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Inherent in all financial assets, servicing comprises activities such as collecting principal and interest, maintaining escrow accounts, pursuing workouts and restructurings of delinquent loans, and initiating foreclosures. A reporting entity may recognize a servicing asset or a servicing liability arising from a contractual undertaking to service a financial asset or group of financial assets. TS 6.3 discusses the circumstances under which a servicing asset or liability should be recognized.

22.7.1 Balance sheet presentation

Servicing assets and liabilities are initially measured at fair value, consistent with the guidance in ASC 860-50-30.
Servicing assets are to be reported separately from servicing liabilities on the reporting entity’s balance sheet. Offsetting is not permitted. Further, ASC 860-50-45-1 requires that a reporting entity’s balance sheet distinguish between servicing assets/liabilities subsequently measured at fair value and those measured using the amortization method.
ASC 860-50-45-2 provides two options for how a reporting entity may meet the separate reporting requirement:
  • Presenting separate line items for the amounts subsequently measured at fair value versus those subsequently measured under the amortization method
  • Combining all amounts in one line, with parenthetical disclosure of the amount measured at fair value

22.7.2 Disclosures applicable to all servicing assets and liabilities

Recognized servicing assets and/or liabilities are subject to the applicable disclosure requirements in ASC 860-50-50. The scope and content of the disclosures depends, in part, on whether the servicer measures the assets and liabilities at amortized cost or fair value, which is an accounting policy election. TS 6.3 discusses the principal accounting and measurement considerations relative to these assets and liabilities.
A reporting entity should first consider the disclosure requirements in ASC 860-50-50-2, which are generally applicable to servicing assets and liabilities, and then apply the specific disclosure requirements predicated on how these assets and liabilities are subsequently measured.

Excerpt from ASC 860-50-50-2

For all servicing assets and servicing liabilities, all the following shall be disclosed:
  1. Management’s basis for determining its classes of servicing assets and servicing liabilities.
  2. A description of the risks inherent in servicing assets and servicing liabilities and, if applicable, the instruments used to mitigate the income statement effect of changes in the fair value of the servicing assets and servicing liabilities.
  3. The amount of contractually specified servicing fees, late fees, and ancillary fees recognized for each period for which results of operations are presented, including a description of where each amount is reported in the statement of income.
  4. Quantitative and qualitative information about the assumptions used to estimate fair value (for example, discount rates, anticipated credit losses, and prepayment speeds).

See TS 6.3.4 for matters a reporting entity should consider when identifying classes of servicing assets and liabilities. The remaining disclosure requirements in ASC 860-50-50 are class-specific, so the reporting entity’s determination of the appropriate classes of servicing assets and liabilities has both accounting and disclosure implications.
ASC 860-50-50-2 also encourages, but does not require, a reporting entity to disclose quantitative information about instruments used to manage the risks inherent in servicing assets and liabilities. This information may include the fair value of the instruments at the beginning and end of the period and the assumptions used to estimate the fair value. As part of this discussion, reporting entities may find it useful to explain why certain instruments were chosen to execute related risk management strategies, and how they are used in the context of those strategies.
See Figure FSP 22-6 for an illustration of certain of these required disclosures.

22.7.3 Disclosure of servicing rights measured at fair value

Servicing assets and liabilities that are subsequently measured at fair value are subject to the fair value disclosure requirements in ASC 820 (see FSP 20). In addition, for each income statement period presented, with respect to servicing assets and liabilities subsequently measured at fair value, the reporting entity should disclose the activity in the balance of each class of servicing assets and liabilities in accordance with ASC 860-50-50-3, including, but not limited to:
  • Beginning and ending balances
  • Additions (purchases of servicing assets, assumptions of servicing liabilities, and recognition of servicing obligations that result from transfers of financial assets)
  • Disposals
  • Changes in fair value during the period attributable to (1) changes in valuation inputs or assumptions or (2) other changes in fair value and a description of those changes
  • Other changes that affect the balance and a description of those changes
The disclosure should include a description of where changes in fair value are reported in the income statement. See Figure FSP 22-6 for an illustration of certain of these required disclosures.

22.7.4 Disclosure of servicing rights under the amortization method

ASC 860-50-50-4 requires the following disclosures for servicing assets and liabilities subsequently measured under the amortization method for each period for which an income statement is presented:
  • The activity in the balance of each class of servicing assets and liabilities including but not limited to:
    • Beginning and ending balances
    • Additions (purchases of servicing assets, assumptions of servicing liabilities, and recognition of servicing obligations resulting from transfers of financial assets)
    • Disposals
    • Amortization
    • Valuation allowance to adjust the carrying value of servicing assets
    • Other-than-temporary impairments
    • Other changes that affect the balance and a description of those changes

      This disclosure should include a description of where changes in the carrying amount are reported in the income statement for each period.
  • The fair value for each class of recognized servicing assets and liabilities at the beginning and end of the period
  • The risk characteristics used to stratify servicing assets for purposes of measuring impairment. If the predominant risk characteristics and corresponding strata are changed, the reporting entity should disclose that fact and the reasons for those changes.
  • For each period for which an income statement is presented, the activity by class in any valuation allowance of servicing assets, including:
    • Beginning and ending balances
    • Aggregate additions charged and recoveries credited to operations
    • Aggregate write-downs charged against the allowance
Figure FSP 22-6 illustrates a sample disclosure of accounting and reporting policies relating to servicing assets and liabilities, and the disclosures about the changes in the balances of those assets and liabilities during the reporting period. For simplicity, this sample disclosure omits any required comparative amounts. Although presented here as a single footnote, a reporting entity may prefer instead to include some of the information in its summary of significant accounting policies.
Figure FSP 22-6
Sample disclosure—servicing assets and servicing liabilities
This sample disclosure illustrates the application of certain of the requirements in ASC 860-50-50-2 through ASC 860-50-50-4.
Note X: Servicing Assets and Servicing Liabilities
In accordance with applicable accounting standards, the Company records a separate servicing asset or servicing liability representing the right or obligation to service third-party mortgage loans or mortgage loans that it has securitized in transactions accounted for as a sale. If servicing is retained in connection with these securitizations, the resulting servicing asset or liability is initially recorded at its fair value as a component of the transaction’s sale proceeds. Initial measurement is based on an analysis of discounted cash flows based on assumptions that market participants use to estimate fair value including, but not limited to, estimates of prepayment rates, default rates, discount rates, contractual servicing fee income, escrow account earnings, and ancillary income and late fees.
Servicing assets and servicing liabilities are subsequently measured at either fair value or amortized in proportion to, and over the period of, estimated net servicing income. The Company elects one of those methods on a class basis. A class is determined based on (1) the availability of market inputs used in determining the fair value of servicing assets and servicing liabilities, and/or (2) our method for managing the risks of servicing assets and servicing liabilities. Based on consideration of these factors, the Company currently applies the fair value method when accounting for servicing rights related to residential real estate loans. The amortization method is followed with respect to servicing rights for commercial mortgage loans.
Servicing assets and servicing liabilities relating to commercial mortgage loans are amortized in proportion to, and over the period of, estimated net servicing income. The impairment of those servicing assets or increases in fair values of servicing liabilities (above carrying values) are evaluated through an assessment of the fair value of those assets and liabilities via a disaggregated, discounted cash flow method under which the assets and liabilities are disaggregated into various strata, based on predominant risk characteristics. The net carrying value of each stratum is compared to its estimated fair value to determine whether adjustments should be made to carrying values or amortization schedules. Impairment of a servicing asset is recognized through a valuation allowance and a charge to current period earnings if it is considered to be temporary or through a direct write-down of the asset and a charge to current period earnings if it is considered other-than-temporary. An increase in the fair value of a servicing liability above its carrying value is recognized through an increase in the liability and a charge to current period earnings. The predominant risk characteristics of the underlying commercial mortgage loans that are used to stratify the servicing assets and liabilities for impairment purposes generally include the (1) loan origination date, (2) loan rate, (3) loan type and size, (4) loan maturity date, and (5) geographic location.
The rate of prepayment of loans serviced (both commercial and residential) is the most significant estimate involved in the measurement process. Estimates of prepayment rates consider prepayment history, projections observed or inferred in the marketplace, industry trends, and other considerations. Actual prepayment rates frequently differ from those projected by management due to changes in a variety of economic factors, including prevailing interest rates and the availability of alternative financing sources to borrowers. If actual prepayments of the loans being serviced were to occur more quickly than projected, the Company may be required to write down the carrying value of servicing through a charge to earnings (or in the case of a servicing liability, reduce the carrying value through a credit to earnings in certain circumstances) in the current period. Conversely, if actual prepayments of the loans being serviced were to occur more slowly than had been projected, the carrying value of servicing assets could increase, and servicing income would exceed previously projected amounts; in the case of a servicing liability, a charge to earnings may be required in these circumstances. Accordingly, the servicing assets actually realized, or the servicing liabilities actually incurred, could differ from the amounts initially recorded.
Changes in the balances of servicing assets and servicing liabilities for residential mortgage loans measured using the fair value method for the year ended December 31, 20X7 were:
Residential mortgage loans
Servicing assets
Servicing liabilities
Fair value as of January 1, 20X7
$xx,xxx
$xxx
Additions:
Purchases of servicing assets
x,xxx
N/A
Assumption of servicing obligations
x,xxx
xx
Servicing obligations that result from transfers of financial assets
xx,xxx
xx
Subtractions—disposals:
(xx)
(x)
Changes in fair value:
Due to change in valuation inputs or assumptions used in valuation model
xx/(xx)
xx/(xx)
Other changes in value
xx/(xx)
xx/(xx)
Fair value as of December 31, 20X7
$xxx,xxx
$xx
Changes in the balances of servicing assets and servicing liabilities for commercial mortgage loans subsequently measured using the amortization method for the year ended December 31, 20X7 are as follows:
Commercial mortgage loans
Servicing assets
Servicing liabilities
Carrying amount as of January 1, 20X7
$xx,xxx
$xxx
Additions:
Purchases of servicing assets
xxx
N/A
Assumption of servicing obligations
xx
x
Servicing obligations that result from transfers of financial assets
x,xxx
x
Subtractions:
Disposals
(xx)
(x)
Amortization
(x,xxx)
(xx)
Other-than-temporary impairments
(xx)
N/A
Recognition of additional servicing liability stemming from increase in fair value
N/A
x
Carrying amount before valuation allowance
xx,xxx
xxx
Valuation allowance for servicing assets:
Beginning balance
xxx
N/A
Provision charged to operations
xx
N/A
Other-than-temporary impairments
(xx)
N/A
Sales and disposals
(xx)
N/A
Ending balance
xxx
N/A
Carrying amount as of December 31, 20X7
$xx,xxx
$xxx
Fair value as of January 1, 20X7
$xx,xxx
$xxx
Fair value as of December 31, 20X7
$xx,xxx
$xxx

22.7.5 Subsequent election to measure servicing rights at fair value

ASC 860-50-35-3(d) allows a reporting entity, at the beginning of its fiscal year, to subsequently measure at fair value a class of servicing assets or liabilities previously accounted for under the amortization method. ASC 860-50-50-5 requires separate disclosure of the amount of the cumulative-effect adjustment to retained earnings resulting from the election, which is irrevocable.
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