We have shadow accounting through our core processor (Fiserv). After successfully collecting payments on a loan for numerous years, the loan had to be charged off. So, all payments made within shadow accounting were reversed in the contra-income account.

My question is should the payments be posted to income or should they be booked as a recovery within the ALLL?

The training guide provided by Fiserv states that it is a bank decision, however, I can't find any accounting guidance. Thanks

If it was a loan on non-accrual, all payments should have been applied to principal and there would be no interest income to recognize, regardless of whether the loan was on shadow accounting or not.

That's where Shadow Accounting comes in. Shadow accounting allows payments to non-accrual loan accounts to be paid using a normal payment split of principal and interest, but to be recorded in the General Ledger as principal
only. This will maintain the integrity of the payment stream and proper accrual of interest based on actual principal balances.

So, all payments are being applied as principal but there is a separate ledger maintaining the normal payment splits.

I know what shadow accounting is but I'm just a bit confused when you say non-accrual but then talk about accrual of interest or recognition of income. Maybe I'm just not understanding or maybe shadow accounting works differently through your core than through ours.

If your note is already on "non-accrual" with Fiserv and you are now charging off the remaining Principal Balance - You are charging off the remaining Principal Balance. For example you had a principal balance of 10,000 when placing note into non-accrual status. You collected 5 payments @ 200 each for a total of 1,000 which reduce the principal balance to 9,000. You are charging off the remaining 9,000. You do not "recognize" the interest portion of the payments received and the impact to your ALLL is just the 9,000 charge off. Of course if at some point you recover additional monies those would be recognized as recovery to your ALLL balance until the 9,000 is recovered and then you may recognize the interest (if you are lucky enough to recover it).

My understanding of shadow accounting, only a little above that of a layman, is that its purpose is to provide the borrower with one set of numbers; e.g. "Today's $$200 payment was allocated $160 to interest and $40 to principal," even though the bank allocated the entire $200 payment to principal on its own books. Only after the entire principal was repaid on the bank's books would the bank acknowledge any subsequent payment as income.

"Non accrual" translates to "We will be incredibly lucky to get our principal back and we will not distort the bank's income statement by declaring any portion of future payments as income until all of the original loan amount has been repaid."

Right, if I remember correctly, what FiServ has said is that you can either apply the recovery payment directly to Recoveries GL, or you can apply it to the loan and (if set up right) that payment will flow through to recoveries.