The Financial Accounting Standards Board’s (“FASB”) research staff has issued a question-and-answer document to assist with applying Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The informal guidance offers ways smaller banking institutions can calculate their expected losses on bad loans.
Most of the guidance covers questions the board has recently addressed whether the weighted average remaining maturity (“WARM”) method is permitted under the credit loss standard. The FASB says smaller banks can apply the practical method to estimate loan losses, but the guidance also restates the flexibility of the standard, which does not mention a specific method for estimating losses. The flexibility is for companies managing risk based on factors like their size and portfolio management. Therefore, the WARM method is an acceptable method.