FRB: Financial Accounting Manual 2014 Accessible Version
Example of calculation of liability balance
In 20X2, District Z anticipates that substantially all run-out claims relating to 20X1 will be paid by June 30, 20X2. The calculation of the estimated liability balance for the 4 quarters of 20X2 would be made as follows:
Actual liability at 12/31/X1 equals Claims paid in X1 that relate to X0 divided by Total claims paid in X0 multiplied by Claims paid Jan X1-Dec X1
Liability estimate at 3/31/X2 equals Ratio calculated for 12/31/X1 multiplied by Claims paid Apr X1-Mar X2 (from equation above)
Liability estimate at 6/30/X2 equals Claims paid in X2 that relate to X1* divided by Total claims paid in X1multipled by Claims paid Jul X1-Jun X2
Liability estimate at 9/30/X2 equals Ratio calculated for 6/30/X2 multiplied by Claims paid Oct X1-Sep X2 (from equation above)
Actual liability at 12/31/X2 equals Ratio calculated for 6/30/X2 multiplied by Claims paid Jan X2-Dec X2 (from equation above)
* If complete run-out claim information is not available until later in the year, Districts should continue using the previously calculated ratio until complete information is available.
Application of Statements 5 and 114 to a Loan Portfolio
Application of FASB ASC Topic 450-20, formerly SFAS No. 5 and FASB ASC Topic 310-10; formerly SFAS No. 114 to a Loan Portfolio, Topic No. D-80.
All loans consider Box A, which says is the loan within the scope of Statement 114, paragraph 6? If yes, move to Box B. If no, move to Box E.
Box B, Has the loan been identified for evaluation (Statement 114, paragraph 6, 7, and footnote 1.)? If yes, move to Box C. If no, move to Box E.
Box C, Is it probable the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement (Statement 114, paragraph 9-10)? If yes, move to Box G. If no, move to Box D.
Box D, Are there specific characteristics of the loan indicating that it is probable that there would be an incurred loss in a group of loans with those characteristics. If yes, move to Box E. If no, move to Box F.
Box E, The need for an allowance should be determined under Statement 5 (or possibly other literature, e.g. Statement 115).
Box F, No allowance is recorded under any GAAP.
Box G, Measure impairment under Statement 114, paragraph 12-16. Record only a Statement 114 allowance.
Framework for considering the consolidation of special purpose entities
Step 1: Determine if SPE is subject to FIN 46R
Is the SPE a business as defined in FIN 46R?
If no, SPE may be a VIE. Proceed to next Step 2.
If yes, continue.
Did the Bank participate in design of SPE?
Are all of the SPE's activities conducted on behalf of the Bank & related parties?
Do the Bank & its related parties provide more than half of the SPE's financial support?
Are activities of the SPE primarily related to securitizations/other forms of asset-backed financing?
If yes to any single question above, the SPE may be a VIE. Proceed to next Step 2
If no to any single question above, SPE may be a VIE. Proceed to next Step 2.
If no to all questions above, STOP. SPE not subject to FIN 46R. Consolidation not required.
Step 2: Determine if SPE is a VIE
Is the equity at risk in the SPE sufficient to finance its activities?
As a group, do the holders of equity interests have the characteristics of a controlling financial interest?
If classes of equity investors have different rights and obligations, do any of the classes have characteristics of financial control?
If no to all questions above, the SPE is likely a VIE. Proceed to next Step 3
If yes to any single question above, STOP. SPE is not a VIE. Consolidation not required.
Step 3: Determine if the Bank is the primary beneficiary of the VIE
Does the Bank and its related parties have the power to direct the activities of the VIE that most affect its economic performance?
Will the Bank, including its related parties, absorb losses or receive benefits that could potentially be significant to the VIE?
Scenario 1: Factor 1 (Control) = Yes. Factor 2 (Losses and Benefits) = Yes. Strong indication that Bank is the primary beneficiary and should consolidate the VIE.
Scenario 2: Factor 1 (Control) = Yes. Factor 2 (Losses and Benefits) = No. Indication that the Bank is not the primary beneficiary. However, see Step 4 for determination of the primary beneficiary within a related party group.
Scenario 3: Factor 1 (Control) = No. Factor 2 (Losses and Benefits) = Yes. Indication that the Bank is not the primary beneficiary. However, see Step 4 for determination of the primary beneficiary within a related party group.
Scenario 4: Factor 1 (Losses) = No. Factor 2 (Gains) = No. Bank is not the primary beneficiary and should not consolidate the VIE.
Step 4: Determine if other VIE interest holders are related parties
Are any of the VIE's other financial interest holders dependent on the Bank for financial support?
Did any of the VIE's other financial interest holders receive their interest as a contribution or loan from the Bank?
Are any of the other financial interest holders an officer, employee, or member of the governing board of the Bank?
Is there an agreement in place with any of the other financial interest holders that they cannot sell, transfer, or encumber their interest without prior approval of the Bank?
Is there a close relationship between any of the other financial interest holders and the Bank?
If No to all above questions, Consider only the Bank's financial interest in performing the analysis under Step 3.
If Yes to any of single question above, In performing the analysis under Step 3, consider the Bank's financial interest, as well as that of any related party for which a "yes" answer is applicable.