Alvarez & Marsal Taxand, LLC has offices in major metropolitan markets throughout the United States, in addition to London, England with the recent launch in 2007 of Alvarez & Marsal Taxand UK LLP. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Each institution must consider its own size and complexity in determining the most appropriate approach to CECL. However, Abrigo’s ALLL/CECL solutions (MST Loan Loss Analyzer, which Summit Community uses, and Sageworks ALLL, which Camden uses) have been identified by the ABA as best-in-class solutions that meet the operational needs of financial institutions as they prepare for CECL compliance deadlines.

FAS 5 relates to calculating the ALLL

This will be necessary to properly account for the accrual in the financial statements and to update the accrual periodically. All the situations described above must be considered when evaluating whether the contingency is probable. A company is not able to consider audit detection risk. For example, taxing authorities have never identified the exposure as a result of an audit examination or imposed an assessment. Reserves made for general issues or unspecified business risks are not permitted. Customer obligations/indemnifications — When quantifying your exposure, consider customer obligations.

FAS No. 5 Accounting for Contingencies

Camden National Bank, the winner of the Celent Model Bank Award for Risk Management in 2018, decided to shift to an automated approach ahead of CECL. The Camden, Maine, bank found the switch from an Excel-based model saves time and gives it more confidence in the accuracy of its allowance. Automation of the ALLL also streamlined its process management reporting and portfolio insights, which helps the bank get information quickly to feed its decisions on lending policy, growth objectives, and risk appetite.

For example, the likelihood of being caught if a company does not comply with the law (i.e., does not file a return, does not collect the tax) is not a valid fas 5 reason for not recording the liability. In addition, if an assessment is pending, the tax practitioner must assume all the evidence will be reviewed by the examiner when determining the likelihood of the outcome. When exactly will financial institutions currently using FAS 5 and FAS 114 as their guidance need to begin applying CECL? Review by the external auditors — Bottom line, make sure you have proper documentation on file to support your accrual. It may be several months before the auditors will review your documentation.

Automating the ALLL ahead of CECL

Alvarez & Marsal Taxand, LLC, an affiliate of Alvarez & Marsal, a leading global professional services firm, is an independent tax group comprised of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend Alvarez & Marsal’s commitment to offering clients a choice in tax advisors free from audit-based conflicts of interest. Alvarez & Marsal Taxand serves clients with knowledge, experience and integrity, and an unyielding commitment to delivering unmatched and responsive client service.

• The disclosure must indicate the nature of the contingency and estimate the possible loss or state that such an estimate can not be made (paragraph 10).
• However, your company and your tax practitioner must be prepared for the inevitable and increased scrutiny by your external audit firm.
• These materials were downloaded from PwC’s Viewpoint (viewpoint.pwc.com) under license.
• Alvarez & Marsal Taxand is a founding member of Taxand, the first global network of independent tax advisors formed in 2005 by small group of highly respected tax firms around the world.
• Each institution must consider its own size and complexity in determining the most appropriate approach to CECL.

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For example, your company may have failed to collect sales tax on taxable sales, something that could result in the need for an accrual. However, contact your customer to see if they have already self assessed and paid the tax, paid the tax as a result of a tax assessment, should have issued a resale or exemption certificate, or would be willing to be invoiced for the tax. If so, and assuming it can be reasonably estimated, your exposure should be modified to take this into account. A large portion of transaction taxes are often overlooked or not considered in their entirety because external auditors have not asked the right questions or had the right resources to analyze the reserve properly. However, your company and your tax practitioner must be prepared for the inevitable and increased scrutiny by your external audit firm.

• Abrigo’s ALLL.com resource website has many articles and other aids for calculating the FAS 5 portion of the ALLL for financial institutions not yet subject to CECL, FASB ASC Topic 326, Financial Instruments – Credit Losses.
• However, contact your customer to see if they have already self assessed and paid the tax, paid the tax as a result of a tax assessment, should have issued a resale or exemption certificate, or would be willing to be invoiced for the tax.
• Consider removing one of your current favorites in order to to add a new one.
• However, given the nature of sales and use taxes, estimating the contingency can be challenging.
• Make yourself at home – we hope you enjoy your new web experience.

If one or both of these conditions are not met related to a contingency, disclosure of the contingency must be made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. The disclosure must indicate the nature of the contingency and estimate the possible loss or state that such an estimate can not be made (paragraph 10). “Reasonably possible” is defined in paragraph 3 as “the chance of the future event or events occurring is more than remote but less than likely.”

It is for your own use only – do not redistribute. These materials were downloaded from PwC’s Viewpoint (viewpoint.pwc.com) under license. As provided in Treasury Department Circular 230, this e-newsletter is not intended or written by Alvarez & Marsal Taxand, LLC, to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

The schedules should speak for themselves and not require any explanation. If you performed a sample, make sure you have documented the methods you used to design and select your sample, as well as any assumptions made. Understand how the external auditors plan to audit the accrual you have calculated. Most auditors have experience doing samples; however, if they plan to test your sample, make sure you understand how they plan to project their results in case they find any errors. Contingency estimate by state or legal entity — If you plan to perform a sample or use an alternative method to estimate the contingency, be prepared to identify the amount of the exposure by state, by legal entity and by period.

Unfortunately, many companies may not have properly accounted for their FAS 5 reserve. It is important to understand the definition of a contingency. In March 1975, the FASB issued FAS 5, outlining the appropriate accounting for contingencies.