Goldman Sachs 2015 Annual Report Download - page 170

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Allowance for Losses on Loans and Lending
Commitments
The firm’s allowance for loan losses is comprised of
portfolio level reserves, specific loan level reserves, and
reserves on PCI loans as described below:
‰Portfolio level reserves are determined on loans
(excluding PCI loans) not deemed impaired by
aggregating groups of loans with similar risk
characteristics and estimating the probable loss inherent
in the portfolio.
‰Specific loan level reserves are determined on loans
(excluding PCI loans) that exhibit credit quality weakness
and are therefore individually evaluated for impairment.
‰Reserves on PCI loans are recorded when it is determined
that the expected cash flows, which are reassessed on a
quarterly basis, will be lower than those used to establish
the current effective yield for such loans or pools of loans.
If the expected cash flows are determined to be
significantly higher than those used to establish the
current effective yield, such increases are initially
recognized as a reduction to any previously recorded
allowances for loan losses and any remaining increases
are recognized as interest income prospectively over the
life of the loan or pools of loans as an increase to the
effective yield.
The allowance for loan losses is determined using various
inputs, including industry default and loss data, current
macroeconomic indicators, borrower’s capacity to meet its
financial obligations, borrower’s country of risk, loan
seniority and collateral type. Management’s estimate of
loan losses entails judgment about loan collectability at the
reporting dates, and there are uncertainties inherent in
those judgments. While management uses the best
information available to determine this estimate, future
adjustments to the allowance may be necessary based on,
among other things, changes in the economic environment
or variances between actual results and the original
assumptions used. Loans are charged off against the
allowance for loan losses when deemed to be uncollectible.
As of December 2015 and December 2014, substantially all
of the firm’s loans receivable were evaluated for
impairment at the portfolio level.
The firm also records an allowance for losses on lending
commitments that are held for investment and accounted
for on an accrual basis. Such allowance is determined using
the same methodology as the allowance for loan losses,
while also taking into consideration the probability of
drawdowns or funding, and is included in “Other liabilities
and accrued expenses” in the consolidated statements of
financial condition. As of December 2015 and
December 2014, substantially all of such lending
commitments were evaluated for impairment at the
portfolio level.
The table below presents changes in the allowance for loan
losses and the allowance for losses on lending
commitments.
$ in millions
Year Ended December
2015 2014
Allowance for loan losses
Balance, beginning of period $228 $139
Charge-offs (1) (3)
Provision for loan losses 187 92
Balance, end of period $414 $228
Allowance for losses on lending commitments
Balance, beginning of period $86 $57
Provision for losses on lending commitments 102 29
Balance, end of period $188 $86
The provision for losses on loans and lending commitments
is included in “Other principal transactions” in the
consolidated statements of earnings. As of December 2015
and December 2014, substantially all of the allowance for
loan losses and allowance for losses on lending
commitments were related to corporate loans and
corporate lending commitments and were primarily
determined at the portfolio level. The firm did not have any
allowance for losses on PCI loans as of December 2015 and
did not have any PCI loans as of December 2014.
158 Goldman Sachs 2015 Form 10-K