ASC 310-30 limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. The investor (transferee) should recognize the accretable yield as interest income on a level-yield basis over the life of the loan.

The guidance requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or ALLL. ASC 310-30 prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. However, the guidance requires that an investor disclose information about the accretable yield and nonaccretable difference in the notes to the financial statements.

Recognition of income under ASC 310-30 is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected. In addition, an investor should continue to estimate cash flows expected to be collected over the life of the loan.

If it is probable that the investor is unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimate after acquisition, the loan is considered impaired and an ALLL should be recorded. Only the declines in collectability that occur subsequent to acquisition date shall be reflected in the investor's ALLL. Decreases in cash flows expected to be collected should be recognized as an impairment charge as opposed to a prospective decline in yield, unless the decreases are solely due to a decrease in the index on a variable rate loan.

A charge-off or a write-down establishes a new cost basis. If a loan’s expected cash flows are subsequently revised upward, the investor should not reverse prior write-downs, but the expected increases in cash flows should be recognized as a yield adjustment on a prospective basis.

The application of ASC 310-30 requires judgment, particularly when assessing the cash flows expected to be collected, on an individual loan or pool of loans.

If it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, the investor should:

The investor must adjust the amount of accretable yield by reclassification from nonaccretable difference. The adjustment is accounted for as a change in estimate in accordance with ASC 250, Accounting Changes and Error Corrections, with the amount of the accretion adjusted over the remaining life of the loan. The resulting yield should be the effective interest used to measure any subsequent impairment.