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14.4 Initial recognition and measurement of non-PCD BIs
Publication date: 31 May 2022
us Loans & investments guide
Typically, beneficial interests are acquired through: (1) transfer of financial assets to a special purpose entity with the transferor receiving a beneficial interest as a part of proceeds or (2) purchase in the marketplace. For both scenarios, ASC 860-20-30 would apply, and the initial investment would be recorded at the fair value of the beneficial interest.
14.4.1 Calculating the initial allowance: AFS beneficial interest
Generally, no allowance is recorded for non-PCD AFS beneficial interests within the scope of ASC 325-40 at initial recognition since generally they are initially recognized at fair value and the guidance in ASC 326-30-35-3 limits the allowance to the amount that fair value is less than the amortized cost basis.
14.4.2 Calculating initial accretable yield—trading, AFS and HTM
ASC 325-40 requires the calculation of the accretable yield, which is used in calculating interest income under the effective interest method and discounting future cash flows. The accretable yield is calculated based on expected cash flows and the initial investment of the beneficial interest.
Upon acquiring a beneficial interest subject to ASC 325-40, an entity is required to determine the excess of all cash flows expected to be collected over the interest’s initial investment (generally the fair value of the beneficial interest as of the acquisition or transaction date). That excess (the accretable yield) is recognized as interest income over the life of the beneficial interest using the effective yield method. The accretable yield calculated at the acquisition date is subject to periodic reassessment, as discussed in LI 14.6.
ASC 325-40-30-2 and ASC 325-40-30-3 provide guidance on the calculation of the accretable yield.
For beneficial interests that do not apply the accounting for purchased financial assets with credit deterioration, the holder shall measure accretable yield initially as the excess of all cash flows expected to be collected attributable to the beneficial interest estimated at the acquisition-transaction date (the transaction date) over the initial investment. For beneficial interests that apply the accounting for purchased financial assets with credit deterioration, the holder shall measure accretable yield initially as the excess of all contractual cash flows attributable to the beneficial interest at the acquisition-transaction date (the transaction date) over the amortized cost basis (the purchase price plus the initial allowance for credit losses).
At the transaction date, all cash flows expected to be collected means the holder's estimate of the amount and timing of estimated future principal and interest cash flows used in determining the purchase price or the holder's fair value determination for purposes of determining a gain or loss under Topic 860.
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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