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.221 Recognition of interest income and impairment of beneficial interests
Publication date: 30 Nov 2022
us Investments and other assets ARM 5010.221
ASC 325-40 provides guidance on the accounting for interest income and impairment of certain beneficial interests. The guidance applies to beneficial interests classified as held-to-maturity, available-for-sale, or trading. ASC 325-40 is the only authoritative guidance related to interest income recognition that includes in its scope entities that account for financial assets at fair value with changes in fair value recorded in earnings.
The guidance in this Subtopic applies to beneficial interests that have all of the following characteristics:
a. Are either debt securities under Subtopic 320-10 or required to be accounted for like debt securities under that Subtopic pursuant to paragraph 860-20-35-2.
b. Involve securitized financial assets that have contractual cash flows (for example, loans, receivables, debt securities, and guaranteed lease residuals, among other items). Thus, the guidance in this Subtopic does not apply to securitized financial assets that do not involve contractual cash flows (for example, common stock equity securities, among other items). See paragraph 320-10-35-38 for guidance on beneficial interests involving securitized financial assets that do not involve contractual cash flows.
c. Do not result in consolidation of the entity issuing the beneficial interest by the holder of the beneficial interests.
d. Are not within the scope of Subtopic.
e. Are not beneficial interests in securitized financial assets that have both of the following characteristics:
1. Are of high credit quality (for example, guaranteed by the U.S. government, its agencies, or other creditworthy guarantors, and loans or securities sufficiently collateralized to ensure that the possibility of credit loss is remote)
2. Cannot contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment.
The following figure summarizes how an investor would determine whether a beneficial interest (BI) is within the scope of ASC 325-40.
ASC 325-40: scoping decision tree
Question: ASC 325-40 excludes from its scope beneficial interests that meet two criteria, one of which is that the interest be of “high credit quality.” What conditions should the beneficial interest satisfy to be considered “high credit quality”?
Interpretative response: ASC 860 does not detail how to evaluate credit quality. However, in our view, a beneficial interest rated AA or above by S&P (or similarly rated by other rating agencies), or having an equivalent shadow rating, should be considered of high credit quality, and thus need not be accounted for in accordance with ASC 325-40. An investor would look instead to the relevant guidance in ASC 310 or ASC 320 when accounting for the investment.
A beneficial interest deemed to be of high credit quality when purchased may not satisfy that condition at a later date (e.g., as a consequence of a rating agency downgrade). In these circumstances, we believe the investor may continue to apply the income recognition and measurement guidance deemed appropriate at the acquisition date. Alternatively, going forward, the investor may treat the beneficial interest as now subject to ASC 325-40. In either case, the policy election should be applied consistently.
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.
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