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14.5 Initial recognition and measurement of AFS/HTM PCD BIs
Publication date: 31 May 2022
us Loans & investments guide
ASC 325-40-35-7 requires an entity to use a present value of expected future cash flows to measure credit losses for a beneficial interest (BI). Therefore, reporting entities that hold held to maturity securities that are beneficial interests subject to ASC 325-40 should estimate expected credit losses using a discounted cash flow approach. This differs from the usual guidance under ASC 326 for HTM securities that are not beneficial interests subject to ASC 325-40. HTM securities that are not beneficial interests should apply the general CECL model, which provides a reporting entity with the flexibility to decide whether to use a discounted cash flow or another method to estimate to estimate expected credit losses.
If an entity has determined that the beneficial interest is considered to be PCD and they have calculated the initial allowance for credit losses, the beneficial interest is recorded with a balance sheet gross up whereby the allowance for credit losses is added to the purchase price to determine the initial amortized cost basis of the beneficial interest. Similar to other PCD assets, the initial allowance for credit losses does not have an impact on earnings.
14.5.1 PCD: Calculating initial accretable yield AFS and HTM
ASC 325-40 requires the calculation of the accretable yield that will be 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 carrying amount of the beneficial interest.
ASC 325-40-30-2 provides guidance on the calculation of the accretable yield for beneficial interests in purchased financial assets with credit deterioration.
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).
For acquired beneficial interests subject to ASC 325-40 that are determined to be PCD, an entity is required to determine the excess of all cash flows expected to be collected over the amortized cost basis (i.e., the purchase price plus the initial allowance for credit losses as of the acquisition (transaction) date). Any difference between the “contractual cash flows” and the initial amortized cost basis is considered to be accretable yield and will be accreted/amortized into interest income using the interest method. Refer to LI 14.3.2 for further details on how to calculate “contractual cash flows.” Similar to non-PCD assets, the accretable yield calculated at the acquisition date for PCD beneficial interests is subject to periodic reassessment, as described in LI 14.6.
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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