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Amendments to Subtopic 326-20
Publication date: 26 Nov 2019
us FASB ASU 2019-11
4. Amend paragraph 326-20-30-13 and add paragraphs 326-20-30-13A and 326-20-55-86 through 55-90 and their related headings, with a link to transition paragraph 326-10-65-4, as follows:
Financial Instruments—Credit Losses—Measured at Amortized Cost
Initial Measurement
> 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,
30-10 and
326-20-30-12, and 326-20-30-13A. 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.326-20-30-13A The allowance for credit losses for purchased financial assets with credit deterioration shall include expected recoveries of amounts previously written off and expected to be written off by the entity and shall not exceed the aggregate of amounts previously written off and expected to be written off by the entity.
- If the entity estimates expected credit losses using a method other than a discounted cash flow method in accordance with paragraph 326-20-30- 4, expected recoveries shall not include any amounts that result in an acceleration of the noncredit discount.
- The entity may include increases in expected cash flows after acquisition.
(See Examples 18 and 19 in paragraphs 326-20-55-86 through 55-90.)
Implementation Guidance and Illustrations
> Illustrations
> > Example 18: Determining the Negative Allowance for Purchased Financial Assets with Credit Deterioration with No Change in Credit Conditions
326-20-55-86 The following Example illustrates the application of the guidance in paragraph 326-20-30-13A for purchased financial assets with credit deterioration. For purposes of this Example, the acquired portfolio of loans is assumed to share similar risk characteristics and is evaluated for credit losses on a collective basis.
326-20-55-87 Bank Q purchases a portfolio of loans with a par amount of $10 million for $2 million. At acquisition, Bank Q expects to collect $2.5 million on the loan portfolio. Bank Q estimates expected credit losses using a method other than a discounted cash flow method in accordance with paragraph 326-20-30-4. The acquisition-date journal entry is as follows.
[For ease of readability, the new journal entries in Examples 18 and 19 are not underlined.]
Loan—par amount | $ 10,000,000 | |
Loan—noncredit discount | $ 500,000 | |
Allowance for credit losses | 7,500,000 | |
Cash | 2,000,000 |
326-20-55-88 After acquisition, Bank Q determines that each loan is deemed uncollectible on an individual unit-of-account basis and, therefore, writes off the loan portfolio. The following journal entries are recorded.
Provision expense | $ 2,000,000 | |
Allowance for credit losses | $ 2,000,000 | |
Allowance for credit losses | $ 9,500,000 | |
Loan—noncredit discount | 500,000 | |
Loan—par amount | $ 10,000,000 |
326-20-55-89 Although deemed uncollectible on an individual basis, when grouped together, the group of loans is expected to have some recoveries on an aggregate basis. Therefore, Bank Q records a negative allowance in accordance with paragraph 326-20-30-13A. Because Bank Q’s expectation of credit conditions has not changed since acquisition, the expected recoveries of $2.5 million must not result in the acceleration of the noncredit discount that existed immediately before being written off. Therefore, the following journal entry is recorded.
Allowance for credit losses | $ 2,000,000 | |
Provision expense | $ 2,000,000 |
> > Example 19: Determining the Negative Allowance for Purchased Financial Assets with Credit Deterioration after a Change in Credit Conditions
326-20-55-90 Assume the same facts from Example 18. Bank Q subsequently determines that a change in credit conditions has occurred and expects to collect an additional $600,000 (for a total of $3.1 million) on the group of loans. Because Bank Q’s expectation of credit conditions has changed and it is determining the amount that it expects to collect using a method other than a discounted cash flow method, the expected recoveries of $3.1 million would be reduced by the noncredit discount of $0.5 million (that has not been accreted). This would result in Bank Q having an overall negative allowance of $2.6 million. Therefore, the following journal entry is recorded.
Allowance for credit losses | $ 600,000 | |
Provision expense | $ 600,000 |
Copyright #year# by Financial Accounting Foundation, Norwalk, Connecticut.
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