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Reporting entities should record lifetime expected credit losses for financial instruments within the scope of the CECL model through the allowance for credit losses account. As a result, the financial statements will generally reflect the net amount expected to be collected on the financial instrument. The allowance is measured and recorded upon the initial recognition of the in-scope financial instrument, regardless of whether it is originated or purchased or acquired in a business combination. Recording an impairment as an adjustment to the basis of the instrument is only permitted in certain circumstances, such as when the asset is written off (see LI 7.3.5.3).
ASC 326-20-30-1 defines the allowance for credit losses.

Excerpt from ASC 326-20-30-1

The allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial asset(s) to present the net amount expected to be collected on the financial asset.

At each reporting period, a reporting entity should update its estimate and adjust the allowance for credit losses accordingly. Increases in the allowance are recorded through net income as credit loss expense. Decreases in the allowance are recorded through net income as a reversal of credit loss expense.

7.3.1 CECL application to amortized cost basis of financial assets

ASC 326-20-30-5 requires a reporting entity to determine the allowance for credit losses for an instrument based on the amortized cost of the financial asset, including accrued interest, discounts, deferred origination fees or costs, foreign exchange adjustments, and fair value hedge accounting adjustments.
ASC 326-20-20 defines the amortized cost basis.

ASC 326-20-20

Amortized cost basis: The amortized cost basis is the amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion, or amortization of premium, discount, and net deferred fees or costs, collection of cash, writeoffs, foreign exchange, and fair value hedge accounting adjustments.

Question LI 7-4 discusses whether the estimate of expected credit losses is calculated before or after allocating equity method losses to a receivable.
Question LI 7-4
An entity may have a receivable subject to CECL that has had losses allocated to it as a result of applying the equity method of accounting to a separate equity investment in the borrower. Is the estimate of expected credit losses calculated before or after allocating equity method losses?
PwC response
The allowance for credit losses is estimated after allocating the equity method losses under ASC 323. Equity method losses are allocated first because the losses adjust the investment’s amortized cost basis. ASC 326-20-30-4 and ASC 326-20-30-5 require the allowance for credit losses to reflect the expected credit losses related to a financial asset’s amortized cost basis.

7.3.2 Unit of account for applying the CECL model

ASC 326-20-30-2 requires a reporting entity to measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. If a financial instrument does not share similar risk characteristics with other assets subject to CECL, expected credit losses may be measured on an individual asset basis.

ASC 326-20-30-2

An entity shall measure expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist (as described in paragraph 326-20-55-5). If an entity determines that a financial asset does not share risk characteristics with its other financial assets, the entity shall evaluate the financial asset for expected credit losses on an individual basis. If a financial asset is evaluated on an individual basis, an entity also should not include it in a collective evaluation. That is, financial assets should not be included in both collective assessments and individual assessments.

If a financial asset is assessed on an individual basis for expected credit losses, it should not be included in a pool of assets, as doing so would result in double counting the allowance for credit losses related to that asset.
The unit of account for purposes of determining the allowance for credit losses under the CECL impairment model may be different from the unit of account applied for other purposes, such as when calculating interest income. See LI 6 for more details on calculating interest income.

7.3.2.1 Similar risk characteristic for CECL pooling requirement

ASC 326-20-55-5 provides a list of risk characteristics that can be used to pool assets. An entity is permitted to consider one risk characteristic or a combination of risk characteristics when evaluating its pooling. When determining risk characteristics to include in its pooling assessment, reporting entities should consider which attributes are used for credit risk management and credit loss modelling.

ASC 326-20-55-5

In evaluating financial assets on a collective (pool) basis, an entity should aggregate financial assets on the basis of similar risk characteristics, which may include any one or a combination of the following (the following list is not intended to be all inclusive):

  1. Internal or external (third-party) credit score or credit ratings
  2. Risk ratings or classification
  3. Financial asset type
  4. Collateral type
  5. Size
  6. Effective interest rate
  7. Term
  8. Geographical location
  9. Industry of the borrower
  10. Vintage
  11. Historical or expected credit loss patterns
  12. Reasonable and supportable forecast periods.

Figure LI 7-1 provides examples of common risk characteristics that may be used in an entity’s pooling assessment.
Figure LI 7-1
Examples of risk characteristics

Risk characteristic

Description
Collateral type
Collateral type can be based on asset class, such as financial assets collateralized by commercial real estate, residential real estate, inventory, or cash. It can also be more detailed, such as subdividing commercial real estate into multifamily apartment buildings, warehouses, or condominiums.
Credit rating/scores
External or internal credit rating/scores. External are those issued by credit ratings agencies, such as Moody’s or S&P. Internally developed risk ratings are more typically used in commercial lending and for debt securities. Other credit indicators, such as credit default or bond spreads, may also be utilized.

For certain assets, the counterparty’s FICO score may be used as a risk characteristic.
Asset to value ratio
The ratio of the outstanding financial asset balance to the fair value of any underlying collateral
Duration
The duration of the financial assets
Industry
The primary industry in which the borrower or issuer operates
Geographical location
Location of the borrower or issuer
Origination vintage
Year of origination of an asset. For purchased assets, vintage would be the issuance or origination date. Vintage may indicate specific risk characteristics based on the underwriting standards that were in effect at the time the financial asset was originated.
Payment structure
Payment structure can be differentiated between interest only, principal amortization, amortizing with a balloon payment, paid in kind, and capitalized interest. Different payment structures may have different credit risks depending on the nature of the asset.

7.3.2.2 Reassessing pools when applying the CECL model

For purposes of applying the CECL model, financial instruments are initially pooled, as applicable, at origination or acquisition. The pools established are not static and should be reassessed each reporting period. When an instrument no longer shares similar risk characteristics to other instruments in the pool, it should be removed from the pool and put into another pool of instruments with similar risk characteristics. If there are no pools with similar risk characteristics to that of the financial instrument, an entity should individually evaluate the instrument for impairment.
Question LI 7-5 discusses whether certain debt securities classified as held to maturity (HTM) should be pooled with other HTM debt securities for the purposes of measuring the allowance for credit losses.
Question LI 7-5
Investor Corp invests in debt securities classified as HTM. Investor Corp’s portfolio has similar maturity dates and has several bonds issued by companies in similar industries. Is Investor Corp required to pool its HTM debt securities for purposes of measuring its allowance for credit losses?
PwC response
It depends. Financial instruments subject to the CECL impairment model must be pooled with other financial instruments if they share similar risk characteristics. Given that the securities have similar maturity dates and may have similar industry exposure, Investor Corp should consider whether they should be grouped in one or more pools for measuring the allowance for credit losses. Investor Corp would also need to consider other relevant risk factors (e.g., credit ratings) when determining whether these securities should be pooled at a more granular level.

7.3.3  CECL measurement methodology

ASC 326-20-30-3 does not require reporting entities to use a specific method to calculate the allowance for credit losses; instead, various methods can be used, including discounted cash flow (DCF), loss-rate, roll-rate, probability-of-default/loss given default, among others.

ASC 326-20-30-3

The allowance for credit losses may be determined using various methods. For example, an entity may use discounted cash flow methods, loss-rate methods, roll-rate methods, probability-of-default methods, or methods that utilize an aging schedule. An entity is not required to utilize a discounted cash flow method to estimate expected credit losses. Similarly, an entity is not required to reconcile the estimation technique it uses with a discounted cash flow method.

The selection of a model to estimate the allowance for credit losses will depend on the reporting entity’s facts and circumstances, including the complexity and significance of the financial instruments being evaluated, as well as other relevant considerations.
Although ASC 326-20 does not require the use of a DCF, we believe there are certain circumstances when a DCF would be the appropriate method for determining the allowance for credit losses. These circumstances include, but are not limited to:
  • When the impacts of certain types of concessions can only be measured through a DCF method, such as interest rate concessions related to TDRs and reasonably expected TDRs. See LI 10.3.1.2 for further information.
  • When an entity has elected to keep its purchased credit impaired (PCI) pools together when transitioning from the ASC 310-30 accounting guidance to the PCD accounting guidance under CECL. See LI 13 for further information.

7.3.3.1 Measuring CECL allowance using a method other than a DCF

ASC 326-20 does not require a reporting entity to use a DCF method to calculate its allowance for credit losses. ASC 326-20-30-5 states that a reporting entity that does not use a DCF method should use a method that appropriately reflects the estimate of expected credit losses relative to an asset’s amortized cost basis as of the reporting date.

ASC 326-20-30-5

If an entity estimates expected credit losses using a method other than a discounted cash flow method described in paragraph 326-20-30-4, the allowance for credit losses shall reflect the entity’s expected credit losses of the amortized cost basis of the financial asset(s) as of the reporting date. For example, if an entity uses a loss-rate method, the numerator would include the expected credit losses of the amortized cost basis (that is, amounts that are not expected to be collected in cash or other consideration, or recognized in income). In addition, when an entity expects to accrete a discount into interest income, the discount should not offset the entity’s expectation of credit losses. An entity may develop its estimate of expected credit losses by measuring components of the amortized cost basis on a combined basis or by separately measuring the following components of the amortized cost basis, including all of the following:
  1. Amortized cost basis, excluding applicable accrued interest, premiums, discounts (including net deferred fees and costs), foreign exchange, and fair value hedge accounting adjustments (that is, the face amount or unpaid principal balance)
  2. Premiums or discounts, including net deferred fees and costs, foreign exchange, and fair value hedge accounting adjustments
  3. Applicable accrued interest. See paragraph 326-20-30-5A for guidance on excluding accrued interest from the calculation of the allowance for credit losses.

See LI 7.3.3.3 for information on developing an estimate of expected credit losses by measuring components of the amortized cost basis on a combined basis or by separately measuring certain components of the amortized cost basis
Question LI 7-6 discusses whether an entity can discount selected inputs or expected cash flows or discount cash flows to a date other than the reporting date when using a method other than a DCF method.
Question LI 7-6
When using a method other than a DCF method, such as a probability-of-default method, can an entity discount selected inputs or expected cash flows or discount cash flows to a date other than the reporting date?
PwC response
No. This topic was discussed during the November 1, 2018 TRG meeting (TRG Memo 14: Cover Memo and TRG Memo 18: Summary of Issues Discussed and Next Steps).
The FASB staff noted that the effect of discounting would have to be measured as of the reporting date, not another date, such as the default date. At its November 7, 2018 meeting, the FASB agreed that ASC 326-20 prohibits discounting inputs to a date other than the reporting date. Basel III rules require recoveries to be discounted from the receipt date back to the default date for purposes of calculating loss given default for certain reporting entities. Thus, the loss given default data maintained for Basel III rules would need to be adjusted to be used in an estimation of credit losses under ASC 326-20.
Using discounting in an estimate of credit losses will generally require discounting all estimated cash flows (principal and interest) in accordance with ASC 326-20-30-4 (see LI 7.3.3.2). We do not believe it would be appropriate to estimate expected credit losses by discounting amounts of principal not expected to be collected to the reporting date.
In some situations, an estimate of the fair value of collateral (which may be an important consideration in determining estimated credit losses) will require the expected future cash flows of the collateral to be discounted. We believe this is appropriate and would not be the same as discounting only certain inputs.

Question LI 7-7 discusses whether multiplying an annual historical loss rate by the remaining contractual term of a financial asset and applying this to the amortized cost basis of an asset (or pool of assets) is an acceptable method to estimate credit losses under CECL.
Question LI 7-7
Is multiplying an annual historical loss rate by the remaining contractual term of a financial asset and applying this to the amortized cost basis of an asset (or pool of assets) an acceptable method to estimate allowances for credit losses under CECL?
PwC response
Solely using an annual historical loss rate to estimate an allowance for credit losses may not be appropriate under CECL. The use of an annual historical loss rate may not appropriately reflect management’s expectation of current economic conditions or its forecasts of economic conditions. Instead, historical loss data should be used as one of many factors to estimate a CECL allowance.

Question LI 7-8 discusses whether the weighted average remaining maturity (WARM) method is an acceptable method to estimate allowance for credit losses under CECL.
Question LI 7-8
Is the WARM method an acceptable method to estimate allowances for credit losses under CECL?
PwC response
The WARM method is one of many methods that may be used to estimate the allowance for credit losses for less complex pools of financial assets under ASC 326-20. This method is discussed in a FASB staff Q&A document available on the FASB’s website.
The WARM method simplifies the quantitative calculation of estimated expected credit losses by using an average annual charge-off rate that is determined using historical loss information. In order to calculate estimated expected credit losses at the balance sheet date, the WARM method requires an entity to multiply the annual charge-off rate by the estimated amortized cost basis of a pool of financial assets over the pool’s remaining contractual term, adjusted for prepayments.
Generally, the WARM method’s quantitative calculation will not, by itself, be sufficient. Qualitative adjustments will generally be necessary in order to compensate for the method’s simplifying assumptions. For example, the average charge-off rate may not appropriately reflect management’s expectation of current economic conditions or its forecasts of economic conditions. In addition, there may be other challenges, such as a lack of historical loss data, losses with no predictive patterns, current pools that significantly differ from historical pools, a low number of loans in a pool, or changes in the economic environment. The FASB staff’s Q&A acknowledges that a qualitative adjustment may be needed to reflect these considerations.
Additional considerations may be required when using the WARM method. For products with loss profiles that suggest losses do not occur in the same pattern for each year of an asset’s life, adjustments to consider seasonality and other such factors may be required. Additional adjustments may be required if historic loss information is gathered from an “open” pool (and in the case of the FASB staff’s Q&A, a growing pool) of loans because a credit loss estimate should only consider existing assets as they “run-off.” There may be other factors or considerations that should be considered depending on the nature and type of the assets.
For entities that are considering using the WARM method, the complexity of estimating and supporting the method’s qualitative adjustments may outweigh the benefits of using the simplified quantitative approach.

7.3.3.2  Using a DCF method to estimate expected credit losses

ASC 326-20 does not require a reporting entity to use a DCF method to calculate its allowance for credit losses. ASC 326-20-30-4 requires entities electing to use a DCF method to (1) calculate the present value of the financial asset’s expected cash flows at its effective interest rate and (2) calculate the allowance for credit losses as the difference between the asset’s amortized cost basis and the present value of expected cash flows.

ASC 326-20-30-4

If an entity estimates expected credit losses using methods that project future principal and interest cash flows (that is, a discounted cash flow method), the entity shall discount expected cash flows at the financial asset’s effective interest rate. When a discounted cash flow method is applied, the allowance for credit losses shall reflect the difference between the amortized cost basis and the present value of the expected cash flows. If the financial asset’s contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, for example, the prime rate, the London Interbank Offered Rate (LIBOR), or the U.S. Treasury bill weekly average, that financial asset’s effective interest rate (used to discount expected cash flows as described in this paragraph) shall be calculated based on the factor as it changes over the life of the financial asset. An entity is not required to project changes in the factor for purposes of estimating expected future cash flows. If the entity projects changes in the factor for the purposes of estimating expected future cash flows, it shall use the same projections in determining the effective interest rate used to discount those cash flows. In addition, if the entity projects changes in the factor for the purposes of estimating expected future cash flows, it shall adjust the effective interest rate used to discount expected cash flows to consider the timing (and changes in the timing) of expected cash flows resulting from expected prepayments in accordance with paragraph 326-20-30-4A. Subtopic 310-20 on receivables—nonrefundable fees and other costs provides guidance on the calculation of interest income for variable rate instruments.

A reporting entity’s method of estimating the expected cash flows used in forecasting credit losses should be consistent with the FASB’s intent that such cash flows represent the cash flows that an entity expects to collect after a careful assessment of available information. See LI 7.3.5 for further information on developing a forecast of expected credit losses.
The effective interest rate for discounting when using a DCF in the CECL model
Financial instruments accounted for under the CECL model are permitted to use a DCF method to calculate the allowance for credit losses. ASC 326-20-30-4 states that, when using a DCF method, an entity should discount expected cash flows at the financial asset’s effective interest rate. The effective interest rate is defined in ASC 326-20-20.

ASC 326-20-20

Effective interest rate: The rate of return implicit in the financial asset, that is, the contractual interest rate adjusted for any net deferred fees or costs, premium, or discount existing at the origination or acquisition of the financial asset. For purchased financial assets with credit deterioration, however, to decouple interest income from credit loss recognition, the premium or discount at acquisition excludes the discount embedded in the purchase price that is attributable to the acquirer’s assessment of credit losses at the date of acquisition.

When an unadjusted effective interest rate is used to discount expected cash flows on fixed or floating rate instruments, the discount rate will generally not include expectations of prepayments (unless an entity is applying the guidance in ASC 310-20-35-26 (see LI 6.5.1.3)). However, in estimating credit losses, an entity is required by ASC 326-20-30-6 to consider the impact of prepayments in its expected cash flows on these instruments. As a result, ASC 326-20-30-4A provides entities with an accounting policy election to adjust the effective interest rate used to discount expected cash flows for the consideration of timing (and changes in timing) of expected prepayments of financial instruments within the scope of ASC 326-20.

ASC 326-20-30-4A

As an accounting policy election for each class of financing receivable or major security type, an entity may adjust the effective interest rate used to discount expected cash flows to consider the timing (and changes in timing) of expected cash flows resulting from expected prepayments. However, if the asset is restructured in a troubled debt restructuring, the effective interest rate used to discount expected cash flows shall not be adjusted because of subsequent changes in expected timing of cash flows.

Entities need to calculate future cash flows, including future interest (or coupon) payments, in order to determine the effective interest rate. In regard to variable rate instruments, a company can elect whether to use projections of future interest rate environments to estimate future interest payments used in the calculation of these expected cash flows or they can elect to estimate future interest payments using the current rate. ASC 326-20-30-4 further requires variable rate instruments to use the same interest rate projections used to forecast expected cash flows for the purposes of determining the effective interest rate used in discounting to calculate the allowance for credit losses. If an entity does elect to project future interest rate environments when using a DCF to estimate credit losses for variable rate instruments, it is required to adjust the effective interest rate used in discounting cash flows to consider the timing (and changes in timing) of expected cash flows resulting from prepayments. The elections within ASC 326-20-30-4 and ASC 326-20-30-4A are only applicable to adjusting the effective interest rate for the purposes of estimating credit losses. Interest income is required to be recognized using an effective interest rate in accordance with other GAAP (for example ASC 310-20 for loans, which was not amended by these provisions of ASC 326-20).

7.3.3.3 Amortized cost basis and measurement in a CECL model

When a reporting entity measures the allowance for credit losses using a DCF approach, the allowance will reflect the difference between the amortized cost of the financial asset and the present value of the expected cash flows of the financial asset. Under this methodology, the discount rate used to discount estimated cash flows for the purposes of calculating an allowance for credit losses will be the based on the effective interest rate of the instrument. As a result, this methodology explicitly considers elements that impact the amortized cost basis of the asset.
When a reporting entity uses a measurement technique other than a DCF approach, the allowance should reflect the reporting entity’s expected credit losses of the amortized cost basis. Therefore, non-DCF methods should incorporate the impact of accrued interest, premiums, and discounts into the estimate of expected credit losses. ASC 326-20-30-5 allows an entity to measure the estimate of expected credit losses by measuring components of the amortized cost basis on a combined basis or by separately measuring certain components of the amortized cost basis as follows:   
  • Amortized cost basis, excluding applicable accrued interest, premiums, discounts (including net deferred fees and costs), foreign exchange, and fair value hedge accounting adjustments (that is, the face amount or unpaid principal balance)
  • Premiums or discounts, including net deferred fees and costs, foreign exchange, and fair value hedge accounting adjustments
  • Applicable accrued interest. ASC 326-20-30-5A provides guidance on when it would be appropriate to exclude accrued interest from the calculation of the allowance for credit losses
Question LI 7-9 discusses whether an entity should record an allowance for credit losses on unearned future interest coupons/payments when using a method other than a DCF method to estimate expected credit losses.
Question LI 7-9
Should an entity record an allowance for credit losses on unearned future interest coupons/payments when using a method other than a DCF method to estimate expected credit losses?
PwC response
No. An entity should not consider future interest coupons/payments (not associated with unamortized discounts/premiums) that have not yet been accrued if using a method other than a DCF to estimate expected credit losses. This issue was discussed at the June 11, 2018 meeting of the TRG (TRG Memo 8: Capitalized Interest and TRG Memo 13: Summary of Issues Discussed and Next Steps).
Certain instruments permit or require interest payments to be deferred (capitalized) and paid at a later date. In some cases, this deferred interest may effectively become part of the loan’s par or principal amount. Accrued interest coupons/payments (whether capitalized or paid on a recurring basis) only become legally due after the passage of time.
For a financial asset issued at par with expected future interest coupons/payments still to accrue (and potentially capitalized), the amount due upon default is the par amount and accrued interest to date. The borrower is not obligated to repay the lender unearned interest coupons/payments or any amount greater than the outstanding principal plus any accrued interest to date. This is different from a discount, when the lender is legally entitled to par or principal upon a borrower’s default. An entity should therefore not consider future expected interest coupons/payments not associated with unamortized discounts/premiums (e.g., estimated future capitalized interest) when estimating expected credit losses.
Estimating credit losses when there are premiums and discounts
When an entity assesses a financial asset for expected credit losses through a method other than a DCF method, it should consider whether any unamortized premium or discount would also be affected by an expectation of future defaults. However, the FASB agreed as part of the June 11, 2018 TRG meeting that an entity does not need to consider the timing of credit losses when determining the impact of premiums and discounts on the measurement of the allowance for credit losses (see TRG Memo 8: Capitalized Interest and TRG Memo 13: Summary of Issues Discussed and Next Steps).
Although ASC 326-20-30-5 requires the estimate to be based on a financial asset’s amortized cost, it also states that when an entity expects to accrete a discount into interest income, the discount cannot be used to offset the entity’s expectation of credit losses (i.e., a discount on a financial instrument subject to CECL cannot be used to avoid recognizing an allowance).

Question LI 7-10 discusses whether the discount of a purchased HTM debt security can offset the measurement of credit losses at the acquisition date.
Question LI 7-10
If an HTM debt security is purchased at a discount, should the discount offset the measurement of credit losses at acquisition date?
PwC response
No. Despite the fact that the security was acquired at fair value (which includes consideration of credit risk), the CECL impairment model requires day one recognition of expected credit losses. The discount should not offset the initial estimate of expected credit losses.
Accrued interest in a non-DCF model used to measure credit losses
When an entity assesses a financial asset for expected credit losses through a method other than a DCF approach, it should consider whether any accrued interest could be affected by an expectation of future defaults.
For financial assets within the scope of ASC 326-20, the literature provides the following additional guidance:
  • A reporting entity can elect to develop expected credit losses on its accrued interest receivable balances separate from other components of the amortized cost basis.
  • A reporting entity can make an accounting policy election to not measure an allowance for credit losses on accrued interest if an entity writes off the uncollectible accrued interest receivable balance in a timely manner. This accounting policy election should be made at the class of financing receivable or the major security-type level and should be disclosed, including the time period the entity considers timely. This guidance should not be applied by analogy to other components of the amortized cost basis.

    ASC 326-20 does not define what is considered a “timely manner.” This could differ between entities, portfolios, and industry practices. We believe that writing off accrued interest amounts once such amounts are greater than 90 days past due may be consistent with current practice for some assets in certain industries following guidance issued by the US banking regulatory agencies. Entities should apply judgment and consider the specific facts and circumstances of their portfolio when determining what time period is considered timely.
  • A reporting entity can make an accounting policy election to write off accrued interest by reversing interest income or recognize the write off as a credit loss expense (or a combination of both). This accounting policy election should be made at the class of financing receivable or the major security-type level. This election cannot be applied by analogy to other components of the amortized cost basis. This accounting policy is required to be disclosed and any reversal of interest income should be disclosed by portfolio segment or major security type.
This guidance is discussed in ASC 326-20-30-5 (see LI 7.3.3.1), ASC 326-20-30-5A, and ASC 326-20-35-8A.

ASC 326-20-30-5

If an entity estimates expected credit losses using a method other than a discounted cash flow method described in paragraph 326-20-30-4, the allowance for credit losses shall reflect the entity’s expected credit losses of the amortized cost basis of the financial asset(s) as of the reporting date. For example, if an entity uses a loss-rate method, the numerator would include the expected credit losses of the amortized cost basis (that is, amounts that are not expected to be collected in cash or other consideration, or recognized in income). In addition, when an entity expects to accrete a discount into interest income, the discount should not offset the entity’s expectation of credit losses. An entity may develop its estimate of expected credit losses by measuring components of the amortized cost basis on a combined basis or by separately measuring the following components of the amortized cost basis, including all of the following:

  1. Amortized cost basis, excluding applicable accrued interest, premiums, discounts (including net deferred fees and costs), foreign exchange, and fair value hedge accounting adjustments (that is, the face amount or unpaid principal balance)
  2. Premiums or discounts, including net deferred fees and costs, foreign exchange, and fair value hedge accounting adjustments
  3. Applicable accrued interest. See paragraph 326-20-30-5A for guidance on excluding accrued interest from the calculation of the allowance for credit losses.

ASC 326-20-30-5A

An entity may make an accounting policy election, at the class of financing receivable or the major security-type level, not to measure an allowance for credit losses for accrued interest receivables if the entity writes off the uncollectible accrued interest receivable balance in a timely manner. This accounting policy election should be considered separately from the accounting policy election in paragraph 326-20-35-8A. An entity may not analogize this guidance to components of amortized cost basis other than accrued interest.

ASC 326-20-35-8A

An entity may make an accounting policy election, at the class of financing receivable or the major security-type level, to write off accrued interest receivables by reversing interest income or recognizing credit loss expense or a combination of both. This accounting policy election should be considered separately from the accounting policy election in paragraph 326-20-30-5A. An entity may not analogize this guidance to components of amortized cost basis other than accrued interest.

See LI 12 for information regarding the presentation and disclosure requirements related to these elections.
Question LI 7-11 discusses whether a reporting entity is permitted to record an allowance for credit losses as a reduction of interest income.
Question LI 7-11
Is a reporting entity permitted to record an initial allowance for credit losses (or subsequent adjustments) as a reduction of interest income, and not as a credit loss expense, if the reporting entity has made the election in ASC 326-20-35-8A to writeoff accrued interest receivable as a reduction of interest income?
PwC response
No. When establishing an allowance for credit losses (or recording subsequent adjustments not associated with writeoffs), the allowance for credit losses should be recorded as a credit loss expense (or a reversal of credit loss expense) pursuant to ASC 326-20-35-1. As such, any allowance recorded against accrued interest receivable should be reported as a credit loss expense (or reversal of credit loss expense).
ASC 326-20-35-8A allows for an accounting policy choice when writing off accrued interest receivable, but it is only applicable to writeoffs. If a reporting entity has made an accounting policy election to record writeoffs as a reduction of interest income and has established an allowance for credit losses related to the accrued interest receivable, we believe there are two acceptable views on how the writeoff may be recorded:
  • Writeoff the allowance for credit losses (related to the accrued interest) against the accrued interest receivable. This may result in a balance sheet only impact if the amount written off was equal to the allowance. If the accrued interest receivable balance exceeds the allowance established, the writeoff of that excess would be recorded as a reduction of interest income.
  • Reverse the allowance for credit losses (related to the accrued interest) as a recovery of a credit loss expense and writeoff the accrued interest receivable balance by reducing interest income. This view would result in a “gross” impact to the income statement (decreasing credit loss expense and decreasing interest income).
A reporting entity should elect an accounting policy at the appropriate class of financing receivable or the major security type, disclose it, and apply it consistently.

7.3.4 CECL – determining the life of a financial instrument

ASC 326-20-30-6 provides guidance on determining the life to be used for financial instruments for purposes of estimating credit losses.

ASC 326-20-30-6

An entity shall estimate expected credit losses over the contractual term of the financial asset(s) when using the methods in accordance with paragraph 326-20-30-5. An entity shall consider prepayments as a separate input in the method or prepayments may be embedded in the credit loss information in accordance with paragraph 326-20-30-5. An entity shall consider estimated prepayments in the future principal and interest cash flows when utilizing a method in accordance with paragraph 326-20-30-4. An entity shall not extend the contractual term for expected extensions, renewals, and modifications unless either of the following applies:

  1. The entity has a reasonable expectation at the reporting date that it will execute a troubled debt restructuring with the borrower.
  2. The extension or renewal options (excluding those that are accounted for as derivatives in accordance with Topic 815) are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the entity.

Under ASC 326-20 a reporting entity estimates expected credit losses over the life of the financial instrument at each reporting period. The life over which an entity should estimate expected credit losses should consider prepayments, but not expected extensions, renewals, or modifications unless (1) the entity has a reasonable expectation that it will execute a troubled debt restructuring (TDR) or (2) the extension or renewal options (excluding those that are separately accounted for as derivatives in accordance with ASC 815) are explicitly stated in the contract and are not unconditionally under the control of the lender. Contractual extensions or renewals that are not unconditionally within the lender’s control should be considered irrespective of whether or not they are contingent on conditions outside the borrower’s control. See LI 10 for further information on TDRs and reasonably expected TDRs.
See LI 7.6.2 for information regarding determining the life of a net investment in a lease for the purposes of applying ASC 326. See LI 7.5 for information on the life of off-balance sheet credit exposures, including lines of credit.
Question LI 7-12 discusses how an entity should estimate the life of a credit card receivable for the purposes of estimating expected credit losses.
Question LI 7-12
How should an entity estimate the life of a credit card receivable for the purposes of estimating expected credit losses?
PwC response
The June 12, 2017 TRG meeting included a discussion of how to estimate the life of a credit card receivable. The TRG discussed how future credit card activity (i.e., future draws on the unused line of credit) should be considered when determining how future payments are applied to the outstanding balance (see TRG Memo 5: Estimated life of a credit card receivable, TRG Memo 5a: Estimated life of a credit card receivable, TRG Memo 6: Summary of Issues Discussed and Next Steps, and TRG Memo 6b: Estimated life of a credit card receivable). The TRG considered two views: (1) apply estimated future payments to the current outstanding balance (or components of the balance) first (a FIFO approach), or (2) forecast future draws and apply estimated future payments based on how the Credit Card Accountability Responsibility and Disclosure Act of 2009 would require estimated future payments to be applied based upon estimated future balances (and components of such balances). Both of these views would be applied to the current outstanding balance if the undrawn line of credit associated with the credit card agreements is unconditionally cancellable by the creditor.
At the same meeting, questions were raised regarding how future payments on a credit card receivable should be estimated. TRG members noted that future payments could either (1) be estimated at an “account level” (i.e., all payments expected to be received from an individual borrower), which may include payments related to future draws, or (2) estimate only the portion of future payments relating to the outstanding balance as of the measurement date.
At its October 4, 2017 meeting, the FASB decided that any combination of these methodologies for applying and determining future payments is acceptable. The FASB noted that the CECL model provides for flexibility in the type of methodology used to estimate expected credit losses. As a result, various methodologies can be used to estimate the life of a credit card receivable, which is influenced by the determination of how payments are applied. The Board noted that the chosen methodologies should be applied consistently over time and represent a faithful estimate of expected credit losses for financial assets.
We believe the guidance provided by the FASB on credit cards may be useful in other situations, such as in determining the life of account receivables from customers who are buying goods or services on a frequent and recurring basis.

7.3.4.1 CECL - forecasts past the life of financial assets

When developing an allowance for credit losses over the life of the financial instrument, reasonable and supportable information beyond the contractual term should be considered to the extent that it is relevant. See LI 7.3.5.1 for information on estimating credit losses and the consideration of reasonable and supportable information. The issue of considering reasonable and supportable information beyond the contractual term was discussed at the November 1, 2018 TRG meeting (see TRG Memo 15: Contractual term and TRG Memo 18: Summary of Issues Discussed and Next Steps).
Assume, for example, a bank originates a one-year loan to finance a commercial real estate development project anticipated to be completed in three years. The project’s developed assets are the primary source of collateral and expected source of repayment for the loan. In this situation, the borrower will most likely need to refinance the loan with the originating bank or obtain financing from another lender upon the maturity of the one-year loan. Another lender would likely consider future economic forecasts in deciding whether to refinance the loan.
ASC 326-20-30-6 indicates that in estimating credit losses, an entity should not consider modifications, renewals, or extensions unless, at an individual loan level, it has a reasonable expectation of a TDR or the renewal and extension options are explicitly stated in the contract and not within the control of the lender. Based on this guidance, we believe that unless the entity has a reasonable expectation of a TDR or explicit contractual renewals or extensions not within the control of the lender, the reporting entity should model the borrower’s ability to obtain refinancing from another lender who does not have an outstanding loan to the borrower. The ability of the borrower to refinance this loan will likely be based on a lender’s forecast of economic conditions over the life of the project. Based on the guidance in ASC 326-20-30-7, we believe the lender should incorporate this information into the expected credit losses model, as the ability to refinance directly impacts the collectibility of cash flows of the one-year loan.
If an entity has a reasonable expectation that it will execute a TDR with the borrower or explicit contractual renewal or extension options not within the control of the lender, the estimate of expected credit losses should consider the impact of the TDR (including any expected concessions and extension of term), extension, or renewal.
See LI 10.3.1.2 for information on reasonably expected TDRs.
Question LI 7-13 discusses how an entity should estimate the life of a demand loan for the purposes of determining credit losses.
Question LI 7-13
How should an entity estimate the life of a demand loan for the purposes of estimating credit losses?
PwC response
Demand loans are loans that generally require repayment upon request of the lender. Since repayment can be required at any time, the life of the loan is considered to be the amount of time the borrower has to repay the loan once the lender demands repayment. For example, if a borrower has 30 days to repay a loan when requested by the lender, the life of the loan would be considered 30 days for the purposes of estimating expected credit losses.
As a result, when an entity is determining its CECL allowance on demand loans, it should consider the borrower’s ability to repay the loan if payment was demanded on the current date. Some factors an entity should consider when determining the allowance include historical data, current economic conditions, and future economic conditions. Additionally, an entity may need to consider information beyond the life of the loan in order to determine the allowance for credit losses. An entity can accomplish this through modelling the borrower’s ability to obtain refinancing from another lender who does not have an outstanding loan to the borrower. The ability of the borrower to refinance this loan will likely be based on a lender’s forecast of economic conditions beyond the life of the loan, as defined in ASC 326-20.
In the event the lender has a reasonable expectation that they will execute a TDR with the borrower, the impact of the TDR (including its impact to the term of the loan) should be considered. See LI 10 for further information on TDRs and reasonably expected TDRs.

7.3.4.2 CECL - impact of prepayments and call features

In estimating credit losses, ASC 326-20 requires consideration of prepayments. When estimating prepayments, a reporting entity should consider all relevant data. There are many factors that may impact anticipated borrower prepayment behavior. All else being equal, if interest rates decline, borrowers/issuers of instruments will have an incentive to refinance their loans, potentially resulting in prepayment activity that will accelerate amounts expected to be received. For certain asset classes, borrower behavior may also be relevant. For example, a residential mortgage loan or residential mortgage-backed HTM debt security may have an expected life different than its contractual maturity because the assets may be expected to be paid off prior to their contractual maturity due to borrowers having the option to prepay their loans. Borrowers may prepay loans because they are moving to a new home as opposed to taking advantage of lower interest rates. Rising interest rates or deteriorating economic conditions may result in fewer prepayments.
Question LI 7-14 discusses whether a reporting entity should consider the call features on callable corporate bonds classified as HTM when determining its allowance for credit losses.
Question LI 7-14
Investor Corp invests in callable corporate bonds that it appropriately classifies as HTM. The contractual maturity of the bonds ranges between 7 and 10 years and are callable in 3 to 4 years. Should Investor Corp consider the call features when determining an allowance for credit losses on its corporate bond portfolio?
PwC response
Yes. For purposes of determining the allowance for credit losses under the CECL impairment model, Investor Corp should consider the call features when evaluating the expected credit losses of its corporate bonds.

Question LI 7-15 discusses whether loan modifications resulting in “internal refinancings” should represent a prepayment under CECL.
Question LI 7-15
Should the loan modification guidance in ASC 310-20 be used to determine whether an “internal refinancing” represents a prepayment under CECL?
PwC response
It is common for certain types of loans to be refinanced with lenders before their maturity, whether through a contractual modification or through the origination of a new loan, the proceeds of which are used to repay the existing loan. These are sometimes referred to as “internal refinancings.” To the extent these events are considered prepayments, they must be considered in the estimate of expected credit losses under CECL, as they would shorten the expected life of the instrument. Unless the “internal refinancing” would be considered a TDR, it would not extend the life of the instrument beyond its contractual maturity.
This issue was discussed at the June 11, 2018 TRG meeting (TRG Memo 12: Refinancing and loan prepayments and TRG Memo 13: Summary of Issues Discussed and Next Steps). The credit losses standard does not provide specific guidance on what constitutes a prepayment. The FASB clarified that an entity is not required to use the loan modification guidance in ASC 310-20-35-9 through ASC 310-20-35-12 to determine if a refinancing with the same lender constitutes a prepayment for the purposes of estimating expected credit losses, but an entity is not precluded from using this guidance if it provides an appropriate basis for determining prepayments given its specific facts and circumstances.
We believe entities should apply a reasonable, rational, and consistent methodology to determine if internal refinancings would be considered prepayments for the purposes of determining expected credit losses.

See LI 7.3.4.3 for further information on the impact of refinancings and restructurings on the life of a financial asset for the purposes of determining the allowance for credit losses.

7.3.4.3 CECL - impact of refinancing and restructurings

Lenders and debtors may mutually agree to modify their arrangements as a part of their respective business strategies. These modifications may be done in conjunction with declining interest rates in a competitive lending environment, or to extend the maturity of a debt arrangement based on a favorable profile of the debtor. For example, a borrower may approach a lender and request a reduction in the interest rate of a loan (or an extension of the maturity) in lieu of prepaying the loan and refinancing with another lending institution. Borrowers and lenders also may agree to renew maturing lending agreements based on the continuation of a positive credit relationship.
In other instances, modifications, extensions, and refinancings are agreed to by the borrower and the lender as a result of the borrower’s financial difficulty in an attempt by the creditor to maximize its recovery. These restructurings may be accounted for and disclosed as troubled debt restructurings.
When determining the expected life and contractual amount for purposes of calculating expected credit losses, a reporting entity should not consider expectations of modifications of instruments unless there is a reasonable expectation that a loan will be restructured through a TDR or if the loan has been restructured. See LI 10 for further information on TDRs and reasonably expected TDRs. The reporting entity should only consider renewals or extensions if these renewals or extensions are explicitly stated in the original or modified contract and are not unconditionally cancellable by the lender.
Example LI 7-1 illustrates the application of the CECL impairment model to a modification that is not a troubled debt restructuring. Example LI 7-2 illustrates the application of the CECL impairment model to a modification that is a troubled debt restructuring. Although these examples illustrate the application of the guidance to a bank lending relationship, these concepts apply to all restructured financial instruments within the scope of the CECL impairment model.
EXAMPLE LI 7-1
Impact of a refinancing on the life of the asset for purposes of estimating credit losses
Bank Corp originates an interest-only loan to Borrower Corp with the following terms.
Principal amount
$1,000,000
Coupon rate
4.5% paid annually
Payment terms
Interest-only loan; principal repaid at maturity
Term
3 years
Collateral
Real estate
Borrower Corp holds several depository accounts with Bank Corp and utilizes several non-lending service offerings of Bank Corp.
Borrower Corp has made voluntary principal payments and has never been late on an interest payment. Close to the maturity date of the loan, Borrower Corp requests an extension of the original maturity date and an advance of additional funds. Borrower Corp is not in financial difficulty. No extension or renewal options are explicitly stated within the original contract outside of those that are unconditionally cancellable by (within the control of) Bank Corp.
Should Bank Corp consider the potential restructuring in its estimation of expected credit losses?
Analysis
No. Since the potential modification is not a troubled debt restructuring and there are no extension or renewal options explicitly stated within the original contract outside of those that are unconditionally cancellable by/within the control of Bank Corp, Bank Corp should base its estimate of expected credit losses on the term of the current loan. However, Bank Corp may consider additional information obtained during its diligence of Borrower Corp before approving the modification (e.g., changes in real estate value, Borrower Corp credit risk) in its credit loss estimate. Such information may be relevant to consider for the specific loan as well as a data point for estimates of credit losses on similar assets.
After the modification is complete, Bank Corp’s estimate of expected credit losses would be based on the terms of the modified loan.
EXAMPLE LI 7-2
Impact of a troubled debt restructuring on the life of the asset for purposes of estimating credit losses
Bank Corp originates a loan to Borrower Corp with the following terms.
Principal amount
$1,000,000
Coupon rate
4% paid annually
Term
1 year
The current loan originated from a renewal of a previous loan. Bank Corp has an ongoing relationship with Borrower Corp and has renewed its loan to Borrower Corp in each of the preceding three years. None of the previous renewals were considered a troubled debt restructuring.
During the current year, Borrower Corp has had a significant decline in revenue. Although Borrower Corp is currently in compliance with the contractual terms and payment requirements of its loan, Bank Corp forecasts that Borrower Corp may not be able to repay the loan at maturity and concludes that Borrower Corp is experiencing financial difficulties. Bank Corp is in the process of negotiating a loan modification with Borrower Corp that would convert the loan into a five-year amortizing loan with a fixed interest rate of 3.5%, which would be below current market rates.
Should Bank Corp consider the potential restructuring in its estimation of expected credit losses?
Analysis
Yes. Since Borrower Corp is experiencing financial difficulties and the terms of the modification are indicative of a concession, the anticipated modification is reasonably expected to be a troubled debt restructuring. As a result, the life of the loan utilized for modelling expected credit losses should include the terms of the modified loan. See LI 10 for information regarding the impact on the allowance estimate as a result of a reasonably expected TDR.

7.3.5 Estimating lifetime expected credit losses

ASC 326-20 requires an entity to estimate lifetime expected credit losses (after consideration of prepayments, certain contractually provided extension options, and reasonably expected TDRs). In doing so, an entity is not required to develop economic forecasts over the asset’s life if such estimates are not reasonable and supportable, but instead, may use a combination of economic forecasts and reversion to historical loss information in arriving at its estimate. The estimate should consider all relevant data that is reasonably available to an entity at the balance sheet date without undue cost and effort.
An entity will need to support the reasonableness of the expected credit losses estimate in its entirety. The length of the forecast period will be a judgment that should “work together” with all other judgments that contribute to the credit losses estimate (e.g., forecasting methodologies, reversion methodology, historical data used to “revert to”). Each component of an estimate for credit losses must be evaluated in contemplation of each other and in the context of the estimate as a whole. The overall estimate of lifetime expected credit losses is a significant judgment and needs to be reasonable.
ASC 326-20-30-7 through ASC 326-20-30-10 provides information on estimating lifetime expected credit losses.

ASC 326-20-30-7

When developing an estimate of expected credit losses on financial asset(s), an entity shall consider available information relevant to assessing the collectibility of cash flows. This information may include internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. An entity shall consider relevant qualitative and quantitative factors that relate to the environment in which the entity operates and are specific to the borrower(s). When financial assets are evaluated on a collective or individual basis, an entity is not required to search all possible information that is not reasonably available without undue cost and effort. Furthermore, an entity is not required to develop a hypothetical pool of financial assets. An entity may find that using its internal information is sufficient in determining collectibility.

ASC 326-20-30-8

Historical credit loss experience of financial assets with similar risk characteristics generally provides a basis for an entity’s assessment of expected credit losses. Historical loss information can be internal or external historical loss information (or a combination of both). An entity shall consider adjustments to historical loss information for differences in current asset specific risk characteristics, such as differences in underwriting standards, portfolio mix, or asset term within a pool at the reporting date or when an entity’s historical loss information is not reflective of the contractual term of the financial asset or group of financial assets.

ASC 326-20-30-9

An entity shall not rely solely on past events to estimate expected credit losses. When an entity uses historical loss information, it shall consider the need to adjust historical information to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The adjustments to historical loss information may be qualitative in nature and should reflect changes related to relevant data (such as changes in unemployment rates, property values, commodity values, delinquency, or other factors that are associated with credit losses on the financial asset or in the group of financial assets). Some entities may be able to develop reasonable and supportable forecasts over the contractual term of the financial asset or a group of financial assets. However, an entity is not required to develop forecasts over the contractual term of the financial asset or group of financial assets. Rather, for periods beyond which the entity is able to make or obtain reasonable and supportable forecasts of expected credit losses, an entity shall revert to historical loss information determined in accordance with paragraph 326-20-30-8 that is reflective of the contractual term of the financial asset or group of financial assets. An entity shall not adjust historical loss information for existing economic conditions or expectations of future economic conditions for periods that are beyond the reasonable and supportable period. An entity may revert to historical loss information at the input level or based on the entire estimate. An entity may revert to historical loss information immediately, on a straight-line basis, or using another rational and systematic basis.

ASC 326-20-30-10

An entity’s estimate of expected credit losses shall include a measure of the expected risk of credit loss even if that risk is remote, regardless of the method applied to estimate credit losses. However, an entity is not required to measure expected credit losses on a financial asset (or group of financial assets) in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Except for the circumstances described in paragraphs 326-20-35-4 through 35-6, an entity shall not expect nonpayment of the amortized cost basis to be zero solely on the basis of the current value of collateral securing the financial asset(s) but, instead, also shall consider the nature of the collateral, potential future changes in collateral values, and historical loss information for financial assets secured with similar collateral.

7.3.5.1 CECL - determining reasonable and supportable forecast

ASC 326-20-30-9 requires an entity that uses historical data to adjust this data for current conditions and reasonable and supportable forecasts to estimate expected credit losses over the life of an instrument. The term “reasonable and supportable forecasts” is not defined in ASC 326-20. As a result, reporting entities will need to develop their own perspectives and policies when interpreting this term. For the purposes of this section, the term “reasonable and supportable forecast” considers both the current conditions and reasonable and supportable forecasts discussed in ASC 326-20-30-9.
ASC 326-20 also does not include prescriptive guidance on the length of the reasonable and supportable forecast period or how this should be developed, and it does not require an entity to develop a specific statistical confidence level to support the forecast period. An entity is, however, required to support its selection of the forecast period (as well as its expected credit losses estimate in its entirety). While not required, an entity may consider the accuracy of historical forecasts to support its decision regarding the establishment of the reasonable and supportable forecast period. The determination of what is reasonable and supportable should be based on the reporting entity’s facts and circumstances, including the availability of and access to information.
The selection of a reasonable and supportable period is not an accounting policy decision, but is one component of an accounting estimate. The length of the period is judgmental and should be based in part on the availability of data on which to base a forecast of economic conditions and credit losses. The process should be applied consistently and in a systematic manner. Changes in factors such as macroeconomic conditions could cause the reasonable and supportable period to change. The factors considered and judgments applied should be well documented.
An entity should consider the appropriateness of the reasonable and supportable forecast period, as well as all other judgments applied in its credit loss estimate at each reporting date. An entity will also need to consider changes in the supporting information that could indicate a change in the reasonable and supportable forecast period. For example, a change in the source of the supporting information or period covered by the supporting information could result in an entity changing the length of the reasonable and supportable forecast period.
An entity’s process for determining the reasonable and supportable period should also be applied consistently, in a systematic manner, and be well documented consistent with the guidance in SEC Staff Accounting Bulletin No. 119 (SAB 119). SAB 119 amends Topic 6 of the Staff Accounting Bulletin Series, to add Section M, Financial Reporting Release No. 28 - Accounting for Loan Losses by Registrants Engaged in Lending Activities Subject to FASB ASC Topic 326. An entity is expected to support its determination of a reasonable and supportable forecast period and document the factors considered and judgments applied. An entity should develop processes and related controls to support its ongoing evaluation of the reasonable and supportable period.
For the period beyond which management is able to develop a reasonable and supportable forecast, ASC 326-20 states that an entity should revert to unadjusted historical loss information either at an individual input level or at the overall estimate level. See LI 7.3.5.2 for further information on reverting to historical information.
Question LI 7-16 discusses whether an entity is required to probability weight multiple economic scenarios when estimating lifetime expected credit losses under ASC 326-20.
Question LI 7-16
When developing an entity’s reasonable and supportable forecast of expected credit losses, is probability weighting of multiple economic scenarios required?
PwC response
No. The CECL model does not require an entity to probability weight multiple economic scenarios to develop its reasonable and supportable forecast of expected credit losses, but it is not precluded by ASC 326-20. CECL provides flexibility in the method used by an entity to estimate expected credit losses.
While an entity could meet the objectives of CECL by using a single economic scenario, some entities may determine it appropriate to probability weight multiple scenarios in order to capture elements such as nonlinearity of credit risk. Management should apply judgment to determine the appropriate estimation method to be applied based on the entity’s and the portfolio’s facts and circumstances, and be able to support both its reasonable and supportable forecast and its credit losses estimate as a whole.

Question LI 7-17 discusses whether an entity can assert that no reasonable and supportable forecast can be made.
Question LI 7-17
Can an entity assert that no reasonable and supportable forecast can be made and rely solely on historical data?
PwC response
No. CECL requires an entity to use historical data adjusted for current conditions and reasonable and supportable forecasts to estimate expected credit losses over the life of an instrument. Only for the period beyond which an entity is able to develop a reasonable and supportable forecast can an entity revert to unadjusted historical loss information. While some entities may be able to develop reasonable and supportable forecasts for longer periods than other entities, it is not acceptable for an entity to assert it cannot develop a forecast and use only historical loss information.

Question LI 7-18 discusses whether an entity can have different reasonable and supportable forecast periods for different portfolios.
Question LI 7-18
Can an entity have different reasonable and supportable forecast periods for different portfolios?
PwC response
Yes. The length of the reasonable and supportable forecast period is a judgment based on an entity’s ability to forecast economic conditions and expected losses. The reasonable and supportable forecast period may differ between products if, for example, the factors that drive estimated credit losses, the availability of forecasted information, or the period of time covered by that information are different.
In evaluating the information selected to develop its forecast for portfolios, an entity should consider the period of time covered by the information available. An entity should ensure the information used, including the economic assumptions, are relevant to the portfolio being assessed. For example, the US unemployment rate may not be relevant to a portfolio of loans based in Europe, or the home price index may be a key assumption for only some assets. Since different economic forecasts may be relevant for different assets, there may be circumstances when the length of the forecast period that is reasonable and supportable may differ among entities or among asset portfolios within an entity.
An entity should consider whether the assumptions underlying its economic forecasts for its various asset portfolios are consistent with one another when appropriate, and reflect a common view of future economic conditions, especially when different sources are used for different assumptions.

Use of historical data to estimate credit losses
A reporting entity may begin the process of measuring expected credit losses by analyzing its historical loss experience for financial assets with risk characteristics similar to the assets being measured. However, as discussed in ASC 326-20-30-8, this information may need to be adjusted to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated and due to differences in the composition of the current portfolio.
ASC 326-20-30-7 requires a reporting entity to evaluate both internally generated data and reasonably accessible external data for purposes of estimating credit losses. However, it also states a reporting entity may determine that using its internally generated data is sufficient.
Sometimes, a reporting entity may lack historical credit loss experience. For example, a startup institution would have no historical operations from which to develop loss patterns; similarly, an institution may not have relevant loss experience when entering into a new line of business or lending product. When a reporting entity does not have relevant internal historical data, it may look to external data. For example, it may consider rating agency reports to develop its loss expectations related to certain debt instruments, or it can obtain external information for losses on loan and financing lease receivables from call report information filed by regulated banks with regulatory bodies. However, as noted in ASC 326-20-30-7, a reporting entity is not required to search all possible information that is not reasonably available without undue cost and effort.
When estimating expected credit losses, a reporting entity should evaluate how historical data differs from current and future economic conditions. In evaluating conditions that may merit an adjustment to the historical data used to measure expected credit losses, a reporting entity should consider the risk factors relevant to the assets being measured. These may include data that is borrower specific, specific to a group of pooled assets, at a macro-economic level, or some combination of these. Examples of factors that may be considered, include:
  • Unemployment rates
  • Sources of income available to debt issuers
  • Collateral valuations
  • Underwriting policies and procedures of a reporting entity, such as underwriting standards and exception tolerance, “out of area” lending policies and collection and recovery practices
  • Payment status or payment structure
  • Regulatory and legal environment
  • Local and macro-economic and business conditions
  • Conditions of market segments in conjunction with the analysis of financial asset concentrations
ASC 326-20-55-4 provides further examples of factors that may be considered.

Excerpt from ASC 326-20-55-4

To adjust historical credit loss information for current conditions and reasonable and supportable forecasts, an entity should consider significant factors that are relevant to determining the expected collectibility. Examples of factors an entity may consider include any of the following, depending on the nature of the asset (not all of these may be relevant to every situation, and other factors not on the list may be relevant):
  1. The borrower’s financial condition, credit rating, credit score, asset quality, or business prospects
  2. The borrower’s ability to make scheduled interest or principal payments
  3. The remaining payment terms of the financial asset(s)
  4. The remaining time to maturity and the timing and extent of prepayments on the financial asset(s)
  5. The nature and volume of the entity’s financial asset(s)
  6. The volume and severity of past due financial asset(s) and the volume and severity of adversely classified or rated financial asset(s)
  7. The value of underlying collateral on financial assets in which the collateral-dependent practical expedient has not been utilized
  8. The entity’s lending policies and procedures, including changes in lending strategies, underwriting standards, collection, writeoff, and recovery practices, as well as knowledge of the borrower’s operations or the borrower’s standing in the community
  9. The quality of the entity’s credit review system
  10. The experience, ability, and depth of the entity’s management, lending staff, and other relevant staff
  11. The environmental factors of a borrower and the areas in which the entity’s credit is concentrated, such as:
  1. Regulatory, legal, or technological environment to which the entity has exposure
  2. Changes and expected changes in the general market condition of either the geographical area or the industry to which the entity has exposure
  3. Changes and expected changes in international, national, regional, and local economic and business conditions and developments in which the entity operates, including the condition and expected condition of various market segments.

Determining the relevant factors and the amount of adjustments required will require judgment. To the extent an entity’s quantitative models and historical data do not reflect current conditions or an entity’s reasonable and supportable forecasts, such factors should be included through qualitative adjustments such that the estimate in total is reasonable. Over time, the impact of the changes identified may begin to be reflected in the loss history of the portfolio, which may impact the amount of adjustment required. Refer to LI 7.3.5.5 for further information on qualitative factors.
Amortized cost basis and historical data
Reporting entities are expected to apply judgment to determine the appropriate historical data set to use when calculating the allowance for credit losses under the CECL model. Reporting entities may need to analyze historical data to determine whether it should be adjusted to be consistent with the notion of calculating the allowance for credit losses based on an amortized cost amount. For example, if a reporting entity’s historical loss rates are based on amortized cost amounts that have been charged off, such historical data would have included any unamortized premiums and discounts that existed at the time of writeoff. Alternatively, a reporting entity’s historical loss rates may be based on losses of principal amounts, and therefore did not include any unamortized premiums or discounts that may have existed. Refer to LI 7.3.3.3 for further information on the interaction of CECL with the amortized cost basis of financial instruments.
Consideration of collateral and credit enhancements
A reporting entity should consider sources of repayment associated with a financial asset when determining its credit losses forecast under the CECL impairment model, including collection against the collateral and certain embedded credit enhancements, such as guarantees or insurance.
Collateral
Although collateralization mitigates the risk of credit losses, the existence of collateral does not remove the requirement to record current expected credit losses, even when the current fair value of the collateral exceeds the amortized cost of the financial asset (unless the instrument qualifies for one of the practical expedients discussed in LI 7.4). This is because the collateral value may decline in the future, exposing the lender to losses in the event of default by the borrower. In addition, the collateral may be illiquid, such as real estate, automobiles, business inventory, equipment, and other assets. In addition, ASC 326-20-30-10 highlights the fact that the existence of collateral, on its own, does not eliminate the need for an allowance for credit losses.
In considering collateral value, a reporting entity should consider factors such as perfection of the lien, lien positioning, and potential changes in the value of the collateral.
In addition, if a financial asset is collateralized, and the reporting entity determines that foreclosure of the collateral is probable, the entity must measure expected credit losses based on the difference between the fair value of the collateral and the amortized cost basis of the asset. Refer to LI 7.3.5.6 for further information.
Credit enhancements
A reporting entity may obtain credit enhancements, such as guarantees or insurance, contemporaneous with or separate from acquiring or originating a financial asset or off-balance sheet credit exposure. As discussed in ASC 326-20-30-12, only credit enhancements embedded in an asset at origination or purchase can be considered when determining expected credit losses.

ASC 326-20-30-12

The estimate of expected credit losses shall reflect how credit enhancements (other than those that are freestanding contracts) mitigate expected credit losses on financial assets, including consideration of the financial condition of the guarantor, the willingness of the guarantor to pay, and/or whether any subordinated interests are expected to be capable of absorbing credit losses on any underlying financial assets. However, when estimating expected credit losses, an entity shall not combine a financial asset with a separate freestanding contract that serves to mitigate credit loss. As a result, the estimate of expected credit losses on a financial asset (or group of financial assets) shall not be offset by a freestanding contract (for example, a purchased credit-default swap) that may mitigate expected credit losses on the financial asset (or group of financial assets).

For an arrangement to be considered in an expected credit loss estimate, it must “travel with” the underlying instrument in the event of sale. Separate, freestanding contracts (such as credit default swaps or insurance) should not be combined with the underlying financial asset or portfolio for purposes of measuring expected credit losses. The Codification Master Glossary provides information on the definition of a freestanding financial instrument.

Definition from ASC Master Glossary

Freestanding Financial Instrument: A financial instrument that meets either of the following conditions:
  1. It is entered into separately and apart from any of the entity’s other financial instruments or equity transactions.
  2. It is entered into in conjunction with some other transaction and is legally detachable and separately exercisable.

Example LI 7-3 illustrates the consideration of mortgage insurance in the estimate of credit losses.
EXAMPLE LI 7-3
Consideration of mortgage insurance in the estimate of credit losses
Finance Co originates mortgage loans to individuals in the northeastern US. After originating the loans, Finance Co separately enters into a mortgage insurance contract. The mortgage insurance is specific to Finance Co and is not assignable. In the event a mortgage loan subject to the insurance coverage is sold, the insurance coverage on that loan terminates.
Should Finance Co consider the mortgage insurance when it estimates its expected credit losses on the insured loans?
Analysis
No. Since the mortgage insurance has been acquired through a transaction separate from the origination of the loan, and does not transfer with the underlying loan agreement, it should not be considered when determining expected credit losses.

Other considerations when developing the forecast of credit losses
Actual economic conditions may turn out differently than those included in an entity’s forecast as there may be unforeseen events (e.g., fiscal or monetary policy actions). The further out in the forecasted period, the more likely it is that circumstances may be different than what was forecasted. As a result, the accuracy of the forecasted economic conditions may not be an effective indicator of the quality of an entity’s forecasting process, including their judgment in selecting the length of the reasonable and supportable forecast period. However, significantly missing near-term forecasts may be an indicator of a deficient forecasting process.
Assumptions for key economic conditions within an entity are expected to be consistent across relevant estimates. Therefore, an entity should consider the assumptions of future economic conditions used in other forecasted estimates within an entity if they are relevant to the credit loss estimate (e.g., projections used in determining fair value, assessing goodwill impairment, or used in business planning and budgeting). An entity should be able to explain any differences between the assumptions and provide appropriate supporting documentation.
A reporting entity should consider quantitative and qualitative data that relates to both the environment in which the reporting entity and borrower operate as well as data specific to the borrower. Reporting entities should not ignore available information that is relevant to the estimated collectibility of amounts related to the financial asset. Further, the CECL model requires an entity to estimate and recognize an allowance for credit losses for a financial instrument, even when the expected risk of credit loss is remote.
Question LI 7-19 discusses whether an entity is required to perform “backtesting” of historical reasonable and supportable forecasting periods.
Question LI 7-19
Is an entity required to perform “backtesting” of historical reasonable and supportable forecast periods?
PwC response
No. While the CECL standard does not require it, backtesting of elements of the credit losses estimate may be useful.
There is an important distinction between backtesting a forecast of future economic conditions and backtesting elements of the estimate of expected credit losses. An entity’s comparison of its expected credit loss estimate against actual experienced losses may not be of great value due to the estimation uncertainty involved in the estimate. However, we believe there are various components of the entity’s expected credit losses estimation process that may lend themselves to an evaluation utilizing backtesting, such as to assess a model’s responsiveness to changing economic forecasts or its correlation between economic conditions and credit losses.

7.3.5.2 Historical loss data reversion in estimating credit loss

For periods beyond which a reporting entity is able to make reasonable and supportable forecasts of expected credit losses, ASC 326-20-30-9 requires a reporting entity to revert to its unadjusted historical loss information.
ASC 326-20-30-9 provides entities with flexibility in selecting a reversion methodology. Reversion methods include immediately reverting to unadjusted historical information, the use of straight-line, or another rational method. Entities should ensure they can support that the method selected is rational. The reversion technique should be evaluated in conjunction with all other judgments made in an entity’s estimate and in the context of the estimate as a whole. This is an ongoing evaluation that should be supported by an entity’s processes and related controls.
ASC 326-20 also provides entities with flexibility when selecting the unadjusted historical information it reverts to after the reasonable and supportable period. In applying ASC 326-20-30-9, the historical data for reversion that an entity selects may, in part, be influenced by its view of what economic conditions may look like in the future in order to arrive at its best estimate of expected credit losses.
In determining the historical loss information to be used, a reporting entity should consider a number of factors, including:  
  • The historical period over which the historical loss data should be derived
  • The data points to be included in the computation of the historical loss information
  • The reporting entity’s historical experience and expectation regarding loss curves
The determination of the period historical loss information to be used in the estimate of expected credit losses is judgmental and may vary based on a reporting entity’s specific facts and circumstance. However, a reporting entity must consider the remaining life of the financial asset or pool of financial assets when selecting the historical loss information to be used in accordance with ASC 326-20-30-8.
When using the reversion guidance discussed in ASC 326-20, the historical loss information used in the reversion period cannot be adjusted for existing economic conditions or expectations of future economic conditions. Historic loss information should be adjusted for differences in current asset-specific risk characteristics (e.g., underwriting or loan terms). However, the guidance does not preclude an entity from adjusting data used in reversion if that reversion is part of the reasonable and supportable forecast (and not in connection with the reversion guidance specifically discussed in ASC 326-20). For example, an entity may believe that economic data will revert to levels similar to historic levels and as such include such forecasts as part of their reasonable and supportable forecasts. Refer to LI 7.3.5.1 for further information on the reasonable and supportable forecasts in estimating expected credit losses.

7.3.5.3 Writeoffs of financial assets

ASC 326-20-35-8 requires reporting entities to writeoff individual financial assets (or a portion thereof) in the period in which a determination is made that the financial asset (or portion) is uncollectible. This generally occurs when all commercially reasonable means of recovering the loan balance have been exhausted. Factors an entity may consider include (1) significant changes in the borrower’s financial position such that they can no longer pay the obligation or (2) an assessment that the proceeds from collateral will not be sufficient to repay the loan. However, the term “uncollectible” is not defined and continues to require the application of judgment. Certain regulatory agencies have provided guidance to financial institutions with respect to when writeoffs are appropriate or required.

ASC 326-20-35-8

Writeoffs of financial assets, which may be full or partial writeoffs, shall be deducted from the allowance. The writeoffs shall be recorded in the period in which the financial asset(s) are deemed uncollectible.

7.3.5.4 Considering recoveries in the estimate of credit losses

ASC 326-20-30-1 requires entities to consider recoveries when estimating the allowance for credit losses on an individual asset or pool of financial assets. The amount of expected recoveries on previously written off and expected to be written off financial assets considered in the allowance should not exceed the aggregate of amounts previously written off and expected to be written off by the entity.

ASC 326-20-30-1

The allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial asset(s) to present the net amount expected to be collected on the financial asset. Expected recoveries of amounts previously written off and expected to be written off shall be included in the valuation account and shall not exceed the aggregate of amounts previously written off and expected to be written off by an entity. At the reporting date, an entity shall record an allowance for credit losses on financial assets within the scope of this Subtopic. An entity shall report in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses for management’s current estimate of expected credit losses on financial asset(s).

The inclusion of estimated recoveries can result in a “negative allowance” on an individual financial asset or on a pool of financial assets whereby the allowance is added to the amortized cost basis of a financial asset to present the net amount expected to be collected. We believe the types of expected recoveries that should be considered in an entity's expected credit loss calculation include estimates of:
  • cash received from the borrower,
  • proceeds from liquidation of any collateral that would be available in the event of a default,
  • amounts received from the sale of defaulted financial assets (if selling such defaulted financial assets is a component of a company’s credit loss mitigation strategy), and
  • recoveries through the operation of credit enhancements that are not considered freestanding contracts.
Expected recoveries should not include proceeds from sales of performing financial assets that are not part of a strategy to mitigate losses on defaulted assets.
Expected recoveries on PCD assets
It is important to note that the guidance for recoveries and negative allowances is different for PCD assets than non-PCD assets. Companies should consider these differences in establishing and maintaining policies, procedures, and controls related to their allowance estimates.
See LI 9 for further information on purchased credit deteriorated assets.

7.3.5.5 CECL - qualitative factors

An entity should develop an estimate of credit losses based upon historical information, current conditions, and reasonable and supportable forecasts. To the extent an entity’s quantitative models and historical data do not reflect current conditions or an entity’s reasonable and supportable forecasts, such factors should be included through qualitative adjustments such that the estimate in total is reasonable. Documentation of an entity’s estimate, including supporting qualitative adjustments, is a critical element of internal controls over financial reporting.
In developing an estimate of credit losses, an entity should consider the guidance from SEC Staff Accounting Bulletin No. 119.

7.3.5.6 Collateralized assets when foreclosure is probable

Regardless of an entity’s initial measurement method for the allowance for credit losses for a collateralized asset, ASC 326-20-35-4 requires the estimate of expected credit losses to be based on the fair value of the collateral when the entity determines foreclosure is probable. In these cases, the estimate of expected credit losses would be the difference between the fair value of the collateral (less costs to sell, if applicable) and the amortized cost basis of the asset. This prevents the reporting of a credit loss being delayed until actual foreclosure. If repayment is dependent upon the sale of the collateral when foreclosure of a collateralized asset is probable, the fair value used to measure the allowance should be adjusted for the costs to sell.

ASC 326-20-35-4

Regardless of the initial measurement method, an entity shall measure expected credit losses based on the fair value of the collateral at the reporting date when the entity determines that foreclosure is probable. The entity shall adjust the fair value of the collateral for the estimated costs to sell if it intends to sell rather than operate the collateral. When an entity determines that foreclosure is probable, the entity shall remeasure the financial asset at the fair value of the collateral at the reporting date (less costs to sell, if applicable) so that the reporting of a credit loss is not delayed until actual foreclosure. An entity also shall consider any credit enhancements that meet the criteria in paragraph 326-20-30-12 that are applicable to the financial asset when recording the allowance for credit losses. An allowance for credit losses that is added to the amortized cost basis of the financial asset(s) shall not exceed amounts previously written off.

ASC 326-20-35-4 also clarifies that the potential for a negative allowance discussed in LI 7.3.5.4 also exists for collateral-dependent assets when the guidance requires the measurement of credit losses to be based on the fair value of collateral (i.e., when foreclosure is probable). For example, an entity may have determined foreclosure was probable and recorded a writeoff based upon the fair value of the collateral and in a subsequent period the fair value of the collateral increased. In these instances, the guidance would require this recovery to be recorded and it may create a negative allowance.
An entity should reassess its estimate of credit losses at each reporting date. This would include reassessing whether foreclosure is probable. If foreclosure is no longer probable, an entity should apply another technique for estimating credit losses, including the collateral-dependent practical expedient, as long as the borrower meets the criteria to apply the election. The collateral-dependent practical expedient can be applied to a financial asset if (1) the borrower is experiencing financial difficulty, and (2) repayment is expected to be provided substantially through the sale or operation of the collateral. See LI 7.4.1 for further information on the collateral-dependent practical expedient.
Costs to sell
“Costs to sell” is not a defined term within ASC 326. As a result, we believe that the guidance from ASC 360 should be applied. ASC 360 states that costs to sell are incremental direct costs to transact a sale and represent the costs that result directly from and are essential to a sale transaction. Costs to sell would not have been incurred by the entity had the decision to sell not been made.
Costs to sell may vary depending on the nature of the collateral, but generally include legal fees, brokerage commissions, and closing costs that must be incurred before legal title to the collateral can be transferred. Costs to sell generally exclude holding costs, such as insurance, property taxes, security, and utilities while the collateral is held for sale.

7.3.5.7 Possibility of zero nonpayment risk

CECL requires an entity to estimate and recognize an allowance for credit losses for a financial instrument, even when the expected risk of credit loss is remote. However, ASC 326-20-30-10 does not require an entity to measure expected credit losses on an instrument, or a pool of instruments, if historical information adjusted for current conditions and reasonable and supportable forecasts result in zero expected credit losses in all scenarios. In these situations, the risk of default may be greater than zero, but the amount of the expected loss is zero.
ASC 326-20-55-49 and ASC 326-20-55-50 uses US Treasuries as an example of an asset that may result in an expectation that the risk of non-payment of the amortized cost basis (i.e., the loss given default) is zero given that they are explicitly guaranteed by a high-quality sovereign entity and have a long history with no credit losses. However, the FASB did not provide a list of other assets that may qualify for zero expected credit losses. The example in the standard sets a high bar for zero expected credit losses “exception” and these situations are not expected to occur frequently.

ASC 326-20-55-49

Entity J invests in U.S. Treasury securities with the intent to hold them to collect contractual cash flows to maturity. As a result, Entity J classifies its U.S. Treasury securities as held to maturity and measures the securities on an amortized cost basis.

ASC 326-20-55-50

Although U.S. Treasury securities often receive the highest credit rating by rating agencies at the end of the reporting period, Entity J’s management still believes that there is a possibility of default, even if that risk is remote. However, Entity J considers the guidance in paragraph 326-20-30-10 and concludes that the long history with no credit losses for U.S. Treasury securities (adjusted for current conditions and reasonable and supportable forecasts) indicates an expectation that nonpayment of the amortized cost basis is zero, even if the U.S. government were to technically default. Judgment is required to determine the nature, depth, and extent of the analysis required to evaluate the effect of current conditions and reasonable and supportable forecasts on the historical credit loss information, including qualitative factors. In this circumstance, Entity J notes that U.S. Treasury securities are explicitly fully guaranteed by a sovereign entity that can print its own currency and that the sovereign entity’s currency is routinely held by central banks and other major financial institutions, is used in international commerce, and commonly is viewed as a reserve currency, all of which qualitatively indicate that historical credit loss information should be minimally affected by current conditions and reasonable and supportable forecasts. Therefore, Entity J does not record expected credit losses for its U.S. Treasury securities at the end of the reporting period. The qualitative factors considered by Entity J in this Example are not an all-inclusive list of conditions that must be met in order to apply the guidance in paragraph 326-20-30-10.

Entities will need to apply judgment and consider the specific facts and circumstances to determine if a zero-loss estimate is supportable for a specific asset or pool of assets. An entity will need to support that it expects the non-payment of the instruments’ amortized cost basis to be zero, even if the borrower defaults.
Typically, corporate bonds would not qualify for zero expected credit losses as even highly rated bonds have some risk of loss, regardless of the specific corporate borrower having no history or expectation of default and nonpayment.
Based on the current facts and circumstances, we believe Ginnie Mae, Fannie Mae (FNMA) and Freddie Mac (FHLMC) guaranteed pass-through mortgage-backed securities would qualify for zero expected credit losses under CECL. The factors considered in reaching this conclusion include the long history of zero credit losses, the explicit guarantee by the US government (although limited for FNMA and FHLMC securities) and yields that, while not risk-free, generally trade based on market views of prepayment and liquidity risk (not credit risk).
The existence of collateral, in and of itself, does not support an assumption of zero loss of the amortized cost basis. For financial assets secured by collateral, unless applying the collateral maintenance practical expedient, collateral-dependent practical expedient, or when foreclosure is probable, an entity cannot assume a zero expected credit loss solely because the current value of the collateral exceeds the amortized cost basis. An entity should consider potential future changes in collateral value and historical loss experience for financial assets that were secured by similar collateral. For instruments with collateral maintenance provisions, an entity could consider applying the collateral maintenance practical expedient (if the requirements are met). See LI 7.4 for information on practical expedients.
For other financial assets, an entity should consider the instrument’s relevant facts and circumstances in estimating the expected credit loss. The following are some qualitative factors that an entity could consider in determining if a zero-credit loss expectation is supportable:
  • Term and structure of the instrument
  • Credit rating by rating agencies
  • Historic experience of downgrades
  • Historic credit losses (adjusted for current conditions and reasonable and supportable forecasts), including during periods of stress (e.g., the financial crisis)
  • Explicit guarantees by a high credit quality sovereign entity or agency
  • Interest rate or rate of return (and whether it is recognized as a risk-free rate or if any differences from the risk-free-rate relate to non-credit related risk)
  • If the issuer is a sovereign entity, its ability to print its own currency and whether the currency is considered a “reserve currency” (i.e., currency is routinely held by central banks, used in international commerce, and commonly viewed as a reserve currency)
  • The country’s political uncertainty and budgetary concerns
These factors are not all inclusive, nor is one single factor considered conclusive. A combination of factors needs to be considered and judgment applied to determine if an entity’s expectation of non-payment of the instrument’s amortized cost basis is zero.
An entity should continually update its analysis of assets that may qualify for zero expected credit losses and revisit conclusions considering changes in current conditions and reasonable and supportable forecasts of future conditions (e.g., heightened government budgetary concerns). If facts or circumstances change, assets that previously qualified for zero loss treatment may no longer qualify.
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