For every class of financial assets (see LI 12.4.1
for information on determining class of financial asset) and major security type, a reporting entity should provide qualitative and quantitative information about credit quality. The information should be presented based on the applicable credit quality indicator, which is defined in the ASC Master Glossary.
Definition from ASC Master Glossary
Credit Quality Indicator: A statistic about the credit quality of a financial asset.
Examples of credit quality indicators include:
- Consumer credit risk scores
- Credit rating agency ratings
- A reporting entity’s internal credit risk grades
- Debt-to-value ratios
- Collection experience
- Other internal metrics
For every class of financial assets, a reporting entity should describe the credit quality indicator it is using, and then disclose the amortized cost basis of the securities, grouped by credit quality indicator. If a reporting entity provides disclosure grouped by internal risk ratings, then it should provide qualitative information on how those internal risk ratings relate to the likelihood of loss. See ASC 326-20-55-79
for an example disclosure.
In addition, for every credit quality indicator, a reporting entity should disclose the date or range of dates on which the information was last updated. The reporting entity should use the most current information available prior to the balance sheet date.
A reporting entity might use different credit quality indicators for different classes of financial assets. For example, a reporting entity could present residential mortgages based on loan-to-value percentages while reporting other consumer loans based on FICO ratings.
For financing receivables and net investments in leases, a reporting entity that is a public business entity (PBE) should disclose the amortized cost basis grouped by credit quality indicator and detailed by year of origination. This requirement does not apply to reinsurance receivables and funded or unfunded amounts of line-of-credit arrangements, such as credit cards. For this purpose, the year of origination is the initial date on which the instrument was issued, and not the year in which it was purchased by the reporting entity. For origination years before the fifth annual period, a reporting entity may present the amortized cost basis of financing receivables and net investments in leases in the aggregate.
The requirement to present the amortized cost basis within each credit quality indicator by year of origination is not required for a reporting entity that is not a PBE. PBEs that are not SEC filers are permitted to provide the new required vintage disclosures using a phased-in transition approach. In the year of adoption, the reporting entity would present the three most recent origination years. An incremental year is required to be disclosed in each of the next two fiscal years such that thereafter the five separate fiscal years are disclosed.
For revolving lending arrangements, determining the appropriate origination year is more complex. In a revolving lending arrangement, such as a line-of-credit, the timing of the underwriting decision may not align with the borrower’s drawdown of funds. In some instances, the borrower may not drawdown funds until years after the initial underwriting by the lender. As a result, the guidance does not require revolving lending arrangements to disclose credit quality indicators by vintage year, but instead within a separate column of the vintage disclosure table disaggregated by class of financing receivable and credit quality indicator.
Further, the guidance does not require an entity to present the amortized cost basis of line-of-credit arrangements that were converted (either by contractual terms or a modification) into term loans by vintage year. Instead, the amortized cost basis of line-of-credit arrangements that were converted into term loans are required to be disclosed by class of financing receivable and credit quality indicator within a separate column of the vintage disclosure table that is not disaggregated by vintage year. This topic was the subject of a TRG discussion (TRG Memo 16: Vintage Disclosures for Revolving Loans).
The provisions of ASC 310-20-35-9
through ASC 310-20-35-12
govern whether a modification of a loan should be accounted for as the creation of a new debt instrument and the extinguishment of the original debt instrument or whether the modification should be accounted for as the continuation of the original instrument. The results of this analysis should be used to evaluate whether modifications result in a loan being considered originated in the current period. For the net investment in leases, the provisions of ASC 842-10-25-8
and ASC 842-10-25-9
should be used to determine whether a lease modification should be presented as a current-period origination.
Credit quality disclosures are not required for trade receivables that are due in less than a year and that result from revenue transactions in the scope of ASC 606
, except for credit card receivables, and are also not required for receivables measured at the lower of amortized cost basis or fair value.
The disclosure requirements for financing receivables apply also to net investment in leases, since they are in the scope of ASC 326-20
Question LI 12-1 addresses whether reporting entities are required to disclose credit quality information in accordance with ASC 326-20-50
for contract assets recognized under ASC 606
Question LI 12-1
Are reporting entities required to disclose credit quality information in accordance with ASC 326-20-50 for contract assets recognized under ASC 606
states “A credit loss of a contract asset shall be measured, presented, and disclosed in accordance with Subtopic 326-20
(see also paragraph 606-10-50-4(b)).” In the list of required disclosures under ASC 606
, ASC 606-10-50-4(b)
includes: “Credit losses recorded (in accordance with Subtopic 326-20
on financial instruments measured at amortized cost) on any receivables or contract assets arising from an entity’s contracts with customers, which the entity shall disclose separately from credit losses from other contracts.”
Because contract assets are subject to ASC 326-20
, reporting entities are required to disclose certain credit quality information on contract assets in accordance with ASC 326-20-50
. Therefore, we believe the credit quality disclosures required by ASC 326-20-50-4
and ASC 326-20-50-5
apply to contract assets recognized under ASC 606
It is important to note, however, that a contract asset would not meet the definition of a financing receivable if it does not represent a contractual right to receive money either on demand or on fixed or determinable dates. As the explicit quantitative credit quality information disclosures in ASC 326-20-50-5
only apply to financing receivables, contract assets that are not financing receivables would not be subject to these disclosures. Specifically, reporting entities are not required to present credit quality information on contract assets by vintage year, as described within ASC 326-20-50-6
Question LI 12-2
Are reporting entities required to provide the ASC 326-20-50-6
vintage disclosures in its interim financial statements?
Yes. The ASC 326-20-50-6
vintage disclosures are required in a reporting entity’s interim financial statements. Although ASC 326 does not explicitly refer to interim disclosures, reporting entities should consider the guidance in ASC 270
, Interim Reporting.
requires reporting entities to disclose, at a minimum, the following information about the credit quality of financial assets and the allowance for credit losses in accordance with ASC 326-20
- Nonaccrual and past due financial assets
- Allowance for expected credit losses related to financial assets
- Credit-quality information related to instruments within the scope of ASC 326-20
- Modifications of financing receivables
These disclosures should be provided for all periods presented.
The vintage disclosures in ASC 326-20-50-6
are considered part of the credit quality indicator disclosures referenced in ASC 270-10-50-1(p)
, and therefore entities should present comparative vintage disclosures in their interim financial statements.
Reporting entities should also consider the other requirements in ASC 270
, including disclosures of significant changes from prior reporting periods. See FSP 29
for further information.