July 24, 2019

Mr. Shayne Kuhaneck
Acting Technical Director
Financial Accounting Standards Board
401 Merritt 7
PO Box 5116
Norwalk, CT 06856-5116

Dear Mr. Kuhaneck:

PricewaterhouseCoopers LLP appreciates the opportunity to respond to the FASB's Proposed Accounting Standards Update, Codification Improvements to Topic 326, Financial Instruments - Credit Losses.

We generally agree with the proposed amendments. Appendix A contains our responses to the Questions for Respondents, including certain instances in which we recommend additional amendments. Appendix B includes an example of a circumstance when a write-off and recovery can result in recording a net amount similar to the "noncredit discount."

If you have any questions regarding our comments, please contact David Schmid at (973) 236-7247 or Chip Currie at (973) 236-5331.

Sincerely,

PricewaterhouseCoopers LLP

_________________________________
PricewaterhouseCoopers LLP, 400 Campus Drive, Florham Park, NJ 07932
T: (973) 236 4000, F: (973) 236 5000, www.pwc.com

We believe the guidance in ASC 326-20-30-4A and ASC 326-30-35-7A should be amended to permit an entity to consider the impact of estimated defaults on the timing, but not on the amount of estimated cash flows when electing to adjust an effective interest rate used to discount cash flows for the purposes of estimating credit losses. Allowing an entity to consider the timing of defaults when it elects to consider prepayments in determining the discount rate used to discount cash flows for the purposes of estimating credit losses is consistent with the Board's decision to provide entities with the ability to adjust the discount rate. Specifically, an entity can adjust for a potential misalignment between the timing of cash flows and the effective interest rate used to discount those future cash flows.

We do not believe the proposed amendments would require special consideration for nonpublic entities.

We agree that an entity should be permitted to record a negative allowance when measuring the allowance for credit losses for purchased financial assets with credit deterioration.

We support limiting the negative allowance for PCD assets to the amortized cost basis previously written off and expected to be written off by the entity. We agree that the amortized cost basis would include amounts added through the establishment of an allowance for credit losses at acquisition. However, we believe that the last sentence in ASC 326-20-30-13A should be deleted. As proposed, ASC 326-20-30-13A states (emphasis added):

We understand that the last sentence of this paragraph was meant to reinforce the guidance in the first sentence and clarify that if the amortized cost basis was less than the contractual amount due, the limitation related to recording recoveries is not based on the amount contractually due. However, we are concerned that the reference to the "noncredit discount" could be misinterpreted and result in unintended consequences.

The guidance for PCD assets requires the amortized cost basis (and thus the unamortized noncredit discount) to be allocated to individual assets. The guidance also requires the estimate for credit losses to be calculated on a collective (pool) basis when similar risk characteristics exist. The reference to the noncredit discount in ASC 326-20-30-13A could be misinterpreted to preclude the application of the guidance related to recoveries at the same "pool" level at which the credit loss estimate is calculated.

We also note that since purchased assets are recorded at fair value (which represents discounted expected future cash flows) and the estimate of credit losses (including recoveries) is permitted to be calculated on an undiscounted basis, there can be circumstances when a write-off and recovery can result in recording a net amount similar to the "noncredit discount." We believe this is the result of the application of the model whereby the limitations on recoveries is based on the amortized cost basis as opposed to the purchase price. See Appendix B for an example demonstrating this result.

As we understand that the second sentence in ASC 326-20-30-13A was not intended to create additional provisions or complexity and the first sentence indicates recoveries are limited by the amortized cost basis, we believe the second sentence should be removed.

Conceptually, we believe that the recognition of a negative allowance should be the same for financial assets subject to ASC 326-20 and AFS debt securities.  However, we recognize permitting a negative allowance for AFS debt securities would be a more significant change to the impairment model for AFS debt securities than intended. As a result, we agree with the guidance that precludes the recognition of a negative allowance on an AFS debt security.

We agree with the addition of a transition provision permitting an entity to adjust the effective interest rate used to discount cash flows for the purposes of estimating credit losses on existing TDRs using prepayment assumptions on the date of adoption of Topic 326. See our response to question 1 for additional comments on the use of an adjusted effective interest rate to discount cash flows for the purposes of estimating credit losses. We believe that this transition provision should be amended consistent with the amendments we propose in question 1.

We believe comments on the impact to operational concerns are best addressed by financial statement preparers, but we support the proposed amendment.

We support the proposed amendments to clarify the application of the collateral maintenance practical expedient in accordance with paragraph 326-20-35-6.

We believe this question is best addressed by financial statement preparers.

We support the proposed transition method and transition disclosures.

Assume an entity paid $100 for a pool of unsecured loans with a total unpaid principal balance of $1,000. The entity expects to collect $350 from the pool of loans, but is unable to identify which specific loans are expected to generate cash flows. The loans are considered to be PCD and the allowance for credit losses is calculated using an undiscounted approach on a collective (pool) basis since the loans share similar risk characteristics. When the entity applies its policies relating to writeoffs, it determines that on an individual loan level basis, the loans are deemed uncollectible and writes them off.

The journal entries on the date of acquisition are as follows:

As illustrated, the estimated recoveries ($350) are less than the $750 amortized cost basis that was written off ($1,000 loan less the noncredit discount of $250). If the guidance in ASC 326-20-30-13A is interpreted to not permit the recognition in income (on a net basis) of $250 (which equals the noncredit discount), then the limitation on recording recoveries would not be the amortized cost basis of $750, it would be the purchase price of $100, which would be inconsistent with the first sentence in ASC 326-20-30-13A.