Search within this section
Select a section below and enter your search term, or to search all click Accounting and reporting manual (ARM)
Favorited Content
.511 Scope
Publication date: 17 Dec 2019
us Impairment (pre-ASC 326) ARM 3560.511
In general, all impaired loans, whether acquired in a business combination or in a transfer of financial assets accounted for as a sale (i.e., purchase for the creditor), are subject to ASC 310-30. This guidance addresses the accounting for acquired loans that show evidence of deterioration in credit quality since their origination, for which it is probable at acquisition that the investor will be unable to collect all contractually required payments receivables. Deterioration may be evidenced by such observable information as nonperforming status, delinquency, low or falling credit scores or risk ratings, and/or decline in value of collateral. ASC 310-30 does not apply to loans originated by the reporting entity. ASC 310-30 applies to all nongovernmental entities, including not-for-profit organizations that acquire loans with evidence of credit deterioration.
Investors are required to assess loans individually to determine if they are within the scope of ASC 310-30. An acquirer of a portfolio of loans, which may predominantly include good quality loans, should be alert to identifying impaired loans acquired that would be subject to ASC 310-30. See ARM 3560.115 for additional guidance from the AICPA and SEC on the scope of ASC 310-30.
A company that reacquires a defaulted mortgage loan that it previously sold pursuant to a recourse arrangement may not be within the scope of ASC 310-30. For example, consider the following fact pattern:
A company that reacquires a defaulted mortgage loan that it previously sold pursuant to a recourse arrangement. The previous sale transaction met the sale accounting requirements under ASC 860, Transfers and Servicing. The company's experience is that a significant portion of loans similar to this loan will go to foreclosure. However, the company believes if the loan goes to foreclosure it is probable that it will recover all contractual principal and interest due, through foreclosure on the property, deed in lieu of foreclosure, guarantors, or other secondary sources of repayment. In addition, the company expects that the effects of any delay or shortfall will be insignificant to the contractually required payments.
For reacquired loans under a recourse arrangement consistent with the fact pattern above, we believe that a reasonable interpretation of ASC 310-30-15-2 through 15-10 would indicate that the reacquired loans are not within the scope of that guidance if the company believes it is probable that it will collect all of the contractual cash flows, even if the borrower (primary obligor) defaulted, as long as the company collects all of the loan's contractual cash flows through other sources (e.g., the guarantor and/or the liquidation of the underlying collateral).
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
