A creditor that receives physical possession of residential or commercial real estate property through an in substance repossession or foreclosure should recognize the real estate property.
If a company decides to hold such real estate property for use, it should account for the property in accordance with ASC 360, Property, plant and equipment. See PPE 5.3 for guidance on held-for-sale classification criteria. As discussed in ASC 310-40-40-3, a creditor should initially record foreclosed property that is classified as held for sale at fair value less the estimated costs to sell the property. Fair value should be determined using the measurement guidance in ASC 820-10.
The fair value less estimated cost to sell becomes the new cost basis for the asset, which is often referred to as other real estate owned (OREO).
If the amortized cost basis in the loan exceeds the cost basis established for the OREO, the difference should be recorded as a provision for credit loss. Conversely, if the OREO cost basis is higher than the amortized cost basis in the loan, the difference should be recorded as a recovery of previous amounts written off up to the original cost basis of the loan and a gain on disposition of loans thereafter.

11.3A.1 Subsequent measurement of OREO classified as held for sale – before adoption of ASU 2022-02

Subsequent declines in the fair value of OREO should be recorded through the use of a valuation allowance. Changes in fair value should be determined on a property-by-property basis; an allowance allocated to one property may not be used to offset losses incurred on another property. In addition, unallocated valuation allowances are not permitted.
Subsequent increases in the fair value of a property may be used to reduce the valuation allowance, but only to an amount that does not exceed the OREO’s foreclosure date cost basis of the property, as illustrated in ASC 310-40-55-13 through ASC 310-40-55-15. Refer to PPE 5 for further discussion on accounting for assets classified as held for sale.
Subsequent measurement of OREO classified as held for sale
On December 10, 20X5, Bank Corp received a real estate property in satisfaction of a loan. Bank Corp’s recorded investment in the loan at the time was $160,000. The estimated fair value of the property was $162,000 and estimated costs to sell were $7,000; therefore, the new cost basis of the OREO asset was $155,000.
As of March 31, 20X6, the fair value of the property declined to $160,000 and the estimated cost to sell remained at $7,000, resulting in a value of $153,000. Bank Corp recorded the decline in value by establishing a $2,000 valuation allowance.
As of June 30, 20X6, the fair value of the property increased to $165,000 while estimated costs to sell declined to $5,000.
How should Bank Corp record the increase in the fair value of the property as of June 30, 20X6?
The value of the property less costs to sell as of June 30, 20X6 is $160,000 ($165,000 fair value — $5,000 costs to sell). However, Bank Corp can only increase the carrying value of the OREO to the OREO’s foreclosure date cost basis of $155,000. Therefore, Bank Corp can reverse the previously recorded valuation allowance of $2,000, but may not increase the value of the OREO any further.

11.3A.2 Use of appraisals when estimating fair value of OREO – before adoption of ASU 2022-02

Appraisals are a common resource used in estimating the fair value of OREO. Companies should consider available information when evaluating appraisals, including any changes in economic conditions or other circumstances between the date of the appraisal and the reporting date, back testing of prior OREO sales, and the type of appraisal. If concern exists about the accuracy of the appraisal, further analysis should be performed and circumstances may justify other approaches to establish the fair value.
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