Search within this section
Select a section below and enter your search term, or to search all click Loans and investments
Favorited Content
12.7 Credit losses and credit quality of financial instruments
Publication date: 31 May 2022
us Loans & investments guide
The financial statement disclosures related to credit losses are intended to enable users of financial statements to understand the credit risk inherent in a reporting entity’s portfolio, how management monitors this risk, management’s estimate of expected credit losses, and the changes in the estimate that has taken place during the period. As discussed in ASC 326-20-50-3, each reporting entity should determine how much detail it should provide based on its specific facts and circumstances. The disclosure should strike a balance between too much aggregation and excessive detail that could overwhelm financial statement users.
A reporting entity should also consider the requirement of S-X 12-09. This rule requires entities to list, by major classes, all valuation and qualifying accounts not included in specific schedules, grouped by those that are deducted from balance sheet assets and those that are included under the “reserves” line item in the balance sheet. This information can be included in a separate schedule or in the notes to the financial statements.
12.7.1 Financial instruments measured at amortized cost disclosure – after adoption of ASU 2022-02
For each class of financial assets (see LI 12.4.2 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
- Collateral
- Collection experience
- Other internal metrics
For each 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 asset (which would not include any active portfolio layer method basis adjustments; however, reporting entities would be required to disclose total active portfolio layer hedge basis adjustments separately), 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.
In addition, PBEs are required to disclose the current-period gross writeoffs by year of origination in the vintage tables. Entities are not required to disclose gross recoveries in the vintage disclosures.
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 12-2
Are reporting entities required to disclose credit quality information in accordance with ASC 326-20-50 for contract assets recognized under ASC 606?
Are reporting entities required to disclose credit quality information in accordance with ASC 326-20-50 for contract assets recognized under ASC 606?
PwC response
ASC 606-10-45-3 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 12-3
Are reporting entities required to provide the ASC 326-20-50-6 vintage disclosures in its interim financial statements?
Are reporting entities required to provide the ASC 326-20-50-6 vintage disclosures in its interim financial statements?
PwC response
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.
ASC 270-10-50-1(p) 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.
12.7.1A Financial instruments measured at amortized cost disclosure – before adoption of ASU 2022-02
For each class of financial assets (see LI 12.4.2 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
- Collateral
- Collection experience
- Other internal metrics
For each 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 asset (which would not include any active portfolio layer method basis adjustments, however, reporting entities would be required to disclose total active portfolio layer hedge basis adjustments separately), 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 each 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 12-2A
Are reporting entities required to disclose credit quality information in accordance with ASC 326-20-50 for contract assets recognized under ASC 606?
Are reporting entities required to disclose credit quality information in accordance with ASC 326-20-50 for contract assets recognized under ASC 606?
PwC response
ASC 606-10-45-3 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 12-3A
Are reporting entities required to provide the ASC 326-20-50-6 vintage disclosures in its interim financial statements?
Are reporting entities required to provide the ASC 326-20-50-6 vintage disclosures in its interim financial statements?
PwC response
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.
ASC 270-10-50-1(p) 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.
12.7.1.1 Disclosures for the allowance for credit losses
The disclosures related to the allowance for credit losses are designed to provide financial statement users not only with the measurement of the allowance during the period, but also with an understanding of management’s method for developing the allowance.
To provide financial statement’s users with this information, ASC 326-20-50-11 requires a reporting entity to disclose, by portfolio segment and major security type, all of the following.
Excerpt from ASC 326-20-50-11
- A description of how expected loss estimates are developed
- A description of the entity’s accounting policies and methodology to estimate the allowance for credit losses, as well as a discussion of the factors that influenced management’s current estimate of expected credit losses, including:
- Past events
- Current conditions
- Reasonable and supportable forecasts about the future.
- A discussion of risk characteristics relevant to each portfolio segment
- A discussion of the changes in the factors that influenced management’s current estimate of expected credit losses and the reasons for those changes (for example, changes in portfolio composition, underwriting practices, and significant events or conditions that affect the current estimate but were not contemplated or relevant during a previous period)
- Identification of changes to the entity’s accounting policies, changes to the methodology from the prior period, its rationale for those changes, and the quantitative effect of those changes
- Reasons for significant changes in the amount of writeoffs, if applicable
- A discussion of the reversion method applied for periods beyond the reasonable and supportable forecast period
- The amount of any significant purchases of financial assets during each reporting period
- The amount of any significant sales of financial assets or reclassifications of loans held for sale during each reporting period.
In addition, in order to enable users to understand the activity in the allowance for expected credit losses for each period, a reporting entity should provide a rollforward of the allowance for each portfolio segment and major security type in accordance with ASC 326-20-50-13.
The rollforward should include:
- The beginning balance in the allowance
- Current period provision
- The initial allowance for credit losses recognized on financial assets accounted for as purchased financial assets with credit deterioration (including beneficial interest that meet the conditions in ASC 325-40-30-1A and therefore are initially measured under the same guidance), if applicable
- Writeoffs charged against the allowance
- Recoveries collected
- The ending balance in the allowance
Disclosure about interest income and credit loss expense
When a reporting entity chooses to use a discounted cash flow approach to estimate expected credit losses and elects to classify the change in present value attributable to the passage of time as interest income, it should disclose the amount recorded to interest income that results from such election.
See LI 12.3 for information on the election to classify the changes in present value attributable to the passage of time as interest income.
12.7.1.2 Disclosures for past due and nonaccrual status
A reporting entity should provide an aging analysis for financial assets that are past due at the end of the reporting period, reflecting amortized cost disaggregated at the portfolio segment level and by major security type. See ASC 326-20-55-80 for an example disclosure. The amortized cost basis would not include any basis adjustments from active portfolio layer method hedges, but a reporting entity would be required to separately disclose any basis adjustments from active portfolio layer method hedges.
In addition, a reporting entity should disclose the accounting policies detailed in ASC 326-20-50-17.
Excerpt from ASC 326-20-50-17
- Nonaccrual policies, including the policies for discontinuing accrual of interest, recording payments received on nonaccrual assets (including the cost recovery method, cash basis method, or some combination of those methods), and resuming accrual of interest, if applicable
- The policy for determining past-due or delinquency status
- The policy for recognizing writeoffs within the allowance for credit losses.
As discussed in ASC 326-20-50-16, a reporting entity should disclose information sufficient to enable financial statement users to understand the credit risk and interest income recognized on financial assets on nonaccrual status. To do that, it should disclose the following for financial assets on nonaccrual status disaggregated by class of financing receivable and major security type:
- Amortized cost basis as of the beginning and the end of the reporting period
- Interest income recognized during the period on such assets
- The amortized cost basis of financial assets that are 90 days or more past due, but are not on nonaccrual status as of the reporting date
- Amortized cost basis of such assets for which there are no allowances for credit losses as of the reporting date
The amortized cost basis above would not include any basis adjustments from active portfolio layer method hedges, but a reporting entity would be required to separately any basis adjustments from active portfolio layer method hedges.
The disclosures related to past-due and nonaccrual status financial assets 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. They are also not required for receivables measured at the lower of amortized cost basis or fair value.
12.7.1.3 Credit losses: disclosures for PCD assets
A reporting entity should provide a reconciliation between the purchase price and par value of financial assets purchased with credit deterioration during the period. This reconciliation should include the allowance for credit losses at the acquisition date and the discount (or premium) attributable to other factors.
12.7.1.4 Disclosures for collateralized financial assets
For a financial asset for which (1) repayment is expected to be provided substantially through the operation or sale of the collateral (on the basis of an assessment as of the reporting date) and (2) the borrower is experiencing financial difficulty, a reporting entity should describe the type of collateral by class of financing receivable and major security type.
The reporting entity should also describe the extent to which collateral secures its financial assets and include a qualitative explanation by class of financing receivables and major security type of the significant changes in the extent to which collateral secures those assets (whether due to a general deterioration or due to other reasons).
12.7.2 Disclosures for off-balance sheet credit exposures
Reporting entities may have credit exposure related to off-balance sheet loan commitments, standby letters of credit, certain financial guarantees, and other similar instruments (other than those within the scope of ASC 815, Derivatives and Hedging). In addition to the disclosures required by other topics (such as ASC 450, Contingencies, discussed in FSP 23), reporting entities should also describe the accounting policies and methods used to estimate its liabilities related to off-balance sheet credit exposures and related changes. The disclosure should discuss factors that influenced management’s judgment (e.g., historical losses, existing economic conditions, and reasonable and supportable forecasts) and a discussion of risk elements relevant to particular categories of financial instruments.
12.7.3 Credit losses: disclosures for AFS debt securities
Specific disclosures are required regarding credit quality and related to the allowance for credit losses for available-for-sale debt securities.
12.7.3.1 AFS debt securities: allowance for credit losses
For reporting periods in which an allowance for credit losses for available-for-sale debt securities is measured, a reporting entity should disclose by major security type the methodology and significant inputs used to measure the credit loss, including its accounting policy for recognizing writeoffs of uncollectible available-for-sale debt securities. See examples of significant inputs included in ASC 326-30-50-7.
ASC 326-30-50-9 requires a reporting entity to disclose a tabular rollforward of the allowance for credit losses by major security type. The rollforward is meant to provide investors with additional information regarding management’s expectations of credit losses, how those expectations develop over time, and how actual experience compares to prior expectations.
Figure LI 12-5 illustrates a rollforward of the allowance for credit losses on available-for-sale debt securities.
Figure LI 12-5
Example of a rollforward of the allowance for credit losses on available-for-sale debt securities.
Example of a rollforward of the allowance for credit losses on available-for-sale debt securities.
Excerpt of Note X: Investments
The following table displays the rollforward of the allowance for credit losses for the period:
[For example purposes, only a single year is shown.]
Foreign government bonds |
Municipal bonds |
Asset backed securities |
Total |
|
Balance, beginning of year |
129 |
20 |
0 |
149 |
Credit losses on securities for which credit losses were not previously recorded |
31 |
15 |
0 |
46 |
Securities purchased with credit deterioration |
10 |
0 |
12 |
22 |
Reduction due to sales |
(48) |
0 |
0 |
(48) |
Reduction due to intent to sell |
(12) |
0 |
0 |
(12) |
Net increases (decreases) in allowance on previously impaired securities |
7 |
(12) |
0 |
(5) |
Writeoffs charged against the allowance |
(13) |
0 |
(3) |
(16) |
Recoveries of amounts previously written off |
4 |
0 |
0 |
4 |
Increases due to the passage of time |
3 |
1 |
0 |
4 |
Balance, end of year |
111 |
24 |
9 |
144 |
Disclosure about interest income and credit loss expense
When a reporting entity chooses to use a discounted cash flow approach to estimate expected credit losses and elects to classify the change in present value attributable to the passage of time as interest income, it should disclose the amount recorded to interest income that represents the change in present value attributable to the passage of time.
See LI 12.3 for information on the election to classify all changes in discounted cash flows as credit loss.
12.7.3.2 Purchased AFS securities with credit deterioration
A reporting entity should provide a reconciliation between the purchase price and par value of available-for-sale debt securities purchased with credit deterioration during the period. This reconciliation should include the discount attributable to expected credit losses and the discount (or premium) attributable to other factors. This disclosure requirement applies to both financial assets measured at amortized cost and to AFS securities (provided they were acquired with credit deterioration).
The reconciliation should include the purchase price, the allowance for credit losses at the acquisition date, the discount or premium attributable to other factors, and the par value.
12.7.3.3 Securities in unrealized loss position without allowance
Certain quantitative and qualitative disclosures are required for available-for-sale debt securities in unrealized loss position for which no allowance has been recognized or when an allowance has only been recognized for a portion of the credit losses (i.e. there is a non-credit portion recognized in AOCI). The same requirements apply to beneficial interests in securitized financial assets in the scope of ASC 325-40. See ASC 326-30-55-8 and ASC 326-30-55-9 for examples of the required disclosures.
Quantitative disclosures
A reporting entity should disclose both of the following, aggregated by major security type as of each balance sheet date (in a tabular format):
- Aggregate fair value of investments with unrealized losses
- Aggregate amount of unrealized losses (the amount by which amortized cost basis exceeds fair value). This would not include any basis adjustments from active portfolio layer method hedges, but a reporting entity would be required to separately disclose any basis adjustments from active portfolio layer method hedges
These amounts should be disaggregated by those investments in a continuous unrealized loss position for (1) less than 12 months and (2) 12 months or longer.
To establish the duration of the loss position a reporting entity should use the end of the interim reporting period in which the non-credit related impairment was first recognized in OCI as a reference point.
Figure LI 12-6 illustrates the disclosures related to unrealized losses.
Figure LI 12-6
Example disclosure of unrealized losses, by major security type
Example disclosure of unrealized losses, by major security type
Excerpt of Note X: Investments
The following table summarizes the fair value and gross unrealized losses by category and disaggregated by the length of time that individual debt securities have been in a continuous unrealized loss position.
[For example purposes, only a single year is shown. Assume none of the securities are designated as part of an active portfolio layer method hedge.]]
Less than twelve months |
Twelve months or greater |
Total |
||||||
Fair value |
Gross unrealized loss |
Fair value |
Gross unrealized loss |
Fair value |
Gross unrealized loss |
|||
US Treasury securities |
687 |
16 |
324 |
0 |
1,011 |
16 |
||
Foreign government bonds |
608 |
29 |
430 |
31 |
1,038 |
60 |
||
Asset-backed securities |
30 |
14 |
87 |
7 |
117 |
21 |
||
Total debt securities |
1,325 |
59 |
841 |
38 |
2,166 |
97 |
||
Qualitative disclosures
As of the latest balance sheet date, a reporting entity should include a narrative disclosure that allows a financial statement user to understand the information (both positive and negative) that the reporting entity considered in reaching its conclusion as to why no allowance for credit losses was deemed necessary. The reporting entity may aggregate the disclosure by investment category unless there are individually significant unrealized losses. Individually significant unrealized losses should be appropriately disclosed and discussed. ASC 326 outlines examples of the information reporting entities should consider including in this qualitative disclosure.
Excerpt from ASC 326-30-50-4(b)
This disclosure could include all of the following:
1. The nature of the investment(s)
2. The cause(s) of the impairment(s)
3. The number of investment positions that are in an unrealized loss position
4. The severity of the impairment(s)
5. Other evidence considered by the investor in reaching its conclusion that an allowance for credit losses is not necessary, including, for example, any of the following:
i. Performance indicators of the underlying assets in the security, including any of the following:
01. Default rates
02. Delinquency rates
03. Percentage of nonperforming assets.
ii. Debt-to-collateral-value ratios
iii. Third-party guarantees
iv. Current levels of subordination
v. Vintage
vi. Geographic concentration
vii. Industry analyst reports
viii. Credit ratings
ix. Volatility of the security’s fair value
x. Interest rate changes since purchase
xi. Any other information that the investor considers relevant.
ASC 326-30-55-9 provides an example of a detailed narrative disclosure.
Reporting entities should consider what additional information may be necessary to allow the user to understand management’s considerations in determining that an allowance for credit losses was unnecessary.
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.
Link copied
