SEC "Dear CFO" Letter On MD&A For Loan Loss Provision, ALLL; Interp Release on Codification

Aug 24th 2009
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On Aug. 18, 2009 the SEC issued an Interpretive Release: Commission Guidance Regarding the Financial Accounting Standards Board's Accounting Standards Codification (Release Nos. 33-9062A, 34-60519A, FR-80A). The release can be found here: (Note: the release number above - with the letter A at the end, reflects that fact that a corrected version of the release was issued on Aug. 19. The link is to the corrected version.) Highlights from the release and related discussion can be found here: .

In other news, also on August 18, the SEC posted a "Dear CFO" letter - more formally called a "Sample Letter Sent to Public Companies" - a communication vehicle the Commission uses from time to time to spread the word through direct mail of a standard letter to a group of company exec's (e.g. CEOs and/or CFOs of all public co's, co's in a particular industry, or certain public co's).

By posting a copy of the letter on the SEC website for illustrative purposes, the SEC is able to communicate with a large number of constituents (issuers, investors, analysts and others) as to the specific or general disclosures which the Commission is encouraging companies to provide, such as by suggesting specific or general disclosures that companies "may" wish to consider. (The SEC telling you that you "may" wish to consider disclosing something is somewhat akin to a policeman telling you that you "may" wish to follow the posted speed limit.)

The Dear CFO letter posted by the SEC on Aug. 18, entitled: "Sample Letter Sent to Public Companies on MD&A Disclosure Regarding Provisions and Allowances for Loan Losses, was sent by the SEC's Division of Corp Fin to "certain public companies" in August, 2009, with the objective of "identifying a number of disclosure issues they may wish to consider in preparing Management's Discussion & Analysis." General highlights from the letter include:

Clear and transparent disclosure about how you account for your provision and allowance for loan losses has always been critically important to an investor’s understanding of your financial statements.
While generally accepted accounting principles regarding how to account for these items have not changed in recent years, the current economic environment may require you to reassess whether the information upon which you base your accounting decisions remains accurate, reconfirm or reevaluate your accounting for these items, and reevaluate your Management’s Discussion and Analysis disclosure.
Item 303 of Regulation S-K requires you to discuss, in your Management’s Discussion and Analysis, any known trends, demands, commitments, events or uncertainties you reasonably expect to have a material favorable or unfavorable impact on your results of operations, liquidity, and capital resources.
Specific disclosures which the SEC suggests "you should consider" providing in MD&A - "if they are relevant and material to you" - are enumerated in some detail under the following categories in the letter:

- Higher-Risk Loans
- Changes in Practices
- Declines in Collateral Value
- Other (including risk mitigation strategies, key ratios, and certain trend reporting)

The final paragraph of the letter - signed "Sincerely, Associate Chief Accountant"- states: "[A]lthough determining your allowance for loan losses requires you to exercise judgment, it would be inconsistent with generally accepted accounting principles if you were to delay recognizing credit losses that you can estimate based on current information and events. Where we believe a financial institution’s financial statements are inconsistent with GAAP, we will take appropriate action."

For 'my two cents' on the meaning of the above paragraph in the SEC letter - amidst the debate about accounting for incurred vs. expected losses, read 'my two cents' here:


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