Formerly known as the reserve for bad debts, Allowance for Loan and Lease Loss (ALLL) is a 
calculated reserve that is been established by financial institutions so as to reflect the estimated credit risk within the institution’s assets. It is the purpose of the ALLL to reflect the credit losses that are estimated within a bank’s portfolio of loans and leases. These credit losses or risks are the charge offs that need to be realized against the operating income of an organization as of the end date of financial statements. With this reserve, your organization’s book value of loans and leases is reduced to an extent where the organization expects to collect. This means that the ALLL that is shown on the balance sheet as a contra-asset a/c lessens the total amount of loan portfolio which is reported on the balance sheet.
While you are on the process of learning How to calculate ALLL, there are several factors you should take into consideration.
Data Collection: For banks to collect their reserves, it is a major challenge to receive accurate and reliable data. For instance appraisal values, final months’ end reconciled numbers, charge-offs may delay the Allowance for Loan and Lease Loss calculation. It is recommended to absorb loan-level detail as much as possible so as to ensure sound financial decisions and justifications regarding the ALLL reserves.
Disclosure Reporting: Allowance for Loan and Lease Loss’s second recommendation is for data, but most importantly concerns how the data is accessed and reported through Disclosure Reporting. Banks should disaggregate new and existing disclosures depending on how they develop allowance for credits and losses as well as manage credit risk.
Some of the common challenges faced by banks with estimating ALLL are manual, time-intensive nature of the reserve estimation process every period that produces adequate documentation and disclosure. It is also crucial to calculate and maintain allowances for loan and lease losses as it is not watched only by major agencies that supervise the banking system as a whole as well as by the American Institute of Certified Public Accountants.
Join expert speaker Jeffery W. Johnson in an audio conference, ‘Calculating and Maintaining the Allowance for Loan and Lease Losses’ where he will review the elements and thought processes that establish and maintain accurate ALLL levels.