What is FAS 5?

Mary Ellen Biery
April 29, 2013
Read Time: min

FAS 5 relates to calculating the ALLL

FAS 5 refers to one of two underlying sources of accounting guidance factoring into the calculation of the allowance for loan and lease losses (ALLL) under GAAP, and it applies to those financial institutions and other entities not yet implementing the current expected credit loss model, or CECL.

FAS 5, or Financial Accounting Standards No. 5, Accounting for Contingencies, was the original FASB pronouncement superseded by FASB Accounting Standards Codification (ASC) subtopic 450-20, Contingencies: Loss Contingencies. Some financial professionals still use the terms interchangeably to describe the primary source of guidance on the portion of the ALLL calculation that includes loans that have not been individually identified as being impaired (i.e., loans performing in accordance with contractual terms).

In accordance with FAS 5, these non-impaired loans are grouped into homogenous pools, or groups of loans with similar risk characteristics, when measuring estimated credit losses. They are evaluated collectively, considering both quantitative (historical losses) and qualitative measures, which come in the form of environmental adjustments, in order to determine appropriate reserve levels. Abrigo’s ALLL.com resource website has many articles and other aids for calculating the FAS 5 portion of the ALLL for financial institutions not yet subject to CECL, FASB ASC Topic 326, Financial Instruments – Credit Losses.

Streamline the ALLL calculation while bridging to CECL.
Learn More

Automating the ALLL ahead of CECL

The ALLL.com website also has information about the benefits of automating the allowance for loan and lease losses calculation ahead of CECL.

Camden National Bank, the winner of the Celent Model Bank Award for Risk Management in 2018, decided to shift to an automated approach ahead of CECL. The Camden, Maine, bank found the switch from an Excel-based model saves time and gives it more confidence in the accuracy of its allowance. Automation of the ALLL also streamlined its process management reporting and portfolio insights, which helps the bank get information quickly to feed its decisions on lending policy, growth objectives, and risk appetite. 

Another plus of automating the ALLL was that the platform Camden selected included methodologies appropriate for both the incurred credit loss model and for the expected loss model under CECL. Choosing a solution that can calculate both the ALLL now and the allowance for credit losses under CECL will make it easier as financial institutions transition to CECL from FAS 5 and FAS 114 (guidance on accounting for impaired loans under the incurred loss method of GAAP).

When does CECL replace FAS 5, FAS 114?

When exactly will financial institutions currently using FAS 5 and FAS 114 as their guidance need to begin applying CECL? Public business entities that meet the definition of an SEC filer (excluding those that meet the SEC’s definition of a small reporting company) were required to begin reporting the allowance for credit losses using CECL in 2020, and CECL is effective for all other entities in 2023, including interim periods within that year. Early adoption is permitted.

While a 2023 deadline for non-SEC filers might sound like a long time to prepare, SEC filers that have already gone through CECL preparations have encouraged other financial institutions to begin preparing early for the change.

During a recent webinar hosted by the American Bankers Association, Felicity Ours, CPA, CRC, of Summit Financial Group (NASDAQ: SMMF), said that despite starting preparations in 2018, she wished for more time ahead of a 2020 deadline, even though her bank, Summit Community Bank, was on track to meet the implementation date. She also encouraged banks and credit unions with 2023 CECL deadlines to start preparing early, noting that a lack of strong IT and data analysis skills to help with the transition might be an issue for some institutions.

Each institution must consider its own size and complexity in determining the most appropriate approach to CECL. However, Abrigo’s ALLL/CECL solutions (MST Loan Loss Analyzer, which Summit Community uses, and Sageworks ALLL, which Camden uses) have been identified by the ABA as best-in-class solutions that meet the operational needs of financial institutions as they prepare for CECL compliance deadlines.

Learn more about how Abrigo can help your institution automate the ALLL calculation, and explore the latest news and best practices for calculating the allowance on ALLL.com.

About the Author

Mary Ellen Biery

Mary Ellen Biery is a Senior Writer and Content Specialist at Abrigo.

Full Bio

About Abrigo

Abrigo is a leading technology provider of compliance, credit risk, and lending solutions that community financial institutions use to manage risk and drive growth. Our software automates key processes — from anti-money laundering to fraud detection to lending solutions — empowering our customers by addressing their Enterprise Risk Management needs.

Make Big Things Happen.

 

Looking for Banker’s Toolbox? You are in the Right Place!

Banker’s Toolbox is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the login button here, or the link in the top navigation, to log in to Banker’s Toolbox Community Online.

Make yourself at home!