Federal Reserve System SR letter SR 01-17 Interagency Policy Statement on Allowance for Loan and Lease Losses provides comprehensive guidance on the design, implementation and maintenance of ALLL methodologies and supporting documentation practices.

While different institutions may use different methods, there are certain common elements that are often included in an ALLL policy. Generally, policies:

• Describe the bank's ALLL methodology. This is done by:
• Stating which loans will be considered for individual impairment in determining the FAS 114 component of the ALLL.
• Specifying how FAS 114 loans will be valued.
• Stating which internal and external risks will be considered for FAS 114 loans.
• Identifying the segments into which the remainder of the portfolio will be divided to determine the FAS 5 component and the risks that will be considered in developing a loss estimate for each segment. If historical experience is used, identify the time period that will be considered.
• Outline the responsibilities for determining and ensuring the bank has an appropriate ALLL balance.
• Specify what the board considers to be an appropriate level or range for the ALLL balance.
• Detail the documentation requirements to support the bank's methodology and ALLL balance and any changes made to the methodology and balance.
• Provide for at least a quarterly review of the ALLL balance adequacy.
• Require an independent assessment of ALLL methodology to check for consistency, needed changes, appropriate documentation and compliance with Generally Accepted Accounting Principles.
• Provide for the annual board approval of the ALLL policy and methodology.