Allowance for Credit Losses

All loan portfolios come with the risk that some borrowers will not be able to make their loan payments. Some examples of risks examiners should look for include, concentrations of borrowers or geographic areas, credit worthiness of borrowers, types of collateral, or local unemployment. The riskier the loan portfolio, the more funds a credit union should set aside to protect itself from future losses. The funds a credit union sets aside to protect itself from those expected losses are placed in the ACLLL account (previously ALLL). In accounting terms, the ACLLL account is a contra-asset account that represents an estimate of the expected credit losses over the remaining contractual life, net of prepayments, of existing loans. The funds reserved in the ACLLL account reduce the gross value of loans and leases reported on the credit union’s balance sheet, and changes in the ACLLL account balance are reported on the income statement as the CLE on loans and leases (previously PLLL).

FASB uses the term “provision for credit losses” or PCL (ASC 942-230-55-4) interchangeably with CLE, and a credit union’s use of either term is correct. Also, terms like ACLLL account and allowance account may be used interchangeably with the ACLLL account.

Credit unions must establish and fund an ACLLL account to comply with NCUA regulation § 702.113, Full and fair disclosure of financial condition. Compliance includes:

• Making charges for loan and lease losses promptly and in accordance with GAAP

• Maintaining the allowance account in accordance with GAAP

• Funding the allowance account before paying dividends

Though the regulation uses the term ALLL, the intent also applies to the ACLLL.

This chapter of the Examiner's Guide addresses the following:

• Primary Risks
• Risk Management
• ACL and CECL
• Methodology
• Calculation Timing
• Methodology Validation
• Exam Procedures
• Workpapers and Resources

Last updated June 05, 2023