FOR IMMEDIATE RELEASE 2001-67 Commission Staff Issues Accounting Bulletin on Selected Loan Loss Allowance Methodology and Documentation Issues Washington, DC, July 6, 2001 -- The Office of the Chief Accountant and the Division of Corporation Finance of the Securities and Exchange Commission today released Staff Accounting Bulletin (SAB) No. 102, which provides certain views of the staff on the development, documentation, and application of a systematic loan loss allowance methodology. The Commission previously issued guidance on this topic in December 1986 through Financial Reporting Release No. 28 (FRR No. 28). The SAB applies to registrants that are creditors in loan transactions that, individually or in the aggregate, have a material effect on the registrant's financial statements. This SAB was prepared as a result of the March 10, 1999 Joint Interagency Letter to Financial Institutions signed by the SEC, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. In that Joint Letter, the agencies agreed to provide parallel guidance on loan loss allowance methodologies and supporting documentation. The banking agencies are issuing their guidance today through the Federal Financial Institutions Examination Council as interagency guidance, "Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions." The staff views in the SAB are based on the premise underlying FRR No. 28, that loan loss estimates developed without a disciplined methodology or adequate documentation can undermine the credibility of an institution's financial statements. Since the issuance of FRR No. 28, the Commission's staff has continued to observe, from time to time, a lack of discipline in the establishment of allowances for loan losses and situations in which companies may have weaknesses in their documentation related to loan loss allowances. The General Accounting Office has made similar observations about the loan loss allowance practices of depository institutions, as it reported in its October 1994 Report to Congressional Committees, Depository Institutions: Divergent Loan Loss Methods Undermine Usefulness of Financial Reports. The SAB provides guidance to registrants to assist them in improving both their systematic methodologies for estimating loan loss allowances and their supporting documentation. This SAB does not change any of the accounting profession's existing rules on accounting for loan loss provisions or allowances. As agreed in the March 1999 Joint Letter, the SEC and the federal banking agencies continue to support and encourage the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants in its work of developing additional guidance on the accounting for loan losses. SABs are not rules or interpretations of the Commission. Rather, they are interpretations and practices followed by staff of the Office of the Chief Accountant and the Division of Corporation Finance in administering the disclosure requirements of the federal securities laws. For further information contact: Jenifer Minke-Girard in the Office of the Chief Accountant at (202) 942-4400 or Donald A.Walker, Jr. in the Division of Corporation Finance at (202) 942-1799. # # # Fact Sheet: Staff Accounting Bulletin No. 102 - Loan Loss Allowance Methodology and Documentation Issues July 6, 2001 Staff Accounting Bulletin (SAB) No. 102 provides certain views of the staff on the development, documentation, and application of a systematic loan loss allowance methodology. SABs are not rules or interpretations of the Commission. Rather, they are interpretations and practices followed by staff of the Office of the Chief Accountant and the Division of Corporation Finance in administering the disclosure requirements of the federal securities laws. Background In December 1986, the Commission issued Financial Reporting Release No. 28 (FRR No. 28) to add guidance on Procedural Discipline in Determining the Allowance and Provision for Loan Losses to be Reported./1 In FRR No. 28, the Commission noted that certain registrants had appeared to lack adequate documentation of procedures for performing detailed reviews of loan portfolios and for determining amounts of allowances and provisions for loan losses. The Commission indicated that the staff normally would expect to find "that the books and records of registrants engaged in lending activities include documentation of: (a) systematic methodology to be employed each period in determining the amount of loan losses to be reported, and (b) rationale supporting each period's determination that the amounts reported were adequate." Since the issuance of FRR No. 28, the Commission's staff has continued to observe some cases of insufficient documentation of allowances for loan losses. In the ordinary course of its reviews of filings, the staff has observed, from time to time, a lack of discipline in the establishment of allowances for loan losses and situations in which companies may have weaknesses in their documentation related to loan loss allowances, both for individually impaired loans and loans that are impaired on a pool basis. The General Accounting Office has made similar observations about the loan loss allowance practices of depository institutions, as it reported in its October 1994 Report to Congressional Committees, Depository Institutions: Divergent Loan Loss Methods Undermine Usefulness of Financial Reports. In recognition of these concerns, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Commission issued a joint letter to financial institutions on the allowance for loan and lease losses (ALLL) on March 10, 1999. In the Joint Letter, the Agencies announced the establishment of a Joint Working Group to study ALLL issues and provide improved guidance on this topic. The SAB was prepared as a result of the Joint Letter. The banking agencies have issued their guidance on July 6, 2001 through the Federal Financial Institutions Examination Council as interagency guidance, "Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions." Summary of Staff Interpretations The SAB does not change any of the accounting profession's existing rules on accounting for loan loss provisions or allowances. Rather, the SAB draws upon existing guidance, in Commission rules and interpretations, generally accepted accounting principles, and generally accepted auditing standards, and explains certain views of the staff in applying existing guidance related to loan loss allowance methodologies and supporting documentation. As agreed in the March 1999 Joint Letter, the SEC and the federal banking agencies continue to support and encourage the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants in its process of developing additional guidance on the accounting (as opposed to documentation) for loan losses. The staff views in the SAB are organized into the following topical areas: 1. A summary of current loan loss allowance guidance under generally accepted accounting principles and under Commission rules and interpretations; 2. General factors or elements for registrants to consider in developing and documenting their loan loss allowance methodologies, including in their written policies and procedures; 3. Staff expectations for measuring and documenting loan impairment under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan; 4. Staff expectations for measuring and documenting loan impairment under FASB Statement of Financial Accounting Standards No. 5, Accounting for Contingencies; 5. Staff expectations related to registrants' documentation (e.g., summary documentation) of the results of their systematic loan loss methodology; and 6. General guidance to registrants on validating, and documenting the validation of, their systematic loan loss methodology. For further information contact: Jenifer Minke-Girard in the Office of the Chief Accountant at (202) 942-4400 or Donald A.Walker, Jr. in the Division of Corporation Finance at (202) 942-1799. ------------------ 1/ See subsection (b) of Section 401.09 of the Commission's Codification of Financial Reporting Policies. # # # SAB 102: http://www.sec.gov/interps/account/sab102.htm