Regulators vs. Accountants On Reserving for Losses
American Banker (09/08/00) Vol. 2, No. 4 p.4; Garver, Rob

A proposal published in the Federal Register by the Federal Reserve Board, Office of the Comptroller of the Currency, Office of Thift Supervision, and Federal Deposit Insurance Corp., said that banks can reserve for loan losses by estimating future defaults. The proposal is in direct contrast with changing accounting standards. The proposal is part of an agreement with the Securities and Exchange Commission to simplify the accounting rules for loan-loss reserves. The regulators wrote that a reserve recorded under GAAP "is an institution's best estimate of the probable amount of loans and leases-financing receivables that it will be unable to collect based on current information and events." The regulators called the estimation of the amount of that reserve "inevitably imprecise" because of the sizeable quantity of management judgment it entails. Meanwhile, accounting standards for loss reserves are being reviewed by the AICPA, which, in a draft proposal, said that a reserve may only be recorded when banks can provide evidence of an actual loss.

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