The document discusses the reserve for bad debts, also known as the allowance for loan and lease losses (ALLL). It is a valuation reserve established by banks to estimate amounts from loans and leases that may be uncollectible. The higher the provision for loan losses, the lower the bank's net operating income. The document also discusses proposed changes by the IASB and FASB to move from an incurred loss model for recognizing loan losses to an expected loss model.

1. Brian S. McDaniel

2. Definition
Reserve for Bad Debts
Valuation reserve established and
maintained by charges against a
bank’s operating income
Estimate of uncollectible amounts
used to reduce the book value of
loans and leases to the amount
that a bank expects to collect.

3. Income 5% 10% 20%
Loan Income 50,000$ 50,000$ 50,000$
Other Income 3,500$ 3,500$ 3,500$
Total Income 53,500$ 53,500$ 53,500$
Operating Expenses
Loan Servicing 500$ 500$ 500$
Provision for Loss 2,500$ 5,000$ 10,000$
Total Expenses 3,000$ 5,500$ 10,500$
Net Operating Income 50,500$ 48,000$ 43,000$
Non-Operating Expenses
Interest Paid to Depositors 500$ 500$ 500$
(Gain) Loss on Sale of Investment -$ -$ -$
Total Non-Operating Expenses 500$ 500$ 500$
Net Income 50,000$ 47,500$ 42,500$

4. 0.53%0.54%
0.45%
0.51%
0.81%
1.21%
1.14%
0.91%
0.73%
0.60%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

5. 0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
Credit Card First
Mortgage
Second
Mortgage
Business
Loans
2007
2008
2009
2010
2011
2012

6. Made at the request of theG20
WillChange IFRS 9: Financial Instruments
Will Replace IFRS 39: Recognition
Comment Deadline: 5 July 2013

7.  The existing model
delays recognition
of credit losses until
there is evidence of
a credit loss event

8.  Expected credit
losses would be
updated at each
reporting date to
reflect changes in
credit quality

9.  All entities that hold
financial assets or
commitments to
extend credit that
are not accounted
for at fair value

10. Stage I
12 Month
ExpectedCredit
Loss
Effective Interest
on Gross Carrying
Amount
Stage II
Lifetime
ExpectedCredit
Losses
Effective Interest
on Gross Carrying
Amount
Stage III
Lifetime
ExpectedCredit
Losses
Effective Interest
on Amortized
Cost Carrying
Amount

11.  GAAP and IFRS use Incurred Loss Model
 Both want Expected Loss Model
 FASB Proposed Different Model
 An entity would not measure loss allowance for any
financial instrument using 12 Month Expected Credit
Loss provisions in IASB proposal

12. • This is a great idea!
IFRS/FASB
• Are you kidding me?
Industry

13.  http://www.ifrs.org/Alerts/ProjectUpdate/Pages/IASB
-publishes-revised-proposals-for-loan-loss-
provisioning.aspx
 http://www.ifrs.org/Current-Projects/IASB-
Projects/Financial-Instruments-A-Replacement-of-
IAS-39-Financial-Instruments-
Recognitio/Impairment/Exposure-Draft-March-
2013/Documents/ED-Impairment-Snapshot-March-
2013.pdf
 http://www.occ.gov/topics/credit/commercial-
credit/allowance-loan-lease-losses.html