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12.4 Loan and receivable disclosure requirements
Publication date: 31 May 2022
us Loans & investments guide
ASC 310-10-50-2 specifies the information required to be addressed in an accounting policy note for all loans and trade receivables.
The summary of significant accounting policies shall include the following:
a. The basis for accounting for loans and trade receivables
b. The method used in determining the lower of amortized cost basis or fair value of nonmortgage loans held for sale (that is, aggregate or individual asset basis)
c. The classification and method of accounting for interest-only strips, loans, other receivables, or retained interests in securitizations that can be contractually prepaid or otherwise settled in a way that the holder would not recover substantially all of its recorded investment
d. The method for recognizing interest income on loan and trade receivables, including a statement about the entity’s policy for treatment of related fees and costs, including the method of amortizing net deferred fees or costs.
Reporting entities are also required to disclose the allowance for credit losses (i.e., allowance for loan losses or allowance for doubtful accounts), unearned income, unamortized premiums and discounts, and net unamortized deferred fees and costs in its financial statements. See LI 12.7 for disclosure requirements related to credit quality and the allowance for doubtful accounts on loans and receivables. Further, entities are required to disclose the recorded investment for all mortgage loans backed by residential real estate properties when formal foreclosure proceedings are in process.
If major categories of loans or trade receivables are not presented separately on the face of the balance sheet, they should be presented in the notes.
ASC 835-30-45-2 requires that the description of a note receivable include the effective interest rate. In addition, the face amount should be disclosed on the face of the financial statements or in the notes.
Receivables are generally considered to be financial assets, and as such, reporting entities are required to comply with the fair value disclosure requirements of ASC 825, Financial Instruments, discussed in FSP 20. However, reporting entities do not need to provide the fair value disclosures for trade receivables if they are due in less than a year. Reporting entities are not required to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
SEC registrants are required to separately disclose major categories of accounts and notes receivable, including receivables from customers (trade); related parties; underwriters, promoters, and employees (other than related parties) that arose in a manner other than the ordinary course of business; and receivables held for sale (reported at lower of cost or fair value).
In addition, in accordance with S-X 5-02(3)(b), if the aggregate amount of notes receivable exceeds 10% of the aggregate amount of receivables, SEC registrants must separately disclose accounts receivable and notes receivable either on the face of the balance sheet or in the notes.
Additional disclosure requirements apply under S-X 5-02(3)(c) when receivables include amounts due under long-term contracts. See LI 12.11 and LI 12.12 for additional considerations that apply to insurance and banking entities that are subject to Article 7 and Article 9 of Regulation S-X, respectively.
Finally, if loans and trade receivables have contractual terms that expose the reporting entities to risks and uncertainties, the disclosure requirements of ASC 275, Risks and Uncertainties, may be required. See FSP 24 for discussion of disclosure requirements associated with risks and uncertainties.
12.4.1 Portfolio layer method
For any entities using a portfolio layer method hedge, there are specific balance sheet presentation and disclosure considerations for presenting basis adjustments resulting from these hedges.
The “portfolio layer method” permits reporting entities to designate a portion of a closed portfolio of financial assets, beneficial interests secured by financial assets, or a combination of the two, that is not expected to be prepaid during the hedge period as the hedged item in a fair value hedge of interest rate risk. Although the portfolio layer method (originally referred to as the last-of-layer model) was designed considering prepayable mortgage loans or mortgage-backed securities, it may be applicable to other assets as well. The guidance allows an entity to essentially ignore prepayment risk in the hedge relationship even when prepayable assets are present in the closed portfolio. It does so by permitting designation of the portion of the pool not expected to be prepaid, defaulted, or sold as the hedged item.
For an active portfolio layer hedge, the basis adjustment is not allocated to individual assets until the hedge is dedesignated. The basis adjustment is maintained on the closed portfolio of assets and therefore adjusts the carrying amount of the balance sheet line item in which the closed portfolio of assets is presented.
For disclosure purposes, the guidance in ASC 815-10-50-5B states that for active portfolio layer method hedges, when a reporting entity is required to disclose the amortized cost basis on a more disaggregated basis than the balance sheet line item, the entity should exclude the portfolio layer method basis adjustment from the amortized cost basis of those assets and separately disclose the basis adjustment that has been excluded from the disclosure as a reconciling item. Refer to FSP 19.5.4.2 for further information.
If a portfolio layer method hedge relationship is dedesignated, ASC 815-25-40-9 and 815-25-40-9A require the basis adjustments to be allocated to individual assets. Subsequently, the basis adjustment is considered part of the amortized cost basis of the individual assets and included in the amortized cost disclosures, similar to any other fair value hedge basis adjustment. Refer to DH 10.3.8 for further information.
12.4.2 Class of financing receivables and portfolio segment
Some disclosures are required to be provided by class or by portfolio segment. The master glossary defines portfolio segments and class of financing receivables.
Definitions from ASC Master Glossary
Portfolio Segment: The level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses.
Class of Financing Receivable: A group of financing receivables determined on the basis of both of the following:
a. Risk characteristics of the financing receivable
b. An entity’s method for monitoring and assessing credit risk.
Reporting entities should base their determination of portfolio segments and classes on their business model and industry, risk management practices, and how they manage their portfolios.
The portfolio segment is generally the starting point for the required degree of disaggregation in the disclosures. Finance receivables categorized by type, industry, or other risk (such as risk rating) could be the basis for portfolio segment.
The determination of class of financing receivables is principally based on the level that a reporting entity uses when assessing and monitoring the risk and performance of the portfolio. The grouping into classes for disclosure purposes is normally based on the internal reporting processes of the reporting entity. In determining the appropriate level of internal reporting that a reporting entity should use when making these disclosures, it should consider the level of detail needed by financial statement users to understand the risks inherent in the reporting entity’s financing receivables.
ASC 326-20-55-12 provides the following examples of factors that can be used to disaggregate financing receivables for disclosure purposes.
- Categorization of borrowers (e.g., commercial loan borrowers, consumer loan borrowers and related party borrowers)
- Type of financing receivables (e.g., mortgage loans, credit card loans, interest-only loans and finance leases)
- Industry sector
- Type of collateral (e.g., residential property, commercial property, government-guaranteed collateral and unsecured)
- Geographic distribution (Domestic, international and local)
- Additional factors related to concentration of credit risk as discussed in ASC 825-10-55
12.4.3 Disclosure of net fees and costs
Reporting entities may acquire a loan by initially lending money or by purchasing the loan from another party. Typically, nonrefundable fees and costs are associated with these lending activities and loan purchases.
As part of the disclosure of the method for recognizing interest income on loans, reporting entities should also include their accounting policy for related fees and costs and their method of amortizing net deferred fees or costs.
ASC 310-20-50 includes other required disclosures related to net fees and costs.
Entities that anticipate prepayments in applying the interest method shall disclose that policy and the significant assumptions underlying the prepayment estimates.
The unamortized net fees and costs shall be reported as a part of each loan category. Additional disclosures such as unamortized net fees and costs may be included in the notes to financial statements if the lender believes that such information is useful to the users of financial statements.
ASC 310-20-50-4 requires reporting entities to disclose the net amount of credit card fees received and costs for both purchased and originated credit cards capitalized at the balance sheet date and the related accounting policy and amortization periods.
12.4.4 Disclosure of modifications with borrowers experiencing financial difficulty by a creditor – after adoption of ASU 2022-02
ASC 310-10-50-39 indicates that the disclosure requirements apply to assets for which the accounting for modifications is within the scope of ASC 310-20. This would include loans, but would not include leases.
These disclosure requirements apply to modifications of instruments with borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows. As a result, the disclosures are applicable to situations when there is
- principal forgiveness,
- interest rate reductions,
- other-than-insignificant payment delays,
- term extensions, or
- a combination of the above.
The disclosures in paragraphs 310-10-50-42 through 50-44 shall be provided for modifications of receivables to borrowers experiencing financial difficulty in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension made within the scope of this Topic. For purposes of those disclosures, covenant waivers and modifications of contingent acceleration clauses would not be considered term extensions.
Since the concept of a concession was removed in conjunction with the elimination of TDRs for creditors, disclosures are required for modifications of loans with borrowers experiencing financial difficulty, regardless of whether the modification is considered to be a concession as defined in previous guidance. That is, modifications of loans with borrowers experiencing financial difficulty that may not have been considered concessions and therefore not accounted for or disclosed as TDRs may now be within the scope of the required disclosures. For example, if a creditor lowers the interest rate on a loan to a borrower experiencing financial difficulty in exchange for receiving additional collateral, the modification may have not been considered a concession under previous GAAP; however, such a modification is in the scope of the disclosures required by the revised guidance.
Other situations, such as covenant waivers and modifications of contingent acceleration clauses, may have only indirect changes to the timing of cash flows. For example, as a result of a covenant waiver, a loan’s principal amount may no longer be subject to potential acceleration. Since this is not a direct change to the timing or amount of contractual cash flows, ASC 310-10-50-39 indicates that in the absence of other modifications, the loan would not be required to be included in the disclosures.
With respect to delays in payments, if a modification of a loan with a borrower experiencing financial difficulty only involves an insignificant delay in payment, it is not required to be included in the disclosures. The guidance requires the consideration of a 12-month lookback period when determining whether a delay in payment resulting from the current restructuring is insignificant.
If the debt has been previously restructured, an entity shall consider the cumulative effect of past restructurings made within the 12-month period before the current restructuring when determining whether a delay in payment resulting from the current restructuring is insignificant.
Summary of disclosures
ASC 310-10-50-42 through ASC 310-10-50-44 provide disclosure requirements designed to provide users with information about the types of modifications made to receivables with borrowers experiencing financial difficulty, the magnitude of those modifications, and the degree of success of the modifications in mitigating potential credit losses. The disclosures are applicable regardless of whether a modification of a receivable from a troubled debtor is treated as a new loan or a continuation of an existing loan.
Certain financing receivables (such those that are measured at fair value with changes in fair value reported in current earnings) are not subject to the disclosures. The disclosures required in the guidance are applicable regardless of whether a modification to a receivable from a debtor experiencing financial difficulty results in a new receivable or a modified receivable.
For all income statement periods presented, ASC 310-10-50-42 requires reporting entities to disclose the following for modifications of receivables made to debtors experiencing financial difficulty that are in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension:
- Qualitative and quantitative information, by class of financing receivable, including:
- By type of modification, the total period-end amortized cost basis of modified receivables, and the percentage relative to the total period-end amortized cost basis of receivables in the class of financing receivable.
- The financial effect of the modification, providing information about the changes to the contractual terms as a result of the modification, including:
- the incremental effect of principal forgiveness on the amortized cost basis, and/or
- the reduction in the weighted-average interest rate (versus a range) for interest rate reductions.
- The performance of the asset in the 12 months following the modification.
- Qualitative information, by portfolio segment, discussing how such modifications factored into the determination of the allowance for credit losses.
ASC 310-10-50-43 requires that if the same receivable is modified in more than one manner (e.g., an interest rate reduction and principal forgiveness), the modification be shown in a separate category of modification type.
ASC 310-10-50-44 requires that for all income statement periods presented, if there was a payment default during the period and the receivable had been modified in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension within the previous 12 months preceding the payment default when the debtor was experiencing financial difficulty, the reporting entity should also disclose the following:
● Qualitative and quantitative information, by class of financing receivable, about:
○ the types of contractual change that the modification provided. and
○ the amount of financing receivables that defaulted, including the period-end amortized cost basis for financing receivables that defaulted.
● Qualitative information, by portfolio segment, discussing how such defaults factored into the determination of the allowance for credit losses.
For an illustration of the disclosures noted above, refer to Example 3 within ASC 310-10-55-12A. These disclosures are required to be included in annual and interim periods in accordance with ASC 270-10-50-1.
The disclosures required in paragraphs 310-10-50-42 through 50-44 are applicable regardless of whether a modification of a receivable to a debtor experiencing financial difficulty results in a new loan in accordance with paragraphs 310-20-35-9 through 35-11. As a practical expedient, an entity may exclude the accrued interest receivable balance that is included in the amortized cost basis of financing receivables for the purposes of the disclosure requirements in Subtopic 326-20. If an entity has applied that practical expedient, an entity may do the same for the disclosures in paragraphs 310-10-50-42 through 50-44 and shall disclose the total amount of accrued interest excluded from the disclosed amortized cost basis.
For each period for which a statement of income is presented, an entity shall disclose the following information related to modifications of receivables that are in the form of principal forgiveness, an interest rate reduction, an other than-insignificant payment delay, or a term extension (or a combination thereof) made to debtors experiencing financial difficulty during the reporting period:
a. By class of financing receivable, qualitative and quantitative information about:
- The types of modifications utilized by an entity, including the total period-end amortized cost basis of the modified receivables and the percentage of modifications of receivables made to debtors experiencing financial difficulty relative to the total period-end amortized cost basis of receivables in the class of financing receivable.
- The financial effect of the modification by type of modification, which shall provide information about the changes to the contractual terms as a result of the modification and shall include the incremental effect of principal forgiveness on the amortized cost basis of the modified receivables, as applicable, or the reduction in weighted-average interest rates (versus a range) for interest rate reductions.
- Receivable performance in the 12 months after a modification of a receivable made to a debtor experiencing financial difficulty.
b. By portfolio segment, qualitative information about how those modifications and the debtors’ subsequent performance are factored into determining the allowance for credit losses.
Receivables may be modified in more than one manner. An entity that modifies the same receivable in more than one manner shall provide disclosures sufficient for users to understand the different types of combinations of modifications provided to borrowers. For example, a receivable may be modified to provide both principal forgiveness and an interest rate reduction. In that case, an entity shall disclose the period-end amortized cost basis of that receivable in a separate category that reflects that a combination of modification types has been granted. If another receivable was modified to provide both an interest rate reduction and a term extension, the period-end amortized cost basis of that receivable shall be presented in a different category. Multiple separate combination categories may be necessary if significant. The same receivable’s period-end amortized cost basis shall not be presented in multiple categories.
For each period for which a statement of income is presented, an entity shall disclose the following information about financing receivables that had a payment default during the period and had been modified in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension (or a combination thereof) within the previous 12 months preceding the payment default when the debtor was experiencing financial difficulty at the time of the modification:
a. By class of financing receivable, qualitative and quantitative information about those defaulted financing receivables, including the following:
- The type of contractual change that the modification provided
- The amount of financing receivables that defaulted, including the period-end amortized cost basis for financing receivables that defaulted.
b. By portfolio segment, qualitative information about how those defaults are factored into determining the allowance for credit losses.
ASC 310-10-50-36 also requires creditors to disclose the amount of any commitments to lend additional funds to debtors experiencing financial difficulty for which the creditor has modified the terms of the receivables in the form of principal forgiveness, an interest rate reduction, other-than-insignificant payment delay, or a term extension in the current reporting period.
Question LI 12-1
Is the same population of loans captured in the different disclosures in ASC 310-10-50-42(a)?
Is the same population of loans captured in the different disclosures in ASC 310-10-50-42(a)?
PwC response
It depends. ASC 310-10-50-42(a)(3) requires disclosure of the performance of receivables in the 12-months after a modification to a debtor experiencing financial difficulty. ASC 310-10-50-44 requires information about receivables that had a payment default during the period and had been modified in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension (or combination thereof) within the previous 12 months preceding the payment default. For these disclosures, the 12-month period begins the date the receivable was modified (i.e. the date of the most recent modification). However, the disclosures in ASC 310-10-50-42(a)(1) through 50-42(a)(2) are based on modifications made during the reporting period. The example in ASC 310-10-55-12A illustrates these disclosures in annual financial statements. The amounts included in these disclosures for interim reporting periods may not tie to amounts disclosed in accordance with ASC 310-10-50-42(a)(3) and ASC 310-10-50-44. For example, if a calendar year reporting entity modified a receivable in the middle of November of the current period:
- The current year annual financial statements would include information related to this modification under ASC 310-10-50-42(a)(1) through 50-42(a)(3) (and ASC 310-10-50-44, if applicable).
- Next year’s first, second, and third quarter financial statements would include information related to this modification under ASC 310-10-50-42(a)(3) and ASC 310-10-50-44 (if applicable); Disclosures related to this modification under ASC 310-10-50-42(a)(1) through 50-42(a)(2) would not be required because the modification occurred in a previous reporting period.
- Next year’s annual financial statements would include information related to this modification only in the comparative information presented.
12.4.4A Disclosure of troubled debt restructurings by a creditor – before adoption of ASU 2022-02
ASC 310-40 requires creditors to disclose the amount of any commitments to lend additional funds to debtors whose receivables to the creditor have been modified in a troubled debt restructuring.
ASC 310-10-50-31 through ASC 310-10-50-34 also provide disclosure requirements for a creditor’s troubled debt restructuring of financing receivables, including a creditor’s modification of a lease receivable that meets the definition of a troubled debt restructuring. This guidance is not applicable to certain receivables listed in ASC 310-10-50-32 (i.e., certain trade accounts receivable, receivables measured at fair value with changes in fair value reported in earnings, receivables measured at lower of amortized cost basis or fair value, and participant loans in defined contribution pension plans).
For all income statement periods presented, reporting entities must disclose the following for any troubled debt restructurings of financing receivables occurring during the period:
- Qualitative and quantitative information, by class, including how the receivable was modified and the modification’s effects (see LI 12.4.2 for information on determining class)
- Qualitative information, by portfolio segment, discussing how such modifications factored into the determination of the allowance for credit losses (see LI 12.4.2 for information on determining the portfolio segment)
If there was a payment default (after the restructuring) on any financing receivables that were modified within the last twelve months, the reporting entity should also disclose the following for each income statement period presented:
- Qualitative and quantitative information, by class, indicating the types of financing receivables that defaulted and their amount
- Qualitative information, by portfolio segment, discussing how such defaults factored into the determination of the allowance for credit losses
12.4.5 Assets under CECL: accrued interest and related disclosure
For financial assets within the scope of ASC 326-20, the literature provides the following additional guidance on accrued interest receivable disclosures (see LI 7.3.4.3 for further information on accounting for accrued interest receivable):
- If a reporting entity elects to measure expected credit losses on its accrued interest receivable balances separately from other components of the amortized cost basis, disclosure of the accrued interest balance, net of allowance for credit losses (if any), and in which line item on the balance sheet the amount is presented is required. See ASC 326-20-50-3A.
- If a reporting entity makes an accounting policy election to not measure an allowance for credit losses on accrued interest due to the entity writing off uncollectible accrued interest in a timely manner, the election should be disclosed, including the time period or periods the entity considers timely. Disclosure of what time period or periods are considered timely is required by class of financing receivable or major security type. See ASC 326-20-50-3C.
- If a reporting entity makes an accounting policy election to write off accrued interest by reversing interest income or recognizing the write off as a credit loss expense (or a combination of both), the accounting policy election is required to be disclosed in addition to the amount of accrued interest receivable written off by reversing interest income by portfolio segment or major security type. See ASC 326-20-50-3D.
- If an entity elects the practical expedient to exclude the accrued interest receivable balance from the amortized cost disclosure requirements in ASC 326-20-50-4 through ASC 326-20-50-22, the total amount of accrued interest excluded from the amortized cost should be disclosed. See ASC 326-20-50-3B.
- If for the purposes of identifying and measuring an impairment the accrued interest is excluded from the amortized cost basis of an HTM debt security, an entity may elect a practical expedient to exclude the accrued interest that is included in the amortized cost basis for the purposes of the disclosure requirements in ASC 320-10-50-5. If an entity elects this practical expedient, it should disclose the total amount of accrued interest, net of the allowance for credit losses (if any), excluded from the disclosed amortized cost basis. See LI 12.5.4 and LI 12.5.5 for further information regarding the disclosure requirements in ASC 320-10-50-5.
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