To All Depository Institutions and Others Concerned in the Second Federal Reserve District:
In a supervisory letter (SR 04-5), dated March 1, 2004, the Federal Reserve Board and other federal bank and thrift supervisory agencies issued the Update on Accounting for Loans and Lease Losses (statement). The statement describes recent developments in accounting for the allowances for loan and lease losses (ALLL).
In June 2003, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants issued a proposed Statement of Position, "Accounting for Credit Losses" for public comment. After reviewing the comments, the AcSEC has decided to proceed only with guidance to improve the ALLL disclosures. AcSEC will not issue additional loss recognition and measurement guidance for the ALLL.
Consistent with these actions by AcSEC, banking organizations, as well as examiners and other supervisory staff, are reminded that financial institutions should continue to follow existing generally accepted accounting principles (GAAP) and supervisory guidance when determining the ALLL.
Financial institutions are reminded of their responsibility to ensure that controls are in place to consistently determine the ALLL in accordance with GAAP, the institution's stated policies and procedures, and relevant supervisory guidance. To fulfill this responsibility, financial institutions should develop, maintain, and document a comprehensive, systematic, and consistently applied process to determine the amounts of the ALLL and provisions for loan and lease losses.
Policy Department, Bank Supervision