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FAS 5, or Financial Accounting Standards No. 5, Accounting for Contingencies, was the original FASB pronouncement superseded by FASB Accounting Standards Codification (ASC) subtopic 450-20, Contingencies: Loss Contingencies.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.