms, or An above\'s blend

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Troubled Debt Restructurings A change of terms incorporates Reduction of the contractual (expressed) premium rate Extension of the development date at a contractual premium rate lower than the present rate for new obligation with comparative danger Reduction of the face measure of obligation, i.e., pardoning of a segment of key Reduction (absolution) of gathered premium Not all adjustments of terms are vexed obligation restructurings

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Troubled Debt Restructurings Is a change of terms a pained obligation rebuilding? Is the indebted person encountering money related trouble? NO – Not a vexed obligation rebuilding YES – Go to next inquiry Has the loan boss conceded a concession? NO – Not a harried obligation rebuilding YES – Modification is a vexed obligation rebuilding Even if an advance is present, an adjustment of terms would be a disturbed obligation rebuilding if the former conditions are met

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Troubled Debt Restructurings Creditor’s representing a pained obligation rebuilding including an alteration of terms on an advance held for venture Loan is viewed as weakened and FAS 114 must be connected FAS 114 applies regardless of the fact that the advance –, for example, a 1-4 family private home loan – would not generally fall inside of the extent of FAS 114 in light of the fact that it would be a piece of a “large gathering of littler equalization homogeneous advances that are all in all assessed for impairment”

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Troubled Debt Restructurings Impairment (i.e., the FAS 114 remittance) on an advance changed in a grieved obligation rebuilding ought to typically be measured in light of present estimation of expected future money streams marked down at loan’s compelling premium rate Modifying terms of a land advance basically recognizes that there is an extr

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