Applicability

The new accounting standard applies to all banks, savings associations, credit unions, and financial institution holding companies, regardless of asset size. Further, ASU 2016-13 applies to all financial instruments carried at an amortised cost. This includes investment instruments and off-balance-sheet credit exposures such as loan commitments, standby letters of credit and financial guarantees.

Decoding the operational aspects of ASU 326-20

The new accounting standard for estimating loan loss reserves offers general guidelines and a list of possibilities, but provides no specific recommendations on the implementation of those rules. The standard is silent on many aspects such as definition of default and methodologies. Due to the absence of these details and precise guidelines, CRISIL GR&A have analysed the standard and formulated specific measures to deal with the operational aspects, especially with regard to the method. By applying these measures, we have outlined a broad class of estimation techniques that estimate the collectability of the financial assets and can be applied consistently over time. In particular, based on our experience in the area, we have set out operational aspects of the methods under ASU326-20 in terms of their respective merits, demerits and key aspects.