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ASC 326-20 requires all or a portion of the amortized cost basis of a financial asset to be written off when it is deemed uncollectible. Previous amendments to ASC 326-20 introduced the concept of a "negative allowance." The concept of negative allowances is only applicable to assets subject to the CECL model (ASC 326-20) and does not apply to available-for-sale (AFS) debt securities subject to ASC 326-30. The phrase "negative allowance" is used to describe situations when an entity determines that it will recover the amortized cost basis, or a portion of that basis, after a writeoff. The estimated "basis recovery" is included in the allowance for credit losses through a negative allowance. When a negative allowance balance is added to the amortized cost basis of an asset, the total amount represents the amount an entity expects to collect. As a result of stakeholder feedback, the FASB amended ASC 326-20 to clarify that recoveries should be considered when estimating the allowance for credit losses on an individual or a pool of purchased financial assets with credit deterioration (PCD assets).
Similar to non-PCD assets, the allowance for credit losses on PCD assets should include expected recoveries on amounts previously written off and expected to be written off and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, if an entity estimates expected credit losses using a method other than a discounted cash flow (DCF) method, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. The non-credit discount is the excess of the contractual amount of principal (or par) of the asset over the amortized cost basis of the asset that includes the adjustment to the amortized cost basis recorded at acquisition related to the allowance for credit losses (i.e., the balance sheet gross-up). This provision was included in the guidance to prevent entities from recording "day one gains" by (1) acquiring PCD assets, (2) recording a "balance sheet gross up" increasing the amortized cost basis, (3) recording a writeoff of those assets and then (4) recording estimated recoveries on an undiscounted basis.
The guidance also clarifies that estimated recoveries and negative allowances may include increases in expected cash flows after acquisition, subject to the guidance discussed above.
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.

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