Pooled and individual credit-loss evaluation determines which assets share relevant risk characteristics. Assets with shared characteristics are measured collectively. An asset that no longer shares them is evaluated through a separate supported path.
Define why assets belong together
Useful characteristics can include borrower type, credit grade, collateral, term, geography, industry, product, or delinquency status. The selected traits must explain differences in expected cash shortfalls for the entity's assets. A convenient system label is not enough.
Suppose a $330,000 receivable population contains one $25,000 customer in severe financial distress. If that customer no longer shares the pool's risk characteristics, remove the full $25,000 before measuring the remaining $305,000 collectively. Do not leave it in the pool and add a separate reserve; that counts the exposure twice.
Control movement between paths
Record the assignment date, evidence, approver, and reassessment trigger. Reconcile assets entering and leaving each pool because of originations, payments, modifications, risk migration, or individual evaluation. Confirm that every covered asset appears once.
Boundary and source
Individual evaluation does not mean that loss is certain, and pooling does not remove the need for evidence. Read ASC 326-20-30-2 for collective measurement, individual evaluation, and the rule against double counting. Read ASC 326-20-35-2 for reassessment of shared risk characteristics.
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Analyze this concept
- Design and challenge pools using product, geography, industry, collateral, term, delinquency, risk rating, vintage, and loss-pattern evidence without fragmenting solely to reach a preferred result.
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Build on these ideas
- Expected credit loss — Understand
To understand this concept: Required. Pooling is a design choice within the expected-loss estimate.
- Pooled and individual credit-loss evaluation — Understand
To analyze this concept: Required. Segmentation follows shared-risk evidence and reassessment.
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- Pooled and individual credit-loss evaluation — Analyze
Required level here: understand. Required. Segmentation follows shared-risk evidence and reassessment.