ASC 310-40 (see subtopic related to troubled debt restructuring) and ASC 360-10 (see section related to impairment or disposal of long-lived assets) provide guidance on accounting for and reporting of repossessed or foreclosed assets, whether or not formal foreclosure proceedings take place.

ASC 310-40-40-3 stipulates that "A creditor that receives long-lived assets that will be sold from a debtor in full satisfaction of a receivable shall account for those assets at their fair value less cost to sell, as that term is used in ASC 360-10-35-43." ASC 360-10-35-43 states that "A long-lived asset (disposal group) classified as held for sale shall be measured at the lower of cost of its carrying amount or fair value less cost to sell. If the asset (disposal group) is newly acquired, the carrying amount of the asset (disposal group) shall be established based on its fair value less cost to sell at the acquisition date. A long-lived asset shall not be depreciated (amortized) while it is classified as held for sale." See ARM 3560.45 for information on reclassification of residential real estate collateralized commercial loans upon foreclosure.

Upon receipt of the long-lived asset, it should be recorded at the fair value of the asset less the estimated cost to sell, and the loan account reduced for the remaining balance of the loan. This transfer at fair value results in a new cost basis for the asset (often referred to as 'Other Real Estate Owned' or 'OREO').

The amount by which the recorded investment in the loan exceeds the fair value (net of estimated cost to sell) of the OREO is charged to the ALLL. Conversely, the amount by which the fair value (net of estimated cost to sell) of the OREO exceeds the recorded investment in the loan should be recorded at the time of foreclosure as a recovery of previous amounts charged-off (up to the original cost basis of the loan) and gain on disposition of loans thereafter. The recorded investment in the loan is the remaining face amount increased or decreased by applicable interest and unamortized premiums, discounts, finance charges or acquisition costs, and may also reflect a previous direct write-down on the loan.

Subsequent declines in the fair value of OREO below the new cost basis are recorded through the use of a valuation allowance. Changes in fair value must be determined on a property-by-property basis. An allowance allocated to one property may not be used to offset losses incurred on another property. Unallocated valuation allowances are not acceptable. Subsequent increases in the fair value of a property may be used to reduce the allowance, but only to an extent that results in the OREO being valued at the same amount that was determined at the foreclosure date (ASC 310-40-55-15} provides the basis for this conclusion).

Although the fair value of the OREO normally will be determined by an appraisal (or other evaluation), circumstances may justify other approaches in establishing the fair value. The OCC has commented that the fair value determined in the appraisal should be scrutinized closely. If concern exists about the accuracy of the appraisal, further analysis should be performed.

Sales of OREO are accounted for in accordance with ASC 360-20, Property, Plant and Equipment, Real Estate Sales.