17. Add Subtopic 326-10, with a link to transition paragraph 326-10-65-1, as follows:
[For ease of readability, the new Subtopic is not underlined.]
Financial Instruments—Credit Losses—Overall
Overview and Background
General
326-10-05-1 This Topic provides guidance on how an entity should measure credit losses on financial instruments.
326-10-05-2 Topic 326 includes the following Subtopics:
- Overall
- Financial Instruments—Credit Losses—Measured at Amortized Cost
- Financial Instruments—Credit Losses—Available-for-Sale Debt Securities
Scope and Scope Exceptions
General
> Entities
326-10-15-1 The guidance in this Subtopic applies to all entities.
Glossary
Amortized Cost Basis
The amortized cost basis is the amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, writeoffs, foreign exchange, and fair value hedge accounting adjustments.
Debt Security (first definition)
Any security representing a creditor relationship with an entity. The term debt security also includes all of the following:
- Preferred stock that by its terms either must be redeemed by the issuing entity or is redeemable at the option of the investor
- A collateralized mortgage obligation (or other instrument) that is issued in equity form but is required to be accounted for as a nonequity instrument regardless of how that instrument is classified (that is, whether equity or debt) in the issuer's statement of financial position
- U.S. Treasury securities
- U.S. government agency securities
- Municipal securities
- Corporate bonds
- Convertible debt
- Commercial paper
- All securitized debt instruments, such as collateralized mortgage obligations and real estate mortgage investment conduits
- Interest-only and principal-only strips.
The term debt security excludes all of the following:
a. Option contracts
b. Financial futures contracts
c. Forward contracts
d. Lease contracts
e. Receivables that do not meet the definition of security and, so, are not debt securities (unless they have been securitized, in which case they would meet the definition of a security), for example:
1. Trade accounts receivable arising from sales on credit by industrial or commercial entities
2. Loans receivable arising from consumer, commercial, and real estate lending activities of financial institutions.
Effective Interest Rate
The rate of return implicit in the financial asset, that is, the contractual interest rate adjusted for any net deferred fees or costs, premium, or discount existing at the origination or acquisition of the financial asset. For purchased financial assets with credit deterioration, however, to decouple interest income from credit loss recognition, the premium or discount at acquisition excludes the discount embedded in the purchase price that is attributable to an acquirer's assessment of credit losses at the date of acquisition.
Financial Asset (first definition)
Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:
- Receive cash or another financial instrument from a second entity
- Exchange other financial instruments on potentially favorable terms with the second entity.
Loan (second definition)
A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor's statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable.
Not-for-Profit Entity
An entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity:
- Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return
- Operating purposes other than to provide goods or services at a profit
- Absence of ownership interests like those of business entities.
Entities that clearly fall outside this definition include the following:
- All investor-owned entities
- Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.
Public Business Entity
A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.
- It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
- It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
- It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
- d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
- It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity's filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.
Purchased Financial Assets with Credit Deterioration
Acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer's assessment. See paragraph 326-20-55-5 for more information on the meaning of similar risk characteristics for assets measured on an amortized cost basis.
Securities and Exchange Commission (SEC) Filer
An entity that is required to file or furnish its financial statements with either of the following:
- The Securities and Exchange Commission (SEC)
- With respect to an entity subject to Section 12(i) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section.
Financial statements for other entities that are not otherwise SEC filers whose financial statements are included in a submission by another SEC filer are not included within this definition.
Troubled Debt Restructuring
A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider.
Transition and Open Effective Date Information
General
> Transition Related to Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
326-10-65-1 The following represents the transition and effective date information related to Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments:
a. The pending content that links to this paragraph shall be effective as follows:
1. For public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years
2. For public business entities that do not meet the definition of an SEC filer, for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years
3. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.
b. Early application of the pending content that links to this paragraph is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
c. An entity shall apply the pending content that links to this paragraph by means of a cumulative-effect adjustment to the opening retained earnings as of the beginning of the first reporting period in which the pending content that links to this paragraph is effective.
d. An entity shall apply prospectively the pending content that links to this paragraph for purchased financial assets with credit deterioration to {add glossary link to 1st definition}financial assets{add glossary link to 1st definition} for which Subtopic 310-30 was previously applied. The prospective application will result in an adjustment to the amortized cost basis of the financial asset to reflect the addition of the allowance for credit losses at the date of adoption. An entity shall not reassess whether recognized financial assets meet the criteria of a purchased financial asset with credit deterioration as of the date of adoption. An entity may elect to maintain pools of {add glossary link to 2nd definition}loans{add glossary link to 2nd definition} accounted for under Subtopic 310-30 at adoption. An entity shall not reassess whether modifications to individual acquired financial assets accounted for in pools are troubled debt restructurings as of the date of adoption. The noncredit discount or premium, after the adjustment for the allowance for credit losses, shall be accreted to interest income using the interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date. The same transition requirements should be applied to beneficial interests for which Subtopic 310-30 was applied previously or for which there is a significant difference between the contractual cash flows and expected cash flows at the date of recognition.
e. An entity shall apply prospectively the pending content that links to this paragraph to {add glossary link to 1st definition}debt securities{add glossary link to 1st definition} for which an other-than-temporary impairment had been recognized before the date of adoption, such that the amortized cost basis (including previous write-downs) of the debt security is unchanged. In addition, the effective interest rate on a security will remain unchanged as a result of the adoption of the pending content that links to this paragraph. Amounts previously recognized in accumulated other comprehensive income as of the adoption date that relate to improvements in cash flows will continue to be accreted to interest income over the remaining life of the debt security on a level-yield basis. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption shall be recorded to income in the period received.
f. An entity shall disclose the following in the period that the entity adopts the pending content that links to this paragraph:
1. The nature of the change in accounting principle, including an explanation of the newly adopted accounting principle.
2. The method of applying the change.
3. The effect of the adoption on any line item in the statement of financial position, if material, as of the beginning of the first period for which the pending content that links to this paragraph is effective. Presentation of the effect on financial statement subtotals is not required.
4. The cumulative effect of the change on retained earnings or other components of equity in the statement of financial position as of the beginning of the first period for which the pending content that links to this paragraph is effective.
g. An entity that issues interim financial statements shall provide the disclosures in (f) in each interim financial statement of the year of change and the annual financial statement of the period of the change.
h. In the year of initial application of the pending content that links to this paragraph, a public business entity that does not meet the definition of a SEC filer may phase-in the disclosure of credit quality indicators by year of origination by only presenting the three most recent origination years (including the first year of adoption). In each subsequent fiscal year, the then-current origination year will be added in the periods after adoption until a total of five origination years are presented. Origination years before those that are presented separately shall be disclosed in the aggregate. For example, the phase-in approach would work as follows assuming a calendar year-end entity:
1. For the first annual reporting period ended December 31, 2X21, after the effective date of January 1, 2X21, an entity would disclose the end of period amortized cost basis of the current period originations within 2X21, as well as the two origination years of 2X20 and 2X19. The December 31, 2X21 end of period amortized cost balances for all prior originations would be presented separately in the aggregate.
2. For the second annual reporting period ended December 31, 2X22, after the effective date of January 1, 2X21, an entity would disclose the end of period amortized cost basis of the current period originations within 2X22, as well as the three origination years of 2X21, 2X20, and 2X19. The December 31, 2X22 ending amortized cost basis would be presented in the aggregate for all origination periods before the four years that are presented separately.
3. For the third annual reporting period ended December 31, 2X23, after the effective date of January 1, 2X21, an entity would disclose the end-of-period amortized cost basis of the current-period originations within 2X23, as well as the four origination years of 2X22, 2X21, 2X20, and 2X19. The December 31, 2X23 ending amortized cost basis would be presented in aggregate for all origination periods before the five years that are presented separately.
4. For interim-period disclosures within the years discussed above, the current year-to-date originations should be disclosed as the originations in the interim reporting period.
18. Add Subtopic 326-20, with a link to transition paragraph 326-10-65-1, as follows:
[For ease of readability, the new Subtopic is not underlined, except for content moved from other paragraphs in the Codification.]
Financial Instruments—Credit Losses—Measured at Amortized Cost
Overview and Background
General
326-20-05-1 This Subtopic provides guidance on how an entity should measure expected credit losses on financial instruments measured at amortized cost and on leases.
Scope and Scope Exceptions
General
> Entities
326-20-15-1 The guidance in this Subtopic applies to all entities.
> Instruments
326-20-15-2 The guidance in this Subtopic applies to the following items:
a. Financial assets measured at amortized cost basis, including the following:
1. Financing receivables
2. Held-to-maturity debt securities
3. Receivables that result from revenue transactions within the scope of Topic 605 on revenue recognition, Topic 606 on revenue from contracts with customers, and Topic 610 on other income
4. Reinsurance receivables that result from insurance transactions within the scope of Topic 944 on insurance
5. Receivables that relate to repurchase agreements and securities lending agreements within the scope of Topic 860
b. Net investments in leases recognized by a lessor in accordance with Topic 842 on leases
c. Off-balance-sheet credit exposures not accounted for as insurance. Off-balance-sheet credit exposure refers to credit exposures on off-balance-sheet loan commitments, standby letters of credit, financial guarantees not accounted for as insurance, and other similar instruments, except for instruments within the scope of Topic 815 on derivatives and hedging.
326-20-15-3 The guidance in this Subtopic does not apply to the following items:
- Financial assets measured at fair value through net income
- Available-for-sale debt securities
- Loans made to participants by defined contribution employee benefit plans
- Policy loan receivables of an insurance entity
- Promises to give (pledges receivable) of a not-for-profit entity
- Loans and receivables between entities under common control.
Glossary
Amortized Cost Basis
The amortized cost basis is the amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, writeoffs, foreign exchange, and fair value hedge accounting adjustments.
Class of Financing Receivable
A group of financing receivables determined on the basis of both of the following:
- Risk characteristics of the financing receivable
- An entity's method for monitoring and assessing credit risk.
See paragraphs 326-20-55-11 through 55-14 and 326-20-50-3.
Credit Quality Indicator
A statistic about the credit quality of a financial asset.
Debt Security (first definition)
Any security representing a creditor relationship with an entity. The term debt security also includes all of the following:
- Preferred stock that by its terms either must be redeemed by the issuing entity or is redeemable at the option of the investor
- A collateralized mortgage obligation (or other instrument) that is issued in equity form but is required to be accounted for as a nonequity instrument regardless of how that instrument is classified (that is, whether equity or debt) in the issuer's statement of financial position
- U.S. Treasury securities
- U.S. government agency securities
- Municipal securities
- Corporate bonds
- Convertible debt
- Commercial paper
- All securitized debt instruments, such as collateralized mortgage obligations and real estate mortgage investment conduits
- Interest-only and principal-only strips.
The term debt security excludes all of the following:
a. Option contracts
b. Financial futures contracts
c. Forward contracts
d. Lease contracts
e. Receivables that do not meet the definition of security and, so, are not debt securities (unless they have been securitized, in which case they would meet the definition of a security), for example:
1. Trade accounts receivable arising from sales on credit by industrial or commercial entities
2. Loans receivable arising from consumer, commercial, and real estate lending activities of financial institutions.
Effective Interest Rate
The rate of return implicit in the financial asset, that is, the contractual interest rate adjusted for any net deferred fees or costs, premium, or discount existing at the origination or acquisition of the financial asset. For purchased financial assets with credit deterioration, however, to decouple interest income from credit loss recognition, the premium or discount at acquisition excludes the discount embedded in the purchase price that is attributable to an acquirer's assessment of credit losses at the date of acquisition.
Fair Value (second definition)
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Financial Asset (first definition)
Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:
- Receive cash or another financial instrument from a second entity
- Exchange other financial instruments on potentially favorable terms with the second entity.
Financing Receivable
A financing arrangement that has both of the following characteristics:
a. It represents a contractual right to receive money in either of the following ways:
1. On demand
2. On fixed or determinable dates.
b. It is recognized as an asset in the entity's statement of financial position.
See paragraphs 310-10-55-13 through 55-15 for more information on the definition of financing receivable, including a list of items that are excluded from the definition (for example, debt securities).
Freestanding Contract
A freestanding contract is entered into either:
- Separate and apart from any of the entity's other financial instruments or equity transactions
- In conjunction with some other transaction and is legally detachable and separately exercisable.
Line-of-Credit Arrangement
A line-of-credit or revolving-debt arrangement is an agreement that provides the borrower with the option to make multiple borrowings up to a specified maximum amount, to repay portions of previous borrowings, and to then reborrow under the same contract. Line-of-credit and revolving-debt arrangements may include both amounts drawn by the debtor (a debt instrument) and a commitment by the creditor to make additional amounts available to the debtor under predefined terms (a loan commitment).
Loan (second definition)
A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor's statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable.
Loan Commitment
Loan commitments are legally binding commitments to extend credit to a counterparty under certain prespecified terms and conditions. They have fixed expiration dates and may either be fixed-rate or variable-rate. Loan commitments can be either of the following:
- Revolving (in which the amount of the overall commitment is reestablished upon repayment of previously drawn amounts)
- Nonrevolving (in which the amount of the overall commitment is not reestablished upon repayment of previously drawn amounts).
Loan commitments can be distributed through syndication arrangements, in which one entity acts as a lead and an agent on behalf of other entities that will each extend credit to a single borrower. Loan commitments generally permit the lender to terminate the arrangement under the terms of covenants negotiated under the agreement.
Market Participants
Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics:
- They are independent of each other, that is, they are not related parties, although the price in a related-party transaction may be used as an input to a fair value measurement if the reporting entity has evidence that the transaction was entered into at market terms
- They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary
- They are able to enter into a transaction for the asset or liability
- They are willing to enter into a transaction for the asset or liability, that is, they are motivated but not forced or otherwise compelled to do so.
Not-for-Profit Entity
An entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity:
- Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return
- Operating purposes other than to provide goods or services at a profit
- Absence of ownership interests like those of business entities.
Entities that clearly fall outside this definition include the following:
- All investor-owned entities
- Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.
Orderly Transaction
A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale).
Portfolio Segment
The level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. See paragraphs 326-20-50-3 and 326-20-55-10.
Public Business Entity
A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.
- It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
- It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
- It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
- It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
- It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity's filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.
Purchased Financial Assets with Credit Deterioration
Acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer's assessment. See paragraph 326-20-55-5 for more information on the meaning of similar risk characteristics for assets measured on an amortized cost basis.
Reinsurance Receivable
All amounts recoverable from reinsurers for paid and unpaid claims and claim settlement expenses, including estimated amounts receivable for unsettled claims, claims incurred but not reported, or policy benefits.
Related Parties
Related parties include:
- Affiliates of the entity
- Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity
- Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management
- Principal owners of the entity and members of their immediate families
- Management of the entity and members of their immediate families
- Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests
- Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Standby Letter of Credit
A letter of credit (or similar arrangement however named or designated) that represents an obligation to the beneficiary on the part of the issuer for any of the following:
- To repay money borrowed by or advanced to or for the account of the account party
- To make payment on account of any evidence of indebtedness undertaken by the account party
- To make payment on account of any default by the account party in the performance of an obligation.
A standby letter of credit would not include the following:
- Commercial letters of credit and similar instruments where the issuing bank expects the beneficiary to draw upon the issuer and which do not guarantee payment of a money obligation
- A guarantee or similar obligation issued by a foreign branch in accordance with and subject to the limitations of Regulation M of the Federal Reserve Board.
Troubled Debt Restructuring
A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider.
Initial Measurement
General
> Developing an Estimate of Expected Credit Losses
326-20-30-1 The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net amount expected to be collected on the financial asset. At the reporting date, an entity shall record an allowance for credit losses on financial assets within the scope of this Subtopic. An entity shall report in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses for management's current estimate of expected credit losses on financial asset(s).
326-20-30-2 An entity shall measure expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist (as described in paragraph 326-20-55-5). If an entity determines that a financial asset does not share risk characteristics with its other financial assets, the entity shall evaluate the financial asset for expected credit losses on an individual basis. If a financial asset is evaluated on an individual basis, an entity also should not include it in a collective evaluation. That is, financial assets should not be included in both collective assessments and individual assessments.
326-20-30-3 The allowance for credit losses may be determined using various methods. For example, an entity may use discounted cash flow methods, loss-rate methods, roll-rate methods, probability-of-default methods, or methods that utilize an aging schedule. An entity is not required to utilize a discounted cash flow method to estimate expected credit losses. Similarly, an entity is not required to reconcile the estimation technique it uses with a discounted cash flow method.
326-20-30-4 If an entity estimates expected credit losses using methods that project future principal and interest cash flows (that is, a discounted cash flow method), the entity shall discount expected cash flows at the financial asset's effective interest rate. When a discounted cash flow method is applied, the allowance for credit losses shall reflect the difference between the amortized cost basis and the present value of the expected cash flows. If the
loan's
financial asset's contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, for example, the prime rate, the London Interbank Offered Rate (LIBOR), or the U.S. Treasury bill weekly average, that
loan's
financial asset's effective interest rate
(used to discount expected cash flows as described in this paragraph) may
shall be calculated based on the factor as it changes over the life of the
loan
financial asset or may
be fixed at the rate in effect at the date the loan meets the impairment criterion in
paragraphs 310-10-35-16 through 35-17. The creditor's choice shall be applied
consistently for all loans whose contractual interest rate varies based on
subsequent changes in an independent factor.
Projections of changes in the factor shall not be made for purposes of determining the effective interest rate or estimating expected future cash flows.
[Content amended as shown and moved from paragraph 310-10-35-28]
326-20-30-5 If an entity estimates expected credit losses using a method other than a discounted cash flow method described in paragraph 326-20-30-4, the allowance for credit losses shall reflect the entity's expected credit losses of the amortized cost basis of the financial asset(s) as of the reporting date. For example, if an entity uses a loss-rate method, the numerator would include the expected credit losses of the amortized cost basis (that is, amounts that are not expected to be collected in cash or other consideration, or recognized in income). In addition, when an entity expects to accrete a discount into interest income, the discount should not offset the entity's expectation of credit losses. An entity may develop its estimate of expected credit losses by measuring components of the amortized cost basis on a combined basis or by separately measuring the following components of the amortized cost basis, including both of the following:
- Amortized cost basis, excluding premiums, discounts (including net deferred fees and costs), foreign exchange, and fair value hedge accounting adjustments (that is, the face amount or unpaid principal balance)
- Premiums or discounts, including net deferred fees and costs, foreign exchange, and fair value hedge accounting adjustments.
326-20-30-6 An entity shall estimate expected credit losses over the contractual term of the financial asset(s) when using the methods in accordance with paragraph 326-20-30-5. An entity shall consider prepayments as a separate input in the method or prepayments may be embedded in the credit loss information in accordance with paragraph 326-20-30-5. An entity shall consider estimated prepayments in the future principal and interest cash flows when utilizing a method in accordance with paragraph 326-20-30-4. An entity shall not extend the contractual term for expected extensions, renewals, and modifications unless it has a reasonable expectation at the reporting date that it will execute a troubled debt restructuring with the borrower.
326-20-30-7 When developing an estimate of expected credit losses on financial asset(s), an entity shall consider available information relevant to assessing the collectibility of cash flows. This information may include internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. An entity shall consider relevant qualitative and quantitative factors that relate to the environment in which the entity operates and are specific to the borrower(s). When financial assets are evaluated on a collective or individual basis, an entity is not required to search all possible information that is not reasonably available without undue cost and effort. Furthermore, an entity is not required to develop a hypothetical pool of financial assets. An entity may find that using its internal information is sufficient in determining collectibility.
326-20-30-8 Historical credit loss experience of financial assets with similar risk characteristics generally provides a basis for an entity's assessment of expected credit losses. Historical loss information can be internal or external historical loss information (or a combination of both). An entity shall consider adjustments to historical loss information for differences in current asset specific risk characteristics, such as differences in underwriting standards, portfolio mix, or asset term within a pool at the reporting date or when an entity's historical loss information is not reflective of the contractual term of the financial asset or group of financial assets.
326-20-30-9 An entity shall not rely solely on past events to estimate expected credit losses. When an entity uses historical loss information, it shall consider the need to adjust historical information to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The adjustments to historical loss information may be qualitative in nature and should reflect changes related to relevant data (such as changes in unemployment rates, property values, commodity values, delinquency, or other factors that are associated with credit losses on the financial asset or in the group of financial assets). Some entities may be able to develop reasonable and supportable forecasts over the contractual term of the financial asset or a group of financial assets. However, an entity is not required to develop forecasts over the contractual term of the financial asset or group of financial assets. Rather, for periods beyond which the entity is able to make or obtain reasonable and supportable forecasts of expected credit losses, an entity shall revert to historical loss information determined in accordance with paragraph 326-20-30-8 that is reflective of the contractual term of the financial asset or group of financial assets. An entity shall not adjust historical loss information for existing economic conditions or expectations of future economic conditions for periods that are beyond the reasonable and supportable period. An entity may revert to historical loss information at the input level or based on the entire estimate. An entity may revert to historical loss information immediately, on a straight-line basis, or using another rational and systematic basis.
326-20-30-10 An entity's estimate of expected credit losses shall include a measure of the expected risk of credit loss even if that risk is remote, regardless of the method applied to estimate credit losses. However, an entity is not required to measure expected credit losses on a financial asset (or group of financial assets) in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Except for the circumstances described in paragraphs 326-20-35-4 through 35-6, an entity shall not expect nonpayment of the amortized cost basis to be zero solely on the basis of the current value of collateral securing the financial asset(s) but, instead, also shall consider the nature of the collateral, potential future changes in collateral values, and historical loss information for financial assets secured with similar collateral.
> > Off-Balance-Sheet Credit Exposures
326-20-30-11 In estimating expected credit losses for off-balance-sheet credit exposures, an entity shall estimate expected credit losses on the basis of the guidance in this Subtopic over the contractual period in which the entity is exposed to credit risk via a present contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the issuer. At the reporting date, an entity shall record a liability for credit losses on off-balance-sheet credit exposures within the scope of this Subtopic. An entity shall report in net income (as a credit loss expense) the amount necessary to adjust the liability for credit losses for management's current estimate of expected credit losses on off-balance-sheet credit exposures. For that period of exposure, the estimate of expected credit losses should consider both the likelihood that funding will occur (which may be affected by, for example, a material adverse change clause) and an estimate of expected credit losses on commitments expected to be funded over its estimated life. If an entity uses a discounted cash flow method to estimate expected credit losses on off-balance-sheet credit exposures, the discount rate used should be consistent with the guidance in Section 310-20-35.
> > Credit Enhancements
326-20-30-12 The estimate of expected credit losses shall reflect how credit enhancements (other than those that are freestanding contracts) mitigate expected credit losses on financial assets, including consideration of the financial condition of the guarantor, the willingness of the guarantor to pay, and/or whether any subordinated interests are expected to be capable of absorbing credit losses on any underlying financial assets. However, when estimating expected credit losses, an entity shall not combine a financial asset with a separate freestanding contract that serves to mitigate credit loss. As a result, the estimate of expected credit losses on a financial asset (or group of financial assets) shall not be offset by a freestanding contract (for example, a purchased credit-default swap) that may mitigate expected credit losses on the financial asset (or group of financial assets).
> Purchased Financial Assets with Credit Deterioration
326-20-30-13 An entity shall record the allowance for credit losses for purchased financial assets with credit deterioration in accordance with paragraphs 326-20-30-2 through 30-10 and 326-20-30-12. An entity shall add the allowance for credit losses at the date of acquisition to the purchase price to determine the initial amortized cost basis for purchased financial assets with credit deterioration. Any noncredit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration shall be allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined on a collective basis shall be allocated to individual assets to appropriately allocate any noncredit discount or premium.
326-20-30-14 If an entity estimates expected credit losses using a discounted cash flow method, the entity shall discount expected credit losses at the rate that equates the present value of the purchaser's estimate of the asset's future cash flows with the purchase price of the asset. If an entity estimates expected credit losses using a method other than a discounted cash flow method, the entity shall estimate expected credit losses on the basis of the unpaid principal balance (face value) of the financial asset(s). See paragraphs 326-20-55-66 through 55-78 for implementation guidance and examples.
326-20-30-15 An entity shall account for purchased financial assets that do not have a more-than-insignificant deterioration in credit quality since origination in a manner consistent with originated financial assets in accordance with paragraphs 326-20-30-1 through 30-10 and 326-20-30-12. An entity shall not apply the guidance in paragraphs 326-20-30-13 through 30-14 for purchased financial assets that do not have a more-than-insignificant deterioration in credit quality since origination.
Subsequent Measurement
General
> Reporting Changes in Expected Credit Losses
326-20-35-1 At each reporting date, an entity shall record an allowance for credit losses on financial assets (including purchased financial assets with credit deterioration) within the scope of this Subtopic. An entity shall compare its current estimate of expected credit losses with the estimate of expected credit losses previously recorded. An entity shall report in net income (as a credit loss expense or a reversal of credit loss expense) the amount necessary to adjust the allowance for credit losses for management's current estimate of expected credit losses on financial asset(s). The method applied to initially measure expected credit losses for the assets included in paragraph 326-20-30-14 generally would be applied consistently over time and shall faithfully estimate expected credit losses for financial asset(s).
326-20-35-2 An entity shall evaluate whether a financial asset in a pool continues to exhibit similar risk characteristics with other financial assets in the pool. For example, there may be changes in credit risk, borrower circumstances, recognition of writeoffs, or cash collections that have been fully applied to principal on the basis of nonaccrual practices that may require a reevaluation to determine if the asset has migrated to have similar risk characteristics with assets in another pool, or if the credit loss measurement of the asset should be performed individually because the asset no longer has similar risk characteristics.
326-20-35-3 An entity shall adjust at each reporting period its estimate of expected credit losses on off-balance-sheet credit exposures. An entity shall report in net income (as credit loss expense or a reversal of credit loss expense) the amount necessary to adjust the liability for credit losses for management's current estimate of expected credit losses on off-balance-sheet credit exposures at each reporting date.
> Financial Assets Secured by Collateral
> > Collateral-Dependent Financial Assets
326-20-35-4 Regardless of the
initial measurement method,
an entity a creditor
shall measure
expected credit losses impairment
based on the
{add glossary link to 2nd definition}fair value{add glossary link to 2nd definition} of the collateral when the
creditor
entity determines that foreclosure is probable. When
an entity a creditor
determines that foreclosure is probable,
the entity a creditor
shall remeasure the
financial asset loan
at the fair value of the collateral so that
the reporting of a credit loss loss recognition
is not delayed until actual foreclosure.
An entity also shall consider any credit enhancements that meet the criteria in paragraph 326-20-30-12 that are applicable to the financial asset when recording the allowance for credit losses. [Content amended as shown and moved from paragraph 310-10-35-32]
326-20-35-5 An entity may use, as a practical expedient, the fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the allowance for credit losses for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the entity's assessment as of the reporting date (collateral-dependent financial asset). If an entity uses the practical expedient on a collateral-dependent financial asset and repayment or satisfaction of the asset depends on the sale of the collateral, the fair value of the collateral shall be adjusted for estimated costs to sell (on a discounted basis). However, the entity shall not incorporate in the net carrying amount of the financial asset the estimated costs to sell the collateral if repayment or satisfaction of the financial asset depends only on the operation, rather than on the sale, of the collateral. For a collateral-dependent financial asset, an entity may expect credit losses of zero when the fair value (less costs to sell, if applicable) of the collateral at the reporting date is equal to or exceeds the amortized cost basis of the financial asset. If the fair value of the collateral is less than the amortized cost basis of the financial asset for which the practical expedient has been elected, an entity shall recognize an allowance for credit losses on the collateral-dependent financial asset, which is measured as the difference between the fair value of the collateral, less costs to sell (if applicable), at the reporting date and the amortized cost basis of the financial asset. An entity also shall consider any credit enhancements that meet the criteria in paragraph 326-20-30-12 that are applicable to the financial asset when recording the allowance for credit losses.
> > Financial Assets Secured by Collateral Maintenance Provisions
326-20-35-6 For certain financial assets, the borrower may be required to continually adjust the amount of the collateral securing the financial asset(s) as a result of {add glossary link to 2nd definition}fair value{add glossary link to 2nd definition} changes in the collateral. In those situations, an entity may use, as a practical expedient, a method that compares the amortized cost basis with the fair value of collateral at the reporting date to measure the estimate of expected credit losses. An entity may determine that the expectation of nonpayment of the amortized cost basis is zero if the borrower continually replenishes the collateral securing the financial asset such that the fair value of the collateral is equal to or exceeds the amortized cost basis of the financial asset and the entity expects the borrower to continue to replenish the collateral as necessary. If the fair value of the collateral at the reporting date is less than the amortized cost basis of the financial asset, an entity shall limit the allowance for credit losses on the financial asset to the difference between the fair value of the collateral at the reporting date and the amortized cost basis of the financial asset.
> Loans Subsequently Identified for Sale
326-20-35-7 Once a decision has been made to sell loans not currently classified as held for sale, those loans shall be transferred into the held-for-sale classification. The application of the writeoff guidance in paragraph 326-20-35-8 may result in a portion of the amortized cost basis being written off before the loan has been transferred to the held-for-sale classification. Upon transfer, an entity shall measure a valuation allowance equal to the amount by which the amortized cost basis (which is reduced by any previous writeoffs but excludes the allowance for credit losses) exceeds the {add glossary link to 2nd definition}fair value{add glossary link to 2nd definition}. This paragraph applies to both mortgage and nonmortgage loans.
> Writeoffs and Recoveries of Financial Assets
326-20-35-8 Credit losses for loans and trade receivables
Writeoffs of financial assets, which may be
for all or part of a particular loan or trade receivable
full or partial writeoffs, shall be deducted from the allowance. The
related loan or trade
receivable balance
writeoffs shall be
charged off
recorded in the period in which the
loans or trade receivables
financial asset(s) are deemed uncollectible. Recoveries of
loans
financial assets and trade receivables previously
charged
written off shall be recorded when received.
[Content amended as shown and moved from paragraph 310-10-35-41]
326-20-35-9 Practices differ between entities as some industries typically credit recoveries directly to earnings while financial institutions typically credit the allowance for
loan
credit losses for recoveries. The combination of this practice and the practice of frequently reviewing the
appropriateness adequacy
of the allowance for
loan
credit losses results in the same credit to earnings in an indirect manner.
[Content amended as shown and moved from paragraph 310-10-35-42]
> Interest Income on Purchased Financial Assets with Credit Deterioration
326-20-35-10 This Subtopic does not address how a creditor shall recognize interest income. See paragraphs 310-10-35-53A through 35-53C for guidance on recognition of interest income on purchased financial assets with credit deterioration. See paragraph 326-20-45-3 for presentation guidance.
Other Presentation Matters
General
326-20-45-1 For financial assets measured at amortized cost within the scope of this Subtopic, an entity shall separately present on the statement of financial position, the allowance for credit losses that is deducted from the asset's amortized cost basis.
326-20-45-2 For off-balance-sheet credit exposures within the scope of this Subtopic, an entity shall present the estimate of expected credit losses on the statement of financial position as a liability. The liability for credit Credit
losses for off-balance-sheet financial instruments shall be
reduced deducted from the
liability for credit losses
in the period in which the
off-balance-sheet financial instruments expire, result in the recognition of a financial asset, or are otherwise liability is
settled. An
accrual for
estimate of expected credit
losses loss
on a
{remove glossary link}financial instrument{remove glossary link} with off-balance-sheet risk shall be recorded separate from
a valuation account
the allowance for credit losses related to a recognized financial instrument.
[Content amended as shown and moved from paragraphs 825-10-35-1 through 35-2]
326-20-45-3 When a discounted cash flow approach is used to estimate expected credit losses, the change in present value from one reporting period to the next may result not only from the passage of time but also from changes in estimates of the timing or amount of expected future cash flows. An entity that measures credit losses based on a discounted cash flow approach is permitted to report the entire change in present value as credit loss expense (or reversal of credit loss expense). Alternatively, an entity may report the change in present value attributable to the passage of time as interest income. See paragraph 326-20-50-12 for a disclosure requirement applicable to entities that choose the latter alternative and report changes in present value attributable to the passage of time as interest income.
326-20-45-4 The observable market price of an impaired loan or the
The {add glossary link to 2nd definition}fair value{add glossary link to 2nd definition} of the collateral of
an impaired collateral-dependent loan
a collateral-dependent financial asset may change from one reporting period to the next. Changes in
observable market prices or
the fair value of the collateral shall be reported as
bad-debt
credit loss expense or a
reduction in bad-debt
reversal of credit loss expense
when the guidance in paragraphs 326-20-35-4 through 35-6 is applied. [
Content amended as shown and moved from paragraph 310-10-45-6]
Disclosure
General
326-20-50-1 For instruments within the scope of this Subtopic, this Section provides the following disclosure guidance on credit risk and the measurement of expected credit losses:
- Credit quality information
- Allowance for credit losses
- Past-due status
- Nonaccrual status
- Purchased financial assets with credit deterioration
- Collateral-dependent financial assets
- Off-balance-sheet credit exposures.
326-20-50-2 The disclosure guidance in this Section should enable a user of the financial statements to understand the following:
- The credit risk inherent in a portfolio and how management monitors the credit quality of the portfolio
- Management's estimate of expected credit losses
- Changes in the estimate of expected credit losses that have taken place during the period.
326-20-50-3 For financing receivables, the disclosure guidance in this Subtopic requires an entity to provide information by either portfolio segment or class of financing receivable. Net investment in leases are within the scope of this Subtopic, and the disclosure requirements for financing receivables shall be applied to net investment in leases (including the unguaranteed residual asset). For held-to-maturity {add glossary link to 1st definition}debt securities{add glossary link to 1st definition}, the disclosure guidance in this Subtopic requires an entity to provide information by major security type. Paragraphs 326-20-55-10 through 55-14 provide implementation guidance about the terms portfolio segment and class of financing receivable. When disclosing information, an entity shall determine, in light of the facts and circumstances, how much detail it must provide to satisfy the disclosure requirements in this Section. An entity must strike a balance between not obscuring important information as a result of too much aggregation and not overburdening financial statements with excessive detail that may not assist a financial statement user in understanding the entity's financial assets and allowance for credit losses. For example, an entity should not obscure important information by including it with a large amount of insignificant detail. Similarly, an entity should not disclose information that is so aggregated that it obscures important differences between the different types of financial assets and associated risks.
> Credit Quality Information
326-20-50-4 An entity shall provide information that enables a financial statement user to do both of the following:
- Understand how management monitors the credit quality of its financial assets
- Assess the quantitative and qualitative risks arising from the credit quality of its financial assets.
326-20-50-5 To meet the objectives in paragraph 326-20-50-4, an entity shall provide quantitative and qualitative information by class of financing receivable and major security type about the credit quality of financial assets within the scope of this Subtopic (excluding off-balance-sheet credit exposures and repurchase agreements and securities lending agreements within the scope of Topic 860), including all of the following:
- A description of the credit quality indicator(s)
- The amortized cost basis, by credit quality indicator
- For each credit quality indicator, the date or range of dates in which the information was last updated for that credit quality indicator.
326-20-50-6 When disclosing credit quality indicators of financing receivables and net investment in leases (except for reinsurance receivables and funded or unfunded amounts of line-of-credit arrangements, such as credit cards), an entity shall present the amortized cost basis within each credit quality indicator by year of origination (that is, vintage year). For purchased financing receivables and net investment in leases an entity shall use the initial date of issuance to determine the year of origination, not the date of acquisition. For origination years before the fifth annual period, an entity may present the amortized cost basis of financing receivables and net investments in leases in the aggregate. For interim-period disclosures, the current year-to-date originations in the current reporting period are considered to be the current-period originations. The requirement to present the amortized cost basis within each credit quality indicator by year of origination is not required for an entity that is not a public business entity.
326-20-50-7 An entity shall use the guidance in paragraphs 310-20-35-9 through 35-12 when determining whether a modification, extension, or renewal of a financing receivable should be presented as a current-period origination. An entity shall use the guidance in paragraphs 842-10-25-8 through 25-9 when determining whether a lease modification should be presented as a current-period origination.
326-20-50-8 If an entity discloses internal risk ratings, then the entity shall provide qualitative information on how those internal risk ratings relate to the likelihood of loss. [Content moved from paragraph 310-10-50-30]
326-20-50-9 The requirements to disclose credit quality indicators in paragraphs 326-20-50-4 through 50-5 do not apply to receivables measured at the lower of amortized cost basis or fair value, or trade receivables due in one year or less, except for credit card receivables, that result from revenue transactions within the scope of Topic 605 on revenue recognition or Topic 606 on revenue from contracts with customers.
> Allowance for Credit Losses
326-20-50-10 An entity shall provide information that enables a financial statement user to do the following:
- Understand management's method for developing its allowance for credit losses
- Understand the information that management used in developing its current estimate of expected credit losses
- Understand the circumstances that caused changes to the allowance for credit losses, thereby affecting the related credit loss expense (or reversal) reported for the period.
326-20-50-11 To meet the objectives in paragraph 326-20-50-10, an entity shall disclose all of the following by portfolio segment and major security type:
a. A description of how expected loss estimates are developed
b. A description of the entity's accounting policies and methodology to estimate the allowance for credit losses, as well as a discussion of the factors that influenced management's current estimate of expected credit losses, including:
1. Past events
2. Current conditions
3. Reasonable and supportable forecasts about the future.
c. A discussion of risk characteristics relevant to each portfolio segment
d. A discussion of the changes in the factors that influenced management's current estimate of expected credit losses and the reasons for those changes (for example, changes in portfolio composition, underwriting practices, and significant events or conditions that affect the current estimate but were not contemplated or relevant during a previous period)
e. Identification of changes to the entity's accounting policies, changes to the methodology from the prior period, its rationale for those changes, and the quantitative effect of those changes
f. Reasons for significant changes in the amount of writeoffs, if applicable
g. A discussion of the reversion method applied for periods beyond the reasonable and supportable forecast period
h. The amount of any significant purchases of financial assets during each reporting period
i. The amount of any significant sales of financial assets or reclassifications of {add glossary link to 2nd definition)loans{add glossary link to 2nd definition} held for sale during each reporting period.
326-20-50-12 Paragraphs 310-10-45-5 through 45-6
Paragraph 326-20-45-3 explains that a creditor that measures
impairment
expected credit losses based on
the present value of expected future cash flows
a discounted cash flow method is permitted to report the entire change in present value as
bad-debt
credit loss expense
(or reversal of credit loss expense) but
may
also
may report the change in present value attributable to the passage of time as interest income. Creditors that choose the latter alternative shall disclose the amount
of
recorded to interest income that represents the change in present value attributable to the passage of time.
[Content amended as shown and moved from paragraph 310-10-50-19]
> > Rollforward of the Allowance for Credit Losses
326-20-50-13 Furthermore, to enable a financial statement user to understand the activity in the allowance for credit losses for each period, an entity shall separately provide by portfolio segment and major security type the quantitative disclosures of the activity in the allowance for credit losses for financial assets within the scope of this Subtopic, including all of the following:
- The beginning balance in the allowance for credit losses
- Current-period provision for expected credit losses
- The initial allowance for credit losses recognized on financial assets accounted for as purchased financial assets with credit deterioration (including beneficial interests that meet the criteria in paragraph 325-40-30-1A), if applicable
- Writeoffs charged against the allowance
- Recoveries of amounts previously written off, if applicable
- The ending balance in the allowance for credit losses.
> Past-Due Status
326-20-50-14 To enable a financial statement user to understand the extent of financial assets that are past due, an entity shall provide an aging analysis of the amortized cost basis for financial assets that are past due as of the reporting date, disaggregated by class of financing receivable and major security type. An entity also shall disclose when it considers a financial asset to be past due.
326-20-50-15 The requirements to disclose past-due status in paragraph 326-20-50-14 do not apply to receivables measured at the lower of amortized cost basis or {add glossary link to 2nd definition}fair value{add glossary link to 2nd definition}, or trade receivables due in one year or less, except for credit card receivables, that result from revenue transactions within the scope of Topic 605 on revenue recognition or Topic 606 on revenue from contracts with customers.
> Nonaccrual Status
326-20-50-16 To enable a financial statement user to understand the credit risk and interest income recognized on financial assets on nonaccrual status, an entity shall disclose all of the following, disaggregated by class of financing receivable and major security type:
- The amortized cost basis of financial assets on nonaccrual status as of the beginning of the reporting period and the end of the reporting period
- The amount of interest income recognized during the period on nonaccrual financial assets
- The amortized cost basis of financial assets that are 90 days or more past due, but are not on nonaccrual status as of the reporting date
- The amortized cost basis of financial assets on nonaccrual status for which there is no related allowance for credit losses as of the reporting date.
326-20-50-17 An entity's summary of significant accounting policies for financial assets within the scope of this Subtopic shall include all of the following:
- Nonaccrual policies, including the policies for discontinuing accrual of interest, recording payments received on nonaccrual assets (including the cost recovery method, cash basis method, or some combination of those methods), and resuming accrual of interest, if applicable
- The policy for determining past-due or delinquency status
- The policy for recognizing writeoffs within the allowance for credit losses.
326-20-50-18 The requirements to disclose nonaccrual status in paragraphs 326-20-50-16 through 50-17 do not apply to receivables measured at lower of amortized cost basis or fair value, or trade receivables due in one year or less, except for credit card receivables, that result from revenue transactions within the scope of Topic 605 on revenue recognition or Topic 606 on revenue from contracts with customers.
> Purchased Financial Assets with Credit Deterioration
326-20-50-19 To the extent an entity acquired purchased financial assets with credit deterioration during the current reporting period, an entity shall provide a reconciliation of the difference between the purchase price of the financial assets and the par value of the assets, including:
- The purchase price
- The allowance for credit losses at the acquisition date based on the acquirer's assessment
- The discount (or premium) attributable to other factors
- The par value.
> Collateral-Dependent Financial Assets
326-20-50-20 For a financial asset for which the repayment (on the basis of an entity's assessment as of the reporting date) is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty, an entity shall describe the type of collateral by class of financing receivable and major security type. The entity also shall qualitatively describe, by class of financing receivable and major security type, the extent to which collateral secures its collateral-dependent financial assets, and significant changes in the extent to which collateral secures its collateral-dependent financial assets, whether because of a general deterioration or some other reason.
> Off-Balance-Sheet Credit Exposures
326-20-50-21 In addition to disclosures required by
other Topics Subtopic 450-20
, an entity shall disclose a description of the accounting policies and methodology the entity used to estimate its liability for off-balance-sheet credit exposures and related charges for those credit exposures. Such a description shall identify the factors that influenced management's judgment (for example, historical
losses, losses and
existing economic conditions
, and reasonable and supportable forecasts) and a discussion of risk elements relevant to particular categories of financial instruments.
[Content amended as shown and moved from paragraph 310-10-50-9]
326-20-50-22 Off-balance-sheet credit exposures refers to credit exposures on off-balance-sheet {add glossary link}loan commitments{add glossary link}, standby letters of credit, financial guarantees not accounted for as insurance, and other similar instruments, except for instruments within the scope of Topic 815. [Content amended as shown and moved from paragraph 310-10-50-10]
Implementation Guidance and Illustrations
> Implementation Guidance
326-20-55-1 This Section provides implementation guidance for management's estimate of expected credit losses on financial asset(s). This Section is organized as follows:
- Information considered when estimating expected credit losses
- Developing an estimate of expected credit losses
- Net investment in leases
- Effect of a fair value hedge on the discount rate when using a discounted cash flow model.
> > Information Considered When Estimating Expected Credit Losses
326-20-55-2 In determining its estimate of expected credit losses, an entity should evaluate information related to the borrower's creditworthiness, changes in its lending strategies and underwriting practices, and the current and forecasted direction of the economic and business environment. This Subtopic does not specify a particular methodology to be applied by an entity for determining historical credit loss experience. That methodology may vary depending on the size of the entity, the range of the entity's activities, the nature of the entity's financial assets, and other factors.
326-20-55-3 Historical loss information generally provides a basis for an entity's assessment of expected credit losses. An entity may use historical periods that represent management's expectations for future credit losses. An entity also may elect to use other historical loss periods, adjusted for current conditions, and other reasonable and supportable forecasts. When determining historical loss information in estimating expected credit losses, the information about historical credit loss data, after adjustments for current conditions and reasonable and supportable forecasts, should be applied to pools that are defined in a manner that is consistent with the pools for which the historical credit loss experience was observed.
326-20-55-4 Because historical experience may not fully reflect an entity's expectations about the future, management should adjust historical loss information, as necessary, to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information. In making this determination, management should consider characteristics of the financial assets that are relevant in the circumstances. To adjust historical credit loss information for current conditions and reasonable and supportable forecasts, an entity should consider significant factors that are relevant to determining the expected collectibility. Examples of factors an entity may consider include any of the following, depending on the nature of the asset (not all of these may be relevant to every situation, and other factors not on the list may be relevant):
a. The borrower's financial condition, credit rating, credit score, asset quality, or business prospects
b. The borrower's ability to make scheduled interest or principal payments
c. The remaining payment terms of the financial asset(s)
d. The remaining time to maturity and the timing and extent of prepayments on the financial asset(s)
e. The nature and volume of the entity's financial asset(s)
f. The volume and severity of past due financial asset(s) and the volume and severity of adversely classified or rated financial asset(s)
g. The value of underlying collateral on financial assets in which the collateral-dependent practical expedient has not been utilized
h. The entity's lending policies and procedures, including changes in lending strategies, underwriting standards, collection, writeoff, and recovery practices, as well as knowledge of the borrower's operations or the borrower's standing in the community
i. The quality of the entity's credit review system
j. The experience, ability, and depth of the entity's management, lending staff, and other relevant staff
k. The environmental factors of a borrower and the areas in which the entity's credit is concentrated, such as:
1. Regulatory, legal, or technological environment to which the entity has exposure
2. Changes and expected changes in the general market condition of either the geographical area or the industry to which the entity has exposure
3. Changes and expected changes in international, national, regional, and local economic and business conditions and developments in which the entity operates, including the condition and expected condition of various market segments.
> > Developing an Estimate of Expected Credit Losses
326-20-55-5 In evaluating financial assets on a collective (pool) basis, an entity should aggregate financial assets on the basis of similar risk characteristics, which may include any one or a combination of the following (the following list is not intended to be all inclusive):
- Internal or external (third-party) credit score or credit ratings
- Risk ratings or classification
- Financial asset type
- Collateral type
- Size
- Effective interest rate
- Term
- Geographical location
- Industry of the borrower
- Vintage
- Historical or expected credit loss patterns
- Reasonable and supportable forecast periods.
326-20-55-6 Estimating expected credit losses is highly judgmental and generally will require an entity to make specific judgments. Those judgments may include any of the following:
- The definition of default for default-based statistics
- The approach to measuring the historical loss amount for loss-rate statistics, including whether the amount is simply based on the amortized cost amount written off and whether there should be adjustments to historical credit losses (if any) to reflect the entity's policies for recognizing accrued interest
- The approach to determine the appropriate historical period for estimating expected credit loss statistics
- The approach to adjusting historical credit loss information to reflect current conditions and reasonable and supportable forecasts that are different from conditions existing in the historical period
- The methods of utilizing historical experience
- The method of adjusting loss statistics for recoveries
- How expected prepayments affect the estimate of expected credit losses
- How the entity plans to revert to historical credit loss information for periods beyond which the entity is able to make or obtain reasonable and supportable forecasts of expected credit losses
- The assessment of whether a financial asset exhibits risk characteristics similar to other financial assets.
326-20-55-7 Because of the subjective nature of the estimate, this Subtopic does not require specific approaches when developing the estimate of expected credit losses. Rather, an entity should use judgment to develop estimation techniques that are applied consistently over time and should faithfully estimate the collectibility of the financial assets by applying the principles in this Subtopic. An entity should utilize estimation techniques that are practical and relevant to the circumstance. The method(s) used to estimate expected credit losses may vary on the basis of the type of financial asset, the entity's ability to predict the timing of cash flows, and the information available to the entity.
> > Net Investment in Leases
326-20-55-8 This Subtopic requires that an entity recognize an allowance for credit losses on net investment in leases recognized by a lessor in accordance with Topic 842 on leases. An entity should include the unguaranteed residual asset with the lease receivable, net of any deferred selling profit, if applicable (that is, the net investment in the lease). When measuring expected credit losses on net investment in leases using a discounted cash flow method, the discount rate used in measuring the lease receivable under Topic 842 should be used in place of the effective interest rate.
> > Effect of a Fair Value Hedge on the Discount Rate When Using a Discounted Cash Flow Model
326-20-55-9 Section 815-25-35 implicitly affects the measurement of
credit losses impairment
under this Topic by requiring the present value of expected future cash flows to be discounted by the new
{add glossary link}effective
interest rate
{add glossary link} based on the adjusted
amortized cost basis recorded investment
in a hedged
{add glossary link}loan
{add glossary link}. When the
amortized cost basis recorded investment
of a loan has been adjusted under fair value hedge accounting, the effective
interest rate is the discount rate that equates the present value of the loan's future cash flows with that adjusted
amortized cost basis recorded investment
. The adjustment under fair value hedge accounting of the loan's carrying amount for changes in fair value attributable to the hedged risk under Section 815-25-35 shall be considered to be an adjustment of the loan's
amortized cost basis recorded investment
. Paragraph 815-25-35-11 explains that the loan's original effective interest rate becomes irrelevant once the recorded amount of the loan is adjusted for any changes in its fair value.
[Content amended as shown and moved from paragraph 310-10-35-31]
> > Disclosure—Application of the Term Portfolio Segment
326-20-55-10 This implementation guidance addresses the meaning of the term portfolio segment. All of the following are examples of portfolio segments:
- Type of {add glossary link}financing receivable{add glossary link}
- Industry sector of the borrower
- Risk rating
rate(s)
. [Content amended as shown and moved from paragraph 310-10-55-21]
> > Disclosure—Application of the Term Class of Financing Receivable
326-20-55-11 This implementation guidance addresses application of the term class of financing receivable. An entity should base its principal determination of class of financing receivable by disaggregating to the level that the entity uses when assessing and monitoring the risk and performance of the portfolio for various types of financing receivables. In its assessment, the entity should consider the risk characteristics of the financing receivables.
326-20-55-12 In determining the appropriate level of its internal reporting to use as a basis for disclosure, an entity should consider the level of detail needed by a user to understand the risks inherent in the entity's financing receivables. An entity could further disaggregate its financing receivables portfolio by considering numerous factors. Examples of factors that the entity should consider include any of the following:
a. Categorization of borrowers, such as any of the following:
1. Commercial loan borrowers
2. Consumer loan borrowers
3. Related party borrowers.
b. Type of financing receivable, such as any of the following:
1. Mortgage loans
2. Credit card loans
3. Interest-only loans
4. Finance leases.
c. Industry sector, such as either of the following:
1. Real estate
2. Mining.
d. Type of collateral, such as any of the following:
1. Residential property
2. Commercial property
3. Government-guaranteed collateral
4. Uncollateralized (unsecured) financing receivables.
e. Geographic distribution, including both of the following:
1. Domestic
2. International. [Content moved from paragraph 310-10-55-17]
326-20-55-13 An entity also may consider factors related to concentrations of credit risk as discussed in Section 825-10-55. [Content moved from paragraph 310-10-55-17]
326-20-55-14 Classes of financing receivables generally are a disaggregation of a
portfolio segment. For determining the appropriate classes of financing receivables that are related to a portfolio segment, the portfolio segment is the starting point with further disaggregation in accordance with the guidance in paragraphs
326-20-55-11 310-10-55-16
through
55-13 55-17
. The determination of class for financing receivables that are not related to a portfolio segment (because there is no associated allowance) also should be based on the guidance in those paragraphs.
[Content amended as shown and moved from paragraph 310-10-55-18]
> > Disclosure—Application of the Term Credit Quality Indicator
326-20-55-15 This implementation guidance addresses application of the term credit quality indicator. Examples of credit quality indicators include all of the following:
- Consumer credit risk scores
- Credit-rating-agency ratings
- An entity's internal credit risk grades
- Debt-to-value
Loan-to-value
ratios
- Collateral
- Collection experience
- Other internal metrics. [Content amended as shown and moved from paragraph 310-10-55-19]
326-20-55-16 An entity should use judgment in determining the appropriate credit quality indicator for each
{add glossary link}class of financing
receivable{add glossary link} receivables
and major security type. As of the balance sheet date, the entity should use the most current information it has obtained for each credit quality indicator.
[Content amended as shown and moved from paragraph 310-10-55-20]
> Illustrations
326-20-55-17 The following Examples illustrate certain initial and subsequent measurement guidance in this Subtopic to account for expected credit losses on financial assets:
- Example 1: Estimating expected credit losses using a loss-rate approach (collective evaluation)
- Example 2: Estimating expected credit losses using a loss-rate approach (individual evaluation)
- Example 3: Estimating expected credit losses on a vintage-year basis
- Example 4: Estimating expected credit losses using both a collective method and an individual asset method
- Example 5: Estimating expected credit losses for trade receivables using an aging schedule
- Example 6: Estimating expected credit losses—practical expedient for collateral-dependent financial assets
- Example 7: Estimating expected credit losses—practical expedient for financial assets with collateral maintenance provisions
- Example 8: Estimating expected credit losses when potential default is greater than zero, but expected nonpayment is zero
- Example 9: Recognizing writeoffs and recoveries
- Example 10: Applying expected credit losses to unconditionally cancellable loan commitments
- Example 11: Identifying purchased financial assets with credit deterioration
- Example 12: Recognizing purchased financial assets with credit deterioration
- Example 13: Using a loss-rate approach for determining expected credit losses and the discount rate on a purchased financial asset with credit deterioration
- Example 14: Using a discounted cash flow approach for determining expected credit losses and the discount rate on a purchased financial asset with credit deterioration
- Example 15: Disclosing credit quality indicators of financing receivables by amortized cost basis
- Example 16: Disclosing past-due status
- Example 17: Identifying similar risk characteristics in reinsurance receivables.
> > Example 1: Estimating Expected Credit Losses Using a Loss-Rate Approach (Collective Evaluation)
326-20-55-18 This Example illustrates one way an entity may estimate expected credit losses on a portfolio of loans with similar risk characteristics using a loss-rate approach.
326-20-55-19 Community Bank A provides 10-year amortizing loans to customers. Community Bank A manages those loans on a collective basis based on similar risk characteristics. The loans within the portfolio were originated over the last 10 years, and the portfolio has an amortized cost basis of $3 million.
326-20-55-20 After comparing historical information for similar financial assets with the current and forecasted direction of the economic environment, Community Bank A believes that its most recent 10-year period is a reasonable period on which to base its expected credit-loss-rate calculation after considering the underwriting standards and contractual terms for loans that existed over the historical period in comparison with the current portfolio. Community Bank A's historical lifetime credit loss rate (that is, a rate based on the sum of all credit losses for a similar pool) for the most recent 10-year period is 1.5 percent. The historical credit loss rate already factors in prepayment history, which it expects to remain unchanged. Community Bank A considered whether any adjustments to historical loss information in accordance with paragraph 326-20-30-8 were needed, before considering adjustments for current conditions and reasonable and supportable forecasts, but determined none were necessary.
326-20-55-21 In accordance with paragraph 326-20-55-4, Community Bank A considered significant factors that could affect the expected collectibility of the amortized cost basis of the portfolio and determined that the primary factors are real estate values and unemployment rates. As part of this analysis, Community Bank A observed that real estate values in the community have decreased and the unemployment rate in the community has increased as of the current reporting period date. Based on current conditions and reasonable and supportable forecasts, Community Bank A expects that there will be an additional decrease in real estate values over the next one to two years, and unemployment rates are expected to increase further over the next one to two years. To adjust the historical loss rate to reflect the effects of those differences in current conditions and forecasted changes, Community Bank A estimates a 10-basis-point increase in credit losses incremental to the 1.5 percent historical lifetime loss rate due to the expected decrease in real estate values and a 5-basis-point increase in credit losses incremental to the historical lifetime loss rate due to expected deterioration in unemployment rates. Management estimates the incremental 15-basis-point increase based on its knowledge of historical loss information during past years in which there were similar trends in real estate values and unemployment rates. Management is unable to support its estimate of expectations for real estate values and unemployment rates beyond the reasonable and supportable forecast period. Under this loss-rate method, the incremental credit losses for the current conditions and reasonable and supportable forecast (the 15 basis points) is added to the 1.5 percent rate that serves as the basis for the expected credit loss rate. No further reversion adjustments are needed because Community Bank A has applied a 1.65 percent loss rate where it has immediately reverted into historical losses reflective of the contractual term in accordance with paragraphs 326-20-30-8 through 30-9. This approach reflects an immediate reversion technique for the loss-rate method.
326-20-55-22 The expected loss rate to apply to the amortized cost basis of the loan portfolio would be 1.65 percent, the sum of the historical loss rate of 1.5 percent and the adjustment for the current conditions and reasonable and supportable forecast of 15 basis points. The allowance for expected credit losses at the reporting date would be $49,500.
> > Example 2: Estimating Expected Credit Losses Using a Loss-Rate Approach (Individual Evaluation)
326-20-55-23 This Example illustrates one way an entity may estimate expected credit losses on an individual loan using a loss-rate approach when no loans with similar risk characteristics exist.
326-20-55-24 Community Bank B principally provides residential real estate loans to borrowers in the community. In the current year, Community Bank B expanded a program to originate commercial loans. Community Bank B has a few commercial loans outstanding at period end. In evaluating the loans, Community Bank B determines that one of the commercial loans does not share similar risk characteristics with other loans outstanding; therefore, Community Bank B believes that it is inappropriate to pool this commercial loan for purposes of determining its allowance for credit losses. This commercial loan has an amortized cost of $1 million. Historical loss information for commercial loans in the community with similar risk characteristics shows a 0.50 percent loss rate over the contractual term.
326-20-55-25 Community Bank B considers relevant current conditions and reasonable and supportable forecasts that relate to its lending practices and environment and the specific borrower. Community Bank B determines that the significant factors affecting the performance of this loan are borrower-specific operating results and local unemployment rates. Community Bank B considers other qualitative factors including national macroeconomic conditions but determines that they are not significant inputs to the loss estimates for this loan.
326-20-55-26 Community Bank B is able to reasonably forecast local unemployment rates and borrower-specific financial results for one year only. Community Bank B's reasonable and supportable forecasts of those factors indicate that local unemployment rates are expected to remain stable (based on the main employer in the community continuing to operate normally) and that there will be a deterioration in the borrower's financial results (based on an evaluation of rent rolls). Management determines that no adjustment is necessary for local unemployment rates because they are expected to be consistent with the conditions in the 0.50 percent loss-rate estimate. However, the current and forecasted conditions related to borrower-specific financial results are different from the conditions in the 0.50 percent loss-rate estimate, based on borrower-specific information. Community Bank B determines that an upward adjustment of 10 basis points that is incremental to the historical lifetime loss information is appropriate based on those factors. Management estimates the 10-basis-point adjustment based on its knowledge of commercial loan loss history in the community when borrowers exhibit similar declines in financial performance. Management is unable to support its estimate of expectations for local unemployment and borrower-specific financial results beyond the reasonable and supportable forecast period. Under this loss-rate method, Community Bank B applies the same immediate reversion technique as in Example 1, where Community Bank B has immediately reverted into historical losses reflective of the contractual term in accordance with paragraphs 326-20-30-8 through 30-9.
326-20-55-27 The historical loss rate to apply to the amortized cost basis of the individual loan would be adjusted an incremental 10 basis points to 0.60 percent. The allowance for expected credit losses for the reporting period date would be $6,000.
> > Example 3: Estimating Expected Credit Losses on a Vintage-Year Basis
326-20-55-28 The following Example illustrates one way an entity might estimate the expected credit losses on a vintage-year basis.
326-20-55-29 Bank C is a lending institution that provides financing to consumers purchasing new or used farm equipment throughout the local area. Bank C originates approximately the same amount of loans each year. The four-year amortizing loans it originates are secured by collateral that provides a relatively consistent range of loan-to-collateral-value ratios at origination. If a borrower becomes 90 days past due, Bank C repossesses the underlying farm equipment collateral for sale at auction.
326-20-55-30 Bank C tracks those loans on the basis of the calendar year of origination. The following pattern of credit loss information has been developed (represented by the nonshaded cells in the accompanying table) based on the amount of amortized cost basis in each vintage that was written off as a result of credit losses.
326-20-55-31 In estimating expected credit losses on the remaining outstanding loans at December 31, 20X9, Bank C considers its historical loss information. It notes that the majority of losses historically emerge in Year 2 and Year 3 of the loans. It notes that historical loss experience has worsened since 20X3 and that loss experience for loans originated in 20X6 has already equaled the loss experience for loans originated in 20X5 despite the fact that the 20X6 loans will be outstanding for one additional year as compared with those originated in 20X5. In considering current conditions and reasonable and supportable forecasts, Bank C notes that there is an oversupply of used farm equipment in the resale market that is expected to continue, thereby putting downward pressure on the resulting collateral value of equipment. It also notes that severe weather in recent years has increased the cost of crop insurance and that this trend is expected to continue. On the basis of those factors, Bank C determines adjustments to historical loss information for current conditions and reasonable and supportable forecasts. The remaining expected losses (represented by the shaded cells in the table in paragraph 326-20-55-30 in each respective year) reflect those adjustments, and Bank C arrives at expected losses of $60, $260, $430, and $510 for loans originated in 20X6, 20X7, 20X8, and 20X9, respectively. Therefore, the allowance for credit losses for the reporting period date would be $1,260.
> > Example 4: Estimating Expected Credit Losses Using both a Collective Method and an Individual Asset Method
326-20-55-32 This Example illustrates a situation in which loans with credit deterioration are evaluated individually because they no longer exhibit risk characteristics similar to other loans. There is no requirement to evaluate financial assets individually when a certain level of credit deterioration has occurred. However, the assessment of whether financial assets exhibit similar risk characteristics should be based on the relevant and appropriate facts and circumstances.
326-20-55-33 An entity may estimate expected credit losses for some financial assets on a collective (pool) basis and may estimate expected credit losses for other assets on an individual basis when similar risk characteristics do not exist. As a result, the method used to estimate expected credit losses for a financial asset may change over time. For example, a pool of homogeneous loans may initially use a loss-rate method, but certain individual loans no longer may have similar risk characteristics because of credit deterioration. When a financial asset no longer shares similar risk characteristics with the original pool of financial assets, an entity should evaluate that financial asset to determine whether it shares risk characteristics similar to other pools of loans. Expected credit losses of that financial asset should be measured individually if there are no similar risk characteristics with other loans. A discounted cash flow approach is one method to estimate expected credit losses of individual loans, but it is not a required method. Paragraphs 326-20-55-34 through 55-36 illustrate those concepts.
326-20-55-34 One loan program from Bank D provides unsecured commercial loans of up to $75,000 to small businesses and entrepreneurs. Given the relative homogeneity of the borrowers (in terms of credit risk) and loans (in terms of type, amount, and underwriting standards) in the program, Bank D manages this loan program on a collective basis. However, Bank D concludes that the loss estimates for loans with credit deterioration is based on borrower-specific facts and circumstances because the repayment of those loans depends on facts and circumstances unique to each borrower. Therefore, Bank D estimates expected credit losses on an individual basis for loans that no longer exhibit similar risk characteristics because of credit deterioration. A loss-rate method for estimating expected credit losses on a pooled basis is applied for the loans in the portfolio segment that continue to exhibit similar risk characteristics.
326-20-55-35 To estimate expected credit losses for individual loans without similar risk characteristics, Bank D uses a discounted cash flow method for each loan. Frequently, Bank D has insight into the likelihood of a credit loss as a result of information provided by the borrower and recent discussions with the borrower given the elevated credit risk for these loans. Under a discounted cash flow method, the allowance for credit losses is estimated as the difference between the amortized cost basis and the present value of cash flows expected to be collected.
326-20-55-36 To estimate expected credit losses for the remainder of the loans that continue to exhibit similar risk characteristics, Bank D considers historical loss information (updated for current conditions and reasonable and supportable forecasts that affect the expected collectibility of the amortized cost basis of the pool) using a loss-rate approach.
> > Example 5: Estimating Expected Credit Losses for Trade Receivables Using an Aging Schedule
326-20-55-37 This Example illustrates one way an entity may estimate expected credit losses for trade receivables using an aging schedule.
326-20-55-38 Entity E manufactures and sells products to a broad range of customers, primarily retail stores. Customers typically are provided with payment terms of 90 days with a 2 percent discount if payments are received within 60 days. Entity E has tracked historical loss information for its trade receivables and compiled the following historical credit loss percentages:
- 0.3 percent for receivables that are current
- 8 percent for receivables that are 1–30 days past due
- 26 percent for receivables that are 31–60 days past due
- 58 percent for receivables that are 61–90 days past due
- 82 percent for receivables that are more than 90 days past due.
326-20-55-39 Entity E believes that this historical loss information is a reasonable base on which to determine expected credit losses for trade receivables held at the reporting date because the composition of the trade receivables at the reporting date is consistent with that used in developing the historical credit-loss percentages (that is, the similar risk characteristics of its customers and its lending practices have not changed significantly over time). However, Entity E has determined that the current and reasonable and supportable forecasted economic conditions have improved as compared with the economic conditions included in the historical information. Specifically, Entity E has observed that unemployment has decreased as of the current reporting date, and Entity E expects there will be an additional decrease in unemployment over the next year. To adjust the historical loss rates to reflect the effects of those differences in current conditions and forecasted changes, Entity E estimates the loss rate to decrease by approximately 10 percent in each age bucket. Entity E developed this estimate based on its knowledge of past experience for which there were similar improvements in the economy.
326-20-55-40 At the reporting date, Entity E develops the following aging schedule to estimate expected credit losses.
> > Example 6: Estimating Expected Credit Losses—Practical Expedient for Collateral-Dependent Financial Assets
326-20-55-41 This Example illustrates one way an entity may implement the guidance in paragraph 326-20-35-5 for estimating expected credit losses on a collateral-dependent financial asset for which the borrower is experiencing financial difficulty based on the entity's assessment.
326-20-55-42 Bank F provides commercial real estate loans to developers of luxury apartment buildings. Each loan is secured by a respective luxury apartment building. Over the past two years, comparable standalone luxury housing prices have dropped significantly, while luxury apartment communities have experienced an increase in vacancy rates.
326-20-55-43 At the end of 20X7, Bank F reviews its commercial real estate loan to Developer G and observes that Developer G is experiencing financial difficulty as a result of, among other things, decreasing rental rates and increasing vacancy rates in its apartment building.
326-20-55-44 After analyzing Developer G's financial condition and the operating statements for the apartment building, Bank F believes that it is unlikely Developer G will be able to repay the loan at maturity in 20X9. Therefore, Bank F believes that repayment of the loan is expected to be substantially through the foreclosure and sale (rather than the operation) of the collateral. As a result, in its financial statements for the period ended December 31, 20X7, Bank F utilizes the practical expedient provided in paragraph 326-20-35-5 and uses the apartment building's fair value, less costs to sell, when developing its estimate of expected credit losses.
> > Example 7: Estimating Expected Credit Losses—Practical Expedient for Financial Assets with Collateral Maintenance Provisions
326-20-55-45 This Example illustrates one way an entity may implement the guidance in paragraph 326-20-35-6 for estimating expected credit losses on financial assets with collateral maintenance provisions.
326-20-55-46 Bank H enters into a reverse repurchase agreement with Entity I that is in need of short-term financing. Under the terms of the agreement, Entity I sells securities to Bank H with the expectation that it will repurchase those securities for a certain price on an agreed-upon date. In addition, the agreement contains a provision that requires Entity I to provide security collateral that is valued daily, and the amount of the collateral is adjusted up or down to reflect changes in the fair value of the underlying securities transferred. This collateral maintenance provision is designed to ensure that at any point during the arrangement, the fair value of the collateral continually equals or is greater than the amortized cost basis of the reverse repurchase agreement.
326-20-55-47 At the end of the first reporting period after entering into the agreement with Entity I, Bank H evaluates the reverse repurchase agreement's collateral maintenance provision to determine whether it can use the practical expedient in accordance with paragraph 326-20-35-6 for estimating expected credit losses. Bank H determines that although there is a risk that Entity I may default, Bank H's expectation of nonpayment of the amortized cost basis on the reverse repurchase agreement is zero because Entity I continually adjusts the amount of collateral such that the fair value of the collateral is always equal to or greater than the amortized cost basis of the reverse repurchase agreement. In addition, Bank H continually monitors that Entity I adheres to the collateral maintenance provision. As a result, Bank H uses the practical expedient in paragraph 326-20-35-6 and does not record expected credit losses at the end of the first reporting period because the fair value of the security collateral is greater than the amortized cost basis of the reverse repurchase agreement. Bank H performs a reassessment of the fair value of collateral in relation to the amortized cost basis each reporting period.
> > Example 8: Estimating Expected Credit Losses When Potential Default Is Greater Than Zero, but Expected Nonpayment Is Zero
326-20-55-48 This Example illustrates one way, but not the only way, an entity may estimate expected credit losses when the expectation of nonpayment is zero. This example is not intended to be only applicable to U.S. Treasury securities.
326-20-55-49 Entity J invests in U.S. Treasury securities with the intent to hold them to collect contractual cash flows to maturity. As a result, Entity J classifies its U.S. Treasury securities as held to maturity and measures the securities on an amortized cost basis.
326-20-55-50 Although U.S. Treasury securities often receive the highest credit rating by rating agencies at the end of the reporting period, Entity J's management still believes that there is a possibility of default, even if that risk is remote. However, Entity J considers the guidance in paragraph 326-20-30-10 and concludes that the long history with no credit losses for U.S. Treasury securities (adjusted for current conditions and reasonable and supportable forecasts) indicates an expectation that nonpayment of the amortized cost basis is zero, even if the U.S. government were to technically default. Judgment is required to determine the nature, depth, and extent of the analysis required to evaluate the effect of current conditions and reasonable and supportable forecasts on the historical credit loss information, including qualitative factors. In this circumstance, Entity J notes that U.S. Treasury securities are explicitly fully guaranteed by a sovereign entity that can print its own currency and that the sovereign entity's currency is routinely held by central banks and other major financial institutions, is used in international commerce, and commonly is viewed as a reserve currency, all of which qualitatively indicate that historical credit loss information should be minimally affected by current conditions and reasonable and supportable forecasts. Therefore, Entity J does not record expected credit losses for its U.S. Treasury securities at the end of the reporting period. The qualitative factors considered by Entity J in this Example are not an all-inclusive list of conditions that must be met in order to apply the guidance in paragraph 326-20-30-10.
> > Example 9: Recognizing Writeoffs and Recoveries
326-20-55-51 This Example illustrates how an entity may implement the guidance in paragraphs 326-20-35-8 through 35-9 relating to writeoffs and recoveries of expected credit losses on financial assets.
326-20-55-52 Bank K currently evaluates its loan to Entity L on an individual basis because Entity L is 90 days past due on its loan payments and the loan no longer exhibits similar risk characteristics with other loans in the portfolio. At the end of December 31, 20X3, the amortized cost basis for Entity L's loan is $500,000 with an allowance for credit losses of $375,000. During the first quarter of 20X4, Entity L issues a press release stating that it is filing for bankruptcy. Bank K determines that the $500,000 loan made to Entity L is uncollectible. Bank K measures a full credit loss on the loan to Entity L and writes off its entire loan balance in accordance with paragraph 326-20-35-8, as follows:
During March 20X6, Bank K receives a partial payment of $50,000 from Entity L for the loan previously written off. Upon receipt of the payment, Bank K recognizes the recovery in accordance with paragraph 326-20-35-8, as follows:
Cash $50,000 Allowance for credit losses (recovery) $50,000
326-20-55-53 For its March 31, 20X6 financial statements, Bank K estimates expected credit losses on its financial assets and determines that the current estimate is consistent with the estimate at the end of the previous reporting period. During the period, Bank K does not record any change to its allowance for credit losses account other than the recovery of the loan to Entity L. To adjust its allowance for credit losses to reflect the current estimate, Bank K reports the following on March 31, 20X6:
Alternatively, Bank K could record the recovery of $50,000 directly as a reduction to credit loss expense, rather than initially recording the cash received against the allowance.
> > Example 10: Application of Expected Credit Losses to Unconditionally Cancellable Loan Commitments
326-20-55-54 This Example illustrates the application of the guidance in paragraph 326-20-30-11 for off-balance-sheet credit exposures that are unconditionally cancellable by the issuer.
326-20-55-55 Bank M has a significant credit card portfolio, including funded balances on existing cards and unfunded commitments (available credit) on credit cards. Bank M's card holder agreements stipulate that the available credit may be unconditionally cancelled at any time.
326-20-55-56 When determining the allowance for credit losses, Bank M estimates the expected credit losses over the remaining lives of the funded credit card loans. Bank M does not record an allowance for unfunded commitments on the unfunded credit cards because it has the ability to unconditionally cancel the available lines of credit. Even though Bank M has had a past practice of extending credit on credit cards before it has detected a borrower's default event, it does not have a present contractual obligation to extend credit. Therefore, an allowance for unfunded commitments should not be established because credit risk on commitments that are unconditionally cancellable by the issuer are not considered to be a liability.
> > Example 11: Identifying Purchased Financial Assets with Credit Deterioration
326-20-55-57 This Example illustrates factors that may be considered when assessing whether the purchased financial assets have more than an insignificant deterioration in credit quality since origination.
326-20-55-58 Entity N purchases a portfolio of financial assets subsequently measured at amortized cost basis with varying levels of credit quality. When determining which assets should be considered to be in the scope of the guidance for purchased financial assets with credit deterioration, Entity N considers the factors in paragraph 326-20-55-4 that are relevant for determining collectibility.
326-20-55-59 Entity N assesses what is more-than-insignificant credit deterioration since origination and considers the purchased assets with the following characteristics to be consistent with the factors that affect collectibility in paragraph 326-20-55-4. Entity N records the allowance for credit losses in accordance with paragraph 326-20-30-13 for the following assets:
- Financial assets that are delinquent as of the acquisition date
- Financial assets that have been downgraded since origination
- Financial assets that have been placed on nonaccrual status
- Financial assets for which, after origination, credit spreads have widened beyond the threshold specified in its policy.
326-20-55-60 Judgment is required when determining whether purchased financial assets should be recorded as purchased financial assets with credit deterioration. Entity N's considerations represent only a few of the possible considerations. There may be other acceptable considerations and policies applied by an entity to identify purchased financial assets with credit deterioration.
> > Example 12: Recognizing Purchased Financial Assets with Credit Deterioration
326-20-55-61 This Example illustrates application of the guidance to an individual purchased financial asset with credit deterioration.
326-20-55-62 Under paragraphs 326-20-30-13 and 310-10-35-53B, for purchased financial assets with credit deterioration, the discount embedded in the purchase price that is attributable to expected credit losses should not be recognized as interest income and also should not be reported as a credit loss expense upon acquisition.
326-20-55-63 Bank O records purchased financial assets with credit deterioration in its existing systems by recognizing the amortized cost basis of the asset, at acquisition, as equal to the sum of the purchase price and the associated allowance for credit loss at the date of acquisition. The difference between amortized cost basis and the par amount of the debt is recognized as a noncredit discount or premium. By doing so, the credit-related discount is not accreted to interest income after the acquisition date.
326-20-55-64 Assume that Bank O pays $750,000 for a financial asset with a par amount of $1 million. The instrument is measured at amortized cost basis. At the time of purchase, the allowance for credit losses on the unpaid principal balance is estimated to be $175,000. At the purchase date, the statement of financial position would reflect an amortized cost basis for the financial asset of $925,000 (that is, the amount paid plus the allowance for credit loss) and an associated allowance for credit losses of $175,000. The difference between par of $1 million and the amortized cost of $925,000 is a non-credit-related discount. The acquisition-date journal entry is as follows:
326-20-55-65 Subsequently, the $75,000 noncredit discount would be accreted into interest income over the life of the financial asset consistent with other Topics. The $175,000 allowance for credit losses should be updated in subsequent periods consistent with the guidance in Section 326-20-35, with changes in the allowance for credit losses on the unpaid principal balance reported immediately in the statement of financial performance as a credit loss expense.
> > Example 13: Using a Loss-Rate Approach for Determining Expected Credit Losses and the Discount Rate on a Purchased Financial Asset with Credit Deterioration
326-20-55-66 This Example illustrates the application of the guidance to determine the expected credit loss using a loss rate for an individual purchased financial asset with credit deterioration. The method applied to initially measure expected credit losses for purchased financial assets with credit deterioration generally would be applied consistently over time and should faithfully estimate expected credit losses for financial assets by applying this Subtopic. This does not mean that the application of a loss-rate approach is an irrevocable election.
326-20-55-67 Bank P purchases a $5 million amortizing nonprepayable loan with a 6 percent coupon rate and original contract term of 5 years. All contractual principal and interest payments due of $1,186,982 for each of the first 3 years of the loan's life have been received, and the loan has an unpaid balance of $2,176,204 at the purchase date at the beginning of Year 4 of the loan's life. The original contractual amortization schedule of the loan is as follows.
326-20-55-68 At the purchase date, the loan is purchased for $1,918,559 because significant credit events have been discovered. The purchaser expects a 10 percent loss rate, based on historical loss information over the contractual term of the loan, adjusted for current conditions and reasonable and supportable forecasts, for groups of similar loans. In accordance with paragraph 326-20-30-14, as a result of the expected credit losses, the allowance is estimated as $217,620 by multiplying the 10 percent loss rate by the unpaid principal balance, or par amount, of the loan (see beginning balance in Year 4 in the table above). The following journal entry is recorded at the acquisition of the loan:
326-20-55-69 The contractual interest rate is adjusted for the noncredit discount of $40,025 to determine the discount rate (consistent with paragraph 326-20-30-14) of 7.33 percent, which excludes the purchaser's assessment of expected credit losses at the acquisition date. The 7.33 percent (rounded from 7.3344 percent) is computed as the rate that equates the amortized cost of $2,136,179 (computed by adding the purchase price of $1,918,559 to the gross-up adjustment of $217,620) with the net present value of the remaining contractual cash flows on the purchased asset ($1,186,982 in each of Years 4 and 5).
326-20-55-70 A default occurs in the last year of the loan's life. The amortization of the purchased loan would be recorded as follows for the periods after the purchase date in Years 4 and 5 of the loan's life.
(a) The amortized cost at the purchase date is determined as the sum of the purchase price of $1,918,559 and the allowance for credit losses of $217,620.
(b) The cash received is consistent with the expectations at the purchase date.
(c) The writeoff represents the default in the final year of the loan that is written off.
(d) The interest income recognized is determined by multiplying the beginning amortized cost by the discount rate of 7.33 percent (as determined in accordance with paragraph 326-20-55-69).
(e) The reduction of amortized cost is determined as the sum of the cash received (b) and writeoffs recognized (c) (if any), less the interest income recognized (d). The writeoff in Year 5 represents the difference between the contractual cash flows of $1,186,982 and the actual cash flows of $969,362.
(f) The ending amortized cost is equal to the beginning amortized cost (a), less the amortized cost reduction (e).
326-20-55-71 The rollforward of the allowance would be as follows.
> > Example 14: Using a Discounted Cash Flow Approach for Determining Expected Credit Losses and the Discount Rate on a Purchased Financial Asset with Credit Deterioration
326-20-55-72 This Example illustrates the application of the guidance to determine the expected credit loss using a discounted cash flow approach for an individual purchased financial asset with credit deterioration. The method applied to initially measure expected credit losses for purchased financial assets with credit deterioration generally would be applied consistently over time and should faithfully estimate expected credit losses for financial assets by applying this Subtopic. This does not mean that the application of a discounted cash flow approach is an irrevocable election.
326-20-55-73 This Example uses the same assumptions as in Example 13, as described in paragraphs 326-20-55-66 through 55-71.
326-20-55-74 To determine the discount rate in accordance with paragraph 326-20-30-14, the expected cash flows would be estimated and discounted at a rate that equates the purchase price with the present value of expected cash flows. The expected cash flows, including the considerations for current conditions and reasonable and supportable forecasts, are expected to be $1,186,982 in Year 4 and $969,362 in Year 5. The discount rate that equates the purchase price with the cash flows expected to be collected is 8.46 percent (rounded from 8.455 percent). This also is the same rate that equates the amortized cost basis (purchase price plus the acquisition date allowance for credit losses) with the net present value of the future contractual cash flows.
326-20-55-75 To determine the allowance for credit losses at the purchase date, the expected credit loss (that is, the contractual cash that an entity does not expect to collect) is discounted using the discount rate of 8.46 percent. The expected credit loss is $217,620 in Year 5, as determined by finding the difference between the contractual cash flows of $1,186,982 and the expected cash flows of $969,362. The present value of the expected loss at the purchase date is $185,012. The journal entry to record the purchase of this loan is as follows:
326-20-55-76 The amortization of the loan in the years following the purchase date is as follows.
(a) The amortized cost at the purchase date is determined as the sum of the purchase price of $1,918,559 and the allowance for credit losses of $185,012.
(b) The cash received is consistent with the expectations at the purchase date.
(c) The writeoff represents the default in the final year of the loan that is written off.
(d) The interest income recognized is determined by multiplying the beginning amortized cost by the discount rate of 8.46 percent (as determined in accordance with paragraph 326-20-55-74).
(e) The reduction of amortized cost is determined as the sum of the cash received (b) and writeoffs recognized (c) (if any), less the interest income recognized (d). The writeoff in Year 5 represents the difference between the contractual cash flows of $1,186,982 and the actual cash flows of $969,362.
(f) The ending amortized cost is equal to the beginning amortized cost (a), less the amortized cost reduction (e).
326-20-55-77 The Day 1 allowance established at the purchase date was $185,012. The allowance for credit losses was estimated on a discounted cash flow approach and, therefore, the allowance for credit losses needs to be adjusted for the time value of money. The rollforward of the allowance for credit losses is shown below.
(a) The provision for credit losses in Years 4 and 5 is determined by multiplying the beginning allowance for credit losses by the discount rate of 8.46 percent to adjust for the time value of money.
(b) The writeoff represents the default in Year 5. The default is the difference between the Year 5 contractual cash flows of $1,186,982 and the actual cash flows received of $969,362.
326-20-55-78 The net income effect of a loss-rate approach illustrated in Example 13 and of a discounted cash flow approach illustrated in this Example is the same ($237,785 net income). The difference between the two approaches is that the Day 1 allowance for credit losses under a discounted cash flow approach explicitly reflects the time value of money. Therefore, it needs to be accreted to the future value of the loss that ultimately will occur. The change in the allowance for credit losses associated with the time value of money can be presented either as credit loss expense or as an adjustment to interest income in accordance with paragraph 326-20-45-3. Therefore, the discounted cash flow approach, over the life of the asset, presents interest income as $270,393 but will require $32,608 ($15,643 in Year 4 plus $16,965 in Year 5) of credit loss expense to be recorded for the time value of money, resulting in net interest income after credit loss expense of $237,785. Under a loss-rate approach as illustrated in Example 13, interest income over the life of the asset is $237,785 but does not require credit loss expense to be recognized.
> > Example 15: Disclosing Credit Quality Indicators of Financing Receivables by Amortized Cost Basis
326-20-55-79 The following Example illustrates the presentation of credit quality disclosures for a financial institution with a narrow range of loan products offered to local customers—both consumer and commercial. Depending on the size and complexity of an entity's portfolio of financing receivables, the entity may present disclosures that are more or less detailed than the following Example. An entity may choose other methods of determining the class of financing receivable and may determine different credit quality indicators that reflect how credit risk is monitored. Some entities may have more than one credit quality indicator for certain classes of financing receivables.
> > Example 16: Disclosing Past-Due Status
326-20-55-80 The following table illustrates certain of the disclosures in paragraph 326-20-50-14 by class of financing receivable.
> > Example 17: Identifying Similar Risk Characteristics in Reinsurance Receivables
326-20-55-81 Reinsurance receivables may comprise a variety of risks that affect collectibility including:
- Credit risk of the reinsurer/assuming company
- Contractual coverage disputes between the reinsurer/assuming company and the insurer/ceding company including contract administration issues
- Other noncontractual, noncoverage issues including reinsurance billing and allocation issues.
326-20-55-82 This Subtopic only requires measurement of expected losses related to the credit risk of the reinsurer/assuming company.
326-20-55-83 In situations in which similar risk characteristics are not present in the reinsurance receivables, the ceding insurer should measure expected credit losses on an individual basis. Similar risk characteristics may not exist because any one or a combination of the following factors exists, including, but not limited to:
- Customized reinsurance agreements associated with individual risk geographies
- Different size and financial conditions of reinsurers that may be either domestic or international
- Different attachment points among reinsurance agreements
- Different collateral terms of the reinsurance agreements (such as collateral trusts or letters of credit)
- The existence of state-sponsored reinsurance programs.
326-20-55-84 However, similar risk characteristics may exist for certain reinsurance receivables because any one or combination of the following exists:
- Reinsurance agreements that have standardized terms
- Reinsurance agreements that involve similar insured risks and underwriting practices
- Reinsurance counterparties that have similar financial characteristics and face similar economic conditions.
326-20-55-85 Judgment should be applied by ceding insurers in determining if and when similar risks exist within their reinsurance receivables.
19. Add Subtopic 326-30, with a link to transition paragraph 326-10-65-1, as follows:
[For ease of readability, the new Subtopic is not underlined, except for content moved from other paragraphs in the Codification.]
Financial Instruments—Credit Losses—Available-for-Sale Debt Securities
Overview and Background
General
326-30-05-1 This Subtopic provides guidance on how an entity should measure credit losses on available-for-sale debt securities.
Scope and Scope Exceptions
General
> Entities
326-30-15-1 The guidance in this Subtopic applies to all entities.
> Instruments
326-30-15-2 The guidance in this Subtopic applies to {add glossary link to 1st definition}debt securities{add glossary link to 1st definition} classified as available-for-sale securities, including {add glossry link to 2nd definition}loans{add glossry link to 2nd definition} that meet the definition of debt securities and are classified as available-for-sale securities.
Glossary
Amortized Cost Basis
The amortized cost basis is the amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, writeoffs, foreign exchange, and fair value hedge accounting adjustments.
Available-for-Sale Securities
Investments not classified as either trading securities or as held-to-maturity securities.
Debt Security (first definition)
Any security representing a creditor relationship with an entity. The term debt security also includes all of the following:
- Preferred stock that by its terms either must be redeemed by the issuing entity or is redeemable at the option of the investor
- A collateralized mortgage obligation (or other instrument) that is issued in equity form but is required to be accounted for as a nonequity instrument regardless of how that instrument is classified (that is, whether equity or debt) in the issuer's statement of financial position
- U.S. Treasury securities
- U.S. government agency securities
- Municipal securities
- Corporate bonds
- Convertible debt
- Commercial paper
- All securitized debt instruments, such as collateralized mortgage obligations and real estate mortgage investment conduits
- Interest-only and principal-only strips.
The term debt security excludes all of the following:
a. Option contracts
b. Financial futures contracts
c. Forward contracts
d. Lease contracts
e. Receivables that do not meet the definition of security and, so, are not debt securities (unless they have been securitized, in which case they would meet the definition of a security), for example:
1. Trade accounts receivable arising from sales on credit by industrial or commercial entities
2. Loans receivable arising from consumer, commercial, and real estate lending activities of financial institutions.
Effective Interest Rate
The rate of return implicit in the financial asset, that is, the contractual interest rate adjusted for any net deferred fees or costs, premium, or discount existing at the origination or acquisition of the financial asset. For purchased financial assets with credit deterioration, however, to decouple interest income from credit loss recognition, the premium or discount at acquisition excludes the discount embedded in the purchase price that is attributable to the acquirer's assessment of credit losses at the date of acquisition.
Fair Value (second definition)
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Financial Asset (first definition)
Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:
- Receive cash or another financial instrument from a second entity
- Exchange other financial instruments on potentially favorable terms with the second entity.
Holding Gain or Loss
The net change in fair value of a security. The holding gain or loss does not include dividend or interest income recognized but not yet received, writeoffs, or the allowance for credit losses.
Loan (second definition)
A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor's statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable.
Market Participants
Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics:
- They are independent of each other, that is, they are not related parties, although the price in a related-party transaction may be used as an input to a fair value measurement if the reporting entity has evidence that the transaction was entered into at market terms
- They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary
- They are able to enter into a transaction for the asset or liability
- They are willing to enter into a transaction for the asset or liability, that is, they are motivated but not forced or otherwise compelled to do so.
Orderly Transaction
A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale).
Purchased Financial Assets with Credit Deterioration
Acquired individual financial assets (or acquired groups of financial assets with shared risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer's assessment. See paragraph 326-20-55-5 for more information on the meaning of similar risk characteristics for assets measured on an amortized cost basis.
Related Parties
Related parties include:
- Affiliates of the entity
- Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity
- Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management
- Principal owners of the entity and members of their immediate families
- Management of the entity and members of their immediate families
- Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests
- Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Initial Measurement
General
326-30-30-1 Throughout this Subtopic, the term earnings shall be read as performance indicator, and other comprehensive income shall be read as outside the performance indicator for {add glossary link to 1st definition}debt securities{add glossary link to 1st definition} that are within the scope of Subtopic 958-320 on debt securities of not-for-profit entities.
> Purchased Financial Assets with Credit Deterioration
326-30-30-2 A purchased {add glossary link to 1st definition}debt security{add glossary link to 1st definition} classified as available-for-sale shall be considered to be a purchased financial asset with credit deterioration when the indicators of a credit loss in paragraph 326-30-55-1 have been met. The allowance for credit losses for purchased financial assets with credit deterioration shall be measured at the individual security level in accordance with paragraphs 326-30-35-3 through 35-10. The amortized cost basis for purchased financial assets with credit deterioration shall be considered to be the purchase price plus any allowance for credit losses. See paragraphs 326-30-55-1 through 55-7 for implementation guidance.
326-30-30-3 Estimated credit losses shall be discounted at the rate that equates the present value of the purchaser's estimate of the security's future cash flows with the purchase price of the asset.
326-30-30-4 An entity shall record the holding gain or loss through other comprehensive income, net of applicable taxes.
Subsequent Measurement
General
> Impairment of Individual Available-for-Sale Securities
> > Identifying and Accounting for Impairment
326-30-35-1 An investment is impaired if the
{add glossary link to 2nd definition}fair value
{add glossary link to 2nd definition} of the investment is less than its
cost
amortized cost basis.
[Content amended as shown and moved from paragraph 320-10-35-21]
326-30-35-2 For individual
securities
{add glossary link to 1st definition}debt securities{add glossary link to 1st definition} classified as
available-for-sale securities either available for sale or held to maturity
, an entity shall determine whether a decline in fair value below the amortized cost basis
has resulted from a credit loss or other factors. An entity shall record impairment relating to credit losses through an allowance for credit losses. However, the allowance shall be limited by the amount that the fair value is less than the amortized cost basis. Impairment that has not been recorded through an allowance for credit losses shall be recorded through other comprehensive income, net of applicable taxes. An entity shall consider the guidance in paragraphs 326-30-35-6 and 326-30-55-1 through 55-4 when determining whether a credit loss exists. is other than
temporary. Providing a general allowance for unidentified impairment in a
portfolio of securities is not appropriate.
[Content amended as shown and moved from paragraph 320-10-35-18]
326-30-35-3 At each reporting date, an entity shall record an allowance for credit losses that reflects the amount of the impairment related to credit losses, limited by the amount that fair value is less than the amortized cost basis. Changes in the allowance shall be recorded in the period of the change as credit loss expense (or reversal of credit loss expense).
326-30-35-4 Impairment shall be assessed at the individual security level (referred to as an investment). Individual security level means the level and method of aggregation used by the reporting entity to measure realized and unrealized gains and losses on its debt securities. (For example, debt securities
of an issuer
bearing the same Committee on Uniform Security Identification Procedures [CUSIP] number that were purchased in separate trade lots may be aggregated by a reporting entity on an average cost basis if that corresponds to the basis used to measure realized and unrealized gains and losses for the debt securities
of the issuer
.) Providing a general allowance for
an unidentified impairment in a portfolio of
debt securities is not appropriate.
[Content amended as shown and moved from paragraphs 320-10-35-18 and 320-10-35-20]
326-30-35-5 An entity shall not combine separate contracts (a debt security and a guarantee or other credit enhancement) for purposes of determining whether a debt security is impaired or can contractually be prepaid or otherwise settled in such a way that the entity would not recover substantially all of its cost. [Content moved from paragraph 320-10-35-23]
> > > Impairment in Earnings and Other Comprehensive Income
326-30-35-6 If an entity does not expect to recover the entire amortized cost
basis of the security, the entity would be unable to assert that it will recover its
amortized cost basis even if it does not intend to sell the security. Therefore, in
those situations, an other-than-temporary impairment shall be considered to have
occurred. In assessing whether
the entire amortized cost basis of the security will
be recovered,
In assessing whether a credit loss exists, an entity shall compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security,
the
entire amortized cost basis of the security will not be recovered (that is,
a credit loss exists
and an allowance for credit losses shall be recorded for the credit loss, limited by the amount that the {add glossary link to 2nd definition}fair value{add glossary link to 2nd definition} is less than amortized cost basis),
and an other than temporary impairment shall be considered to have occurred
.
Credit losses on an impaired security shall continue to be measured using the present value of expected future cash flows. [Content amended as shown and moved from paragraph 320-10-35-33C]
326-30-35-7 In determining whether a credit loss exists, an entity shall
consider the factors in paragraphs 326-30-55-1 through 55-4 and use its best estimate of the present value of cash flows expected to be collected from the
{add glossary link to 1st definition}debt security
{add glossary link to 1st definition}. One way of estimating that amount would be to consider the methodology described in
paragraphs 326-30-35-8 through 35-10. Section 310-10-35 for measuring an
impairment on the basis of the present value of expected future cash flows. That
Section provides guidance on this calculation.
Briefly, the entity would discount the expected cash flows at the
{add glossary link}effective interest rate
{add glossary link} implicit in the security at the date of acquisition.
[Content amended as shown and moved from paragraph 320-10-35-33D]
326-30-35-8 If a creditor bases its measure of loan impairment on a present
value calculation, the
The estimates of expected future cash flows shall be the
creditor's
entity's best estimate based on
past events, current conditions, and on reasonable and supportable
forecasts assumptions and projections
.
All available
Available evidence
, including estimated costs to sell if those costs are expected
to reduce the cash flows available to repay or otherwise satisfy the loan,
shall be considered in developing the estimate of expected future cash flows. The weight given to the
evidence
information used in the assessment shall be commensurate with the extent to which the evidence can be verified objectively. If
a creditor
an entity estimates a range for either the amount or timing of possible cash flows, the likelihood of the possible outcomes shall be considered in determining the best estimate of expected future cash flows.
[Content amended as shown and moved from paragraph 310-10-35-26]
326-30-35-9 In addition, a creditor shall consider all available information
reflecting past events and current conditions when developing the estimate of
expected future cash flows. All available
Available information would include existing environmental factors, for example, existing industry, geographical, economic, and political factors that are relevant to the collectibility of that
debt security loan and that indicate that it is probable that an asset had been impaired
at the date of the financial statements
.
[Content amended as shown and moved from paragraph 310-10-35-27]
326-30-35-10 If an entity intends to sell the debt security (that is, it has decided to sell the security),
or more likely than not will be required to sell the security before recovery of its amortized cost basis, any allowance for credit losses shall be written off and the amortized cost basis shall be written down to the debt security's fair value at the reporting date with any incremental impairment reported in earnings an other-than-temporary impairment shall be considered to
have occurred
.
[Content amended as shown and moved from 320-10-35-33A] If an entity does not intend to sell the debt security, the entity shall consider available evidence to assess whether it more likely than not will be required to sell the security before the recovery of its amortized cost basis (for example, whether its cash or working capital requirements or contractual or regulatory obligations indicate that the security will be required to be sold before
a
the forecasted recovery occurs).
If the entity more likely than not will be required to
sell the security before recovery of its amortized cost basis, an other-than-temporary impairment shall be considered to have occurred.
[Content amended as shown and moved from paragraph 320-10-35-33B] If an entity intends to
sell the security or more likely than not will be required to sell the security before
recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire
difference between the investment's amortized cost basis and its fair value at the
balance sheet date.
In assessing whether the entity more likely than not will be required to sell the security before recovery of its amortized cost basis
less any
current-period credit losses
, the entity shall consider the factors in
paragraphs 326-30-55-1 through 55-2 paragraph 320-10-35-33F
.
[Content amended as shown and moved from paragraph 320-10-35-34B]
326-30-35-11 If the
loan's
security's contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, for example, the prime rate, the London Interbank Offered Rate (LIBOR), or the U.S. Treasury bill weekly average, that
loan's
security's effective interest rate
(used to discount expected cash flows as described in paragraph 326-30-35-7) may be calculated based on the factor as it changes over the life of the
loan
security or may be fixed at the rate in effect at the date
an entity determines that the
loan
security has a credit loss as determined in accordance with meets the
impairment criterion in
paragraphs
326-30-35-1 through 35-2 310-10-35-16
through 35-17
. The
entity's creditor's
choice shall be applied consistently for all
loans
securities whose contractual interest rate varies based on subsequent changes in an independent factor. Projections of changes in the factor shall not be made for purposes of determining the effective interest rate or estimating expected future cash flows.
[Content amended as shown and moved from paragraph 310-10-35-28]
> Accounting for Debt Securities after a Credit Impairment
326-30-35-12 An entity shall reassess the credit losses each reporting period when there is an allowance for credit losses. An entity shall record subsequent changes in the allowance for credit losses on available-for-sale debt securities with a corresponding adjustment recorded in the credit loss expense on {add glossary link to available-for-sale securities}available-for-sale{add glossary link to available-for-sale securities} {add glossary link to 1st definition}debt securities{add glossary link to 1st definition}. An entity shall not reverse a previously recorded allowance for credit losses to an amount below zero.
326-30-35-13 An entity shall recognize writeoffs and recoveries of available-for-sale debt securities in accordance with paragraphs 326-20-35-8 through 35-9.
> Accounting after a Write-Down Resulting from an Intent to Sell or a More-Likely-Than-Not Requirement to Sell
326-30-35-14 The
Once an individual {add glossary link to 1st definition}debt security{add glossary link to 1st definition} has been written down in accordance with paragraph 326-30-35-10, the previous
{add glossary link} amortized cost basis
{add glossary link} less
the other-than-temporary
impairment recognized
writeoffs, including non-credit-related impairment reported in
earnings
earnings, shall become the new amortized cost basis of the investment. That new amortized cost basis shall not be adjusted for subsequent recoveries in
{add glossary link to 2nd definition}fair value
{add glossary link to second definition}.
However, the amortized cost basis shall be adjusted for
accretion and amortization as prescribed in paragraph 320-10-35-35.
[Content amended as shown and moved from paragraph 320-10-35-34E]
326-30-35-15 In periods after the recognition of an other-than-temporary
impairment loss for debt securities, an entity shall account for the other-than temporarily impaired debt security as if the debt security had been purchased on
the measurement date of the other-than-temporary impairment at an amortized
cost basis equal to the previous amortized cost basis less the other-than-temporary impairment recognized in earnings.
For debt securities for which
other-than-temporary
impairments were
recognized
reported in earnings
as a writeoff because of an intent to sell or a more-likely-than-not requirement to sell, the difference between the new amortized cost basis and the cash flows expected to be collected shall be accreted in accordance with existing applicable guidance as interest income. An entity shall continue to estimate the present value of cash flows expected to be collected over the life of the debt security. For debt securities accounted for in accordance with Subtopic 325-40, an entity should look to that Subtopic to account for changes in cash flows expected to be collected. For all other debt securities, if upon subsequent evaluation, there is a significant increase in the cash flows expected to be collected or if actual cash flows are significantly greater than cash flows previously expected,
such
those changes shall be accounted for as a prospective adjustment to the
accretable
yield
in accordance with Subtopic 310-30 even if the debt security would not
otherwise be within the scope of that Subtopic
. Subsequent increases
and
decreases (if not other-than-temporary impairment)
in the fair value of available-for-sale securities
after the write-down shall be included in other comprehensive income. (This Section does not address when a holder of a debt security would place a debt security on nonaccrual status or how to subsequently report income on a nonaccrual debt security.)
[Content amended as shown and moved from paragraph 320-10-35-35]
> Purchased Financial Assets with Credit Deterioration
326-30-35-16 An entity shall measure changes in the allowance for credit losses on a purchased financial asset with credit deterioration in accordance with paragraph 326-30-35-6. The entity shall report changes in the allowance for credit losses in net income as credit loss expense (or reversal of credit loss expense) in each reporting period.
326-30-35-17 This Subtopic does not address how an entity shall recognize interest income. See paragraphs 310-10-35-53A through 35-53C for guidance on recognition of interest income on purchased financial assets with credit deterioration.
Other Presentation Matters
General
326-30-45-1 An entity shall present {add glossary link to available-for-sale securities}available-for-sale{add glossary link to available-for-sale securities} {add glossary link to 1st definition}debt securities{add glossary link to 1st definition} on the statement of position at {add glossary link to 2nd definition}fair value{add glossary link to 2nd definition}. In addition, an entity shall present parenthetically the amortized cost basis and the allowance for credit losses.
326-30-45-2 An entity shall separately present, in the financial statement in which the components of accumulated other comprehensive income are reported, amounts
recognized
reported therein related to
held-to-maturity and
availablefor-sale debt securities for which
an allowance for credit losses has been recorded a portion of an other-than-temporary impairment has been recognized
in earnings
.
[Content amended as shown and moved from paragraph 320-10-45-9A]
326-30-45-3 When an entity applies the guidance in paragraph 326-30-35-7, the change in present value of cash flows expected to be collected from one reporting period to the next may result not only from the passage of time but also from changes in estimates of the timing or amount of expected future cash flows. An entity is permitted to report the entire change in present value as a credit loss expense (or a reversal of credit loss expense). Alternatively, an entity may report the change in present value attributable to the passage of time as interest income. See paragraph 326-30-50-8 for a disclosure requirement applicable to creditors that choose the latter alternative and report changes in present value attributable to the passage of time as interest income.
Disclosure
General
> General
326-30-50-1 For instruments within the scope of this Subtopic, this Section provides the following disclosure guidance related to credit risk and the measurement of credit losses:
- {add glossary link to available-for-sale securities}Available-for-sale{add glossary link to available-for-sale securities}{add glossary link to 1st definition}debt securities{add glossary link to 1st definition} in unrealized loss positions without an allowance for credit losses
- Allowance for credit losses
- Purchased financial assets with credit deterioration.
326-30-50-2 The disclosure guidance in this Section should enable a user of the financial statements to understand the following:
- The credit risk inherent in available-for-sale debt securities
- Management's estimate of credit losses
- Changes in the estimate of credit losses that have taken place during the period.
326-30-50-3 An entity shall determine, in light of the facts and circumstances, how much detail it must provide to satisfy the disclosure requirements in this Section and how it disaggregates information into major security types. An entity must strike a balance between obscuring important information as a result of too much aggregation and overburdening financial statements with excessive detail that may not assist a financial statement user to understand an entity's securities and allowance for credit losses. For example, an entity should not obscure important information by including it with a large amount of insignificant detail. Similarly, an entity should not disclose information that is so aggregated that it obscures important differences between the different types of {add glossary link to 1st definition}financial assets{add glossary link to 1st definition} and associated risks.
> Available-for-Sale Debt Securities in Unrealized Loss Positions without an Allowance for Credit Losses
326-30-50-4 For all investments in an unrealized loss position, including those
that fall within the scope of Subtopic 325-40, for which other-than-temporary
impairments have not been recognized in earnings (including investments for
which a portion of an other-than-temporary impairment has been recognized in
other comprehensive income)
For {add glossary link to available-for-sale securities}available-for-sale{add glossary link to available-for-sale securities}{add glossary link to 1st definition}debt securities{add glossary link to 1st definition}, including those that fall within the scope of Subtopic 325-40 on beneficial interests in securitized financial assets, in an unrealized loss position for which an allowance for credit losses has not been recorded, an entity shall disclose all of the following in its interim and annual financial statements:
a. As of each date for which a statement of financial position is presented, quantitative information, aggregated by category of investment—each major security type that the entity discloses in accordance with this Subtopic—in tabular form:
1. The aggregate related{add glossary link to 2nd definition}fair value{add glossary link to 2nd definition} of investments with unrealized losses
2. The aggregate amount of unrealized losses (that is, the amount by which {add glossary link}amortized cost basis{add glossary link} exceeds fair value).
b. As of the date of the most recent statement of financial position, additional information (in narrative form) that provides sufficient information to allow
a financial statement
user users
to understand the quantitative disclosures and the information that the entity considered (both positive and negative) in reaching the conclusion that
an allowance for credit losses is unnecessary. the impairment or
impairments are not other-than-temporary. (The application of Step 2 in
paragraph 320-10-35-30 shall provide insight into the entity's rationale
for concluding that unrealized losses are not other-than-temporary
impairments.
The disclosures required may be aggregated by investment categories, but individually significant unrealized losses generally shall not be
aggregated. aggregated.)
This disclosure could include all of the following:
1. The nature of the investment(s)
2. The cause(s) of the impairment(s)
3. The number of investment positions that are in an unrealized loss position
4. The severity
and duration
of the impairment(s)
5. Other evidence considered by the investor in reaching its conclusion that
the investment is not other-than-temporarily
impaired
an allowance for credit losses is not necessary, including, for example, any of the following:
i. Performance indicators of the underlying assets in the security, including any of the following:
01. Default rates
02. Delinquency rates
03. Percentage of nonperforming assets.
ii.
Loan
Debt-to-collateral-value ratios
iii. Third-party guarantees
iv. Current levels of subordination
v. Vintage
vi. Geographic concentration
vii. Industry analyst reports
viii.
Sector credit
Credit ratings
ix. Volatility of the security's fair value
x.
Any other information that the investor considers relevant.
Interest rate changes since purchase
xi. Any other information that the investor considers relevant. [Content amended as shown and moved from paragraph 320-10-50-6]
326-30-50-5 The disclosures in (a)(1) through (a)(2) in
the preceding
paragraph
326-30-50-
4 shall be
disaggregated segregated
by those investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or longer.
[Content amended as shown and moved from paragraph 320-10-50-7]
326-30-50-6 The reference point for determining how long an investment has been in a continuous unrealized loss position is the balance sheet date of the reporting period in which the impairment is identified. For entities that do not prepare interim financial information, the reference point is the annual balance sheet date of the period during which the impairment was identified. The continuous unrealized loss position ceases upon
the investor becoming aware of a recovery of fair value up to (or beyond) the amortized cost basis of the investment during the period. either of the following:
a. The recognition of the total amount by which amortized cost basis
exceeds fair value as an other-than-temporary impairment in earnings
b. The investor becoming aware of a recovery of fair value up to (or
beyond) the amortized cost basis of the investment during the period.
[Content amended as shown and moved from paragraph 320-10-50-8]
> Allowance for Credit Losses
326-30-50-7 For interim and annual periods in which an
other-than-temporary
impairment
allowance for credit losses of
a
an {add glossary link to available-for-sale securities}available-for-sale{add glossary link to available-for-sale securities} {add glossary link to 1st definition}debt security
{add glossary link to 1st definition} is
recorded recognized and only the amount related to a credit
loss was recognized in earnings
, an entity shall disclose by major security type, the methodology and significant inputs used to measure the amount related to credit loss
, including its accounting policy for recognizing writeoffs of uncollectible available-for-sale debt securities. Examples of significant inputs include, but are not limited to, all of the following:
a. Performance indicators of the underlying assets in the security, including all of the following:
1. Default rates
2. Delinquency rates
3. Percentage of nonperforming assets
b.
Loan
Debt-to-collateral-value ratios
c. Third-party guarantees
d. Current levels of subordination
e. Vintage
f. Geographic concentration
g.
Credit ratings.
Industry analyst reports and forecasts
h. Credit ratings
i. Other market data that are relevant to the collectibility of the security.
[Content amended as shown and moved from paragraph 320-10-50-8A]
326-30-50-8 Paragraph 326-30-45-3 explains that an entity may report the change in the allowance for credit losses due to changes in time value as credit loss expense (or reversal of credit loss expense) but also may report the change as interest income. An entity that chooses the latter alternative shall disclose the amount recorded to interest income that represents the change in present value attributable to the passage of time.
> > Rollforward of the Allowance for Credit Losses
326-30-50-9 For each interim and annual reporting period presented, an entity shall disclose
by major security type, a tabular rollforward of the
amount related
to
allowance for credit losses
recognized in earnings in accordance with
paragraph 320-10-35-34D
, which shall
include
include, at a minimum, all of the following:
a. The beginning balance of the
amount related to
allowance for credit losses on
{add glossary link to available-for-sale securities}available-for-sale{add glossary link to available-for-sale securities} {add glossary link to 1st defintion}debt securities
{add glossary link to 1st definition} held by the entity at the beginning of the period
for which a portion of an other-than-temporary impairment was
recognized in other comprehensive income
b. Additions
to for
the
amount related to the
allowance for credit
losses on securities loss
for which
an other-than-temporary impairment
credit losses were was
not previously
recorded recognized
c. Additions to the allowance for credit losses arising from purchases of available-for-sale debt securities accounted for as purchased financial assets with credit deterioration (including beneficial interests that meet the criteria in paragraph 325-40-30-1A)
d. c.
Reductions for securities sold during the period (realized)
e. d.
Reductions
for securities for which the amount previously recognized in
other comprehensive income was recognized in earnings
in the allowance for credit losses because the entity intends to sell the security or more likely than not will be required to sell the security before recovery of its
{add glossary link}amortized cost basis
{add glossary link}
f. e.
If the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, additional increases
or decreases to the amount related
to the
allowance for credit
losses on securities that had an allowance recorded in a previous period loss for which an
other-than-temporary impairment was previously recognized
f.
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security (see paragraph 320-10-35-35)
g. Writeoffs charged against the allowance
h. Recoveries of amounts previously written off
i. g.
The ending balance of the
amount related to
allowance for credit losses
on
related to debt securities held by the entity at the end of the period
for which a portion of an other-than-temporary impairment was
recognized in other comprehensive income
.
[Content amended as shown and moved from paragraph 320-10-50-8B]
> Purchased Financial Assets with Credit Deterioration
326-30-50-10 To the extent an entity acquired purchased financial assets with credit deterioration during the current reporting period, an entity shall provide a reconciliation of the difference between the purchase price of the assets and the par value of the {add glossary link to available-for-sale securities}available-for-sale{add glossary link to available-for-sale securities} {add glossary link to 1st definition}debt securities{add glossary link to 1st definition}, including:
- The purchase price
- The allowance for credit losses at the acquisition date based on the acquirer's assessment
- The discount (or premium) attributable to other factors
- The par value.
Implementation Guidance and Illustrations
General
> Implementation Guidance
> > Information Considered When Estimating Credit Losses
326-30-55-1 There are numerous factors to be considered
when estimating
in determining whether a credit loss exists
and the period over which the debt
security is expected to recover
.
The length of time a security has been in an unrealized loss position should not be a factor, by itself or in combination with others, that an entity would use to conclude that a credit loss does not exist. The following list is not meant to be all inclusive. All of the following factors
shall
should be considered:
a. The
length of time and the
extent to which the
{add glossary link to 2nd definition}fair value
{add glossary link to 2nd definition} has been
is less than the
{add glossary link}amortized cost basis
{add glossary link}
b. Adverse conditions specifically related to the security, an industry, or geographic area; for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed {add glossary link to 1st definition}debt security{add glossary link to 1st definition}, changes in the financial condition of the underlying {add glossary link to 2nd definition}loan{add glossary link to 2nd definition} obligors.
Examples of those changes include any of the following:
1. Changes in technology
2. The discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security
3. Changes in the quality of the credit enhancement.
c. The historical and implied volatility of the fair value of the security
d.
c. The payment structure of the debt security (for example, nontraditional loan terms as described in paragraphs 825-10-55-1 through 55-2
and
310-10-50-25
) and the likelihood of the issuer being able to make payments that increase in the future
e.
d. Failure of the issuer of the security to make scheduled interest or principal payments
f.
e. Any changes to the rating of the security by a rating agency
g. Recoveries or additional declines in fair value after the balance sheet
date
.
[Content amended as shown and moved from paragraph 320-10-35-33F]
326-30-55-2 In making its other-than-temporary impairment assessment, an
An entity
shall
should consider
all
available information relevant to the collectibility of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of cash flows expected to be collected. That information
shall
should include all of the following:
- The remaining payment terms of the security
- Prepayment speeds
- The financial condition of the issuer(s)
- Expected defaults
- The value of any underlying collateral. [Content amended as shown and moved from paragraph 320-10-35-33G]
326-30-55-3 To achieve the objective in
the preceding
paragraph
326-30-55-2, the entity
shall
should consider, for example, all of the following
to the extent they influence the estimate of expected cash flows on a security:
- Industry analyst reports and forecasts
-
Sector credit
Credit ratings
- Other market data that are relevant to the collectibility of the security. [Content amended as shown and moved from paragraph 320-10-35-33H]
326-30-55-4 An entity also
shall
should consider how other credit enhancements affect the expected performance of the security, including consideration of the current financial condition of the guarantor of a security (if the guarantee is not a separate contract as discussed in paragraph
326-30-35-5 320-10-35-23
)
, the willingness of the guarantor to pay, and/or whether any subordinated interests are capable of absorbing estimated losses on the loans underlying the security. The remaining payment terms of the security could be significantly different from the payment terms in prior periods (such as for some securities backed by nontraditional loans; see paragraph 825-10-55-1). Thus, an entity
shall
should consider whether a security backed by currently performing loans will continue to perform when required payments increase in the future (including balloon payments). An entity also
shall
should consider how the value of any collateral would affect the expected performance of the security. If the fair value of the collateral has declined, an entity
shall
should assess the effect of that decline on
the
its ability
of the entity
to collect the balloon payment.
[Content amended as shown and moved from paragraph 320-10-35-33I]
> Illustrations
> > Example 1: Identifying Purchased Financial Assets with Credit Deterioration
326-30-55-5 This Example illustrates one way an entity may identify purchased financial assets with credit deterioration.
326-30-55-6 Entity A purchases a portfolio of debt securities with varying levels of credit quality that it classifies as available for sale. When determining which individual available-for-sale debt securities should be considered to be in the scope of the guidance for purchased financial assets with credit deterioration, Entity A considers the indicators of impairment in paragraph 326-30-55-1. Entity A also considers its practices for identifying credit losses on available-for-sale debt securities. If Entity A determines that, on an individual basis, the purchased debt securities are purchased financial assets with credit deterioration, it should classify them as such.
326-30-55-7 Entity A also considers the securities that are within the scope of Subtopic 325-40 on beneficial interests in securitized financial assets. Entity A purchases a residual tranche and determines that there is a significant difference between contractual cash flows and expected cash flows. In accordance with paragraph 325-40-30-1A(a), Entity A applies the accounting for purchased financial assets with credit deterioration to the residual tranche.
> > Example 3
2: Disclosures about Investments in Available-for-Sale Debt Securities in an Unrealized Loss Position with No Credit Losses Reported That Are Not Other-Than-Temporarily Impaired
326-30-55-8 This Example illustrates the guidance in Section
326-30-50 320-10-50
with a table followed by illustrative narrative disclosures. The
following
table shows the gross unrealized losses and fair value of Entity
B's A's
investments with unrealized losses that are not deemed to
have credit losses be other-than-temporarily impaired
(in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 20X3. This Example illustrates the application of paragraphs
326-30-50-4 through 50-6 320-10-50-6 through 50-8
and, in doing so, describes
Entity B's the investor's
rationale for not
recognizing
reporting all
or a portion of unrealized losses presented in the table as
credit losses other-than-temporary impairments
. In the application of paragraph
326-30-50-4(b) 320-10-50-6(b)
,
Entity B the investor shall
should provide meaningful disclosure about individually significant unrealized losses. To facilitate the narrative disclosures and for simplicity, this Example presents only the quantitative information as of the date of the latest statement of financial position. However,
pursuant to
in accordance with paragraphs
326-30-50-4 through 50-6 320-10-50-6 through 50-8
, that information is required as of each date for which a statement of financial position is presented
, except in the period of initial application of the other-thantemporary impairment guidance in this Subtopic
.
[Content amended as shown and moved from paragraph 320-10-55-22]
326-30-55-9 Following are illustrative narrative disclosures that would follow the illustrative table.
U.S. Treasury obligations. The unrealized losses on Entity
B's A's
investments in U.S. Treasury obligations and direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments.
Because
Entity
B A
does not intend to sell the investments and it is not more likely than not that Entity
B A
will be required to sell the investments before recovery of their amortized cost bases
,
which may be maturity, Entity A does not consider those investments to be otherthan-temporarily impaired at December 31, 20X3
.
Federal agency mortgage-backed securities. The unrealized losses on Entity
B's A's
investment in federal agency mortgage-backed securities were caused by interest rate increases. Entity
B A
purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of Entity
B's A's
investments.
Because the decline in fair value is
attributable to changes in interest rates and not credit quality, and because
Entity
B A
does not intend to sell the investments and it is not more likely than not that Entity
B A
will be required to sell the investments before recovery of their amortized cost bases
, which may be maturity, Entity A does not consider those
investments to be other-than-temporarily impaired at December 31, 20X3
.
Corporate bonds. Entity
B's A's
unrealized loss on investments in corporate bonds relates to a $150 investment in Entity
C's B's
Series C Debentures. Entity
C B
is a manufacturer. The unrealized loss was primarily caused by a recent decrease in profitability and near-term profit forecasts by industry analysts resulting from intense competitive pricing pressure in the manufacturing industry and a recent sector downgrade by several industry analysts. The contractual terms of those investments do not permit Entity
C B
to settle the security at a price less than the amortized cost basis of the investment. While Entity
C's B's
credit rating has decreased from A to BBB (Standard & Poor's), Entity
B A
currently does not expect Entity
C B
to settle the debentures at a price less than the amortized cost basis of the investment (that is, Entity
B A
expects to recover the entire amortized cost basis of the security).
Because
Entity
B A
does not intend to sell the investment and it is not more likely than not that Entity
B A
will be required to sell the investment before recovery of its amortized cost basis
,
which may be maturity, it does not consider the investment in Entity B's
debentures to be other-than-temporarily impaired at December 31, 20X3
.
[Content amended as shown and moved from paragraph 320-10-55-23]