The Office of the Comptroller of the Currency (OCC) recently issued a Comptroller’s Handbook, Allowances for Credit Losses, which applies to OCC-supervised banks that have adopted Financial Accounting Standards Board Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. While the document is intended to provide insight into the expectations for establishing, documenting and monitoring the adequacy of the allowance for credit losses and for the OCC’s related examination procedures, it may be beneficial for banks and other financial institutions not regulated by the OCC, and their auditors, to review its content. Among other topics, the Allowances for Credit Losses Comptroller’s Handbook describes the scope of the current expected credit losses methodology, risks associated with allowances for credit losses, risk management and validation procedures, and the following primary components used to estimate allowances for credit losses:
- Contractual term of financial assets
- Credit loss measurement method
- Reasonable and supportable forecasts
- Reversion period
- Qualitative factor adjustments (i.e., adjustments to historical losses)
For OCC-supervised banks that have not yet adopted ASU 2016-13, the Allowance for Loan and Lease Losses Comptroller’s Handbook continues to apply.