Financial Instruments Credit Losses (Topic 326)

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1 No June 2016 Financial Instruments Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments An Amendment of the FASB Accounting Standards Codification

2 The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. For additional copies of this Accounting Standards Update and information on applicable prices and discount rates contact: Order Department Financial Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, CT Please ask for our Product Code No. ASU FINANCIAL ACCOUNTING SERIES (ISSN ) is published monthly with the exception of January and October by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT Periodicals postage paid at Norwalk, CT and at additional mailing offices. The full subscription rate is $255 per year. POSTMASTER: Send address changes to Financial Accounting Standards Board, 401 Merritt 7, PO Box 5116, Norwalk, CT No. 437 Copyright 2016 by Financial Accounting Foundation. All rights reserved. Content copyrighted by Financial Accounting Foundation may not be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Foundation. Financial Accounting Foundation claims no copyright in any portion hereof that constitutes a work of the United States Government.

3 Accounting Standards Update No June 2016 Financial Instruments Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments An Amendment of the FASB Accounting Standards Codification Financial Accounting Standards Board

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5 Accounting Standards Update Financial Instruments Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments June 2016 CONTENTS Page Numbers Summary Amendments to the FASB Accounting Standards Codification Background Information and Basis for Conclusions Amendments to the XBRL Taxonomy

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7 Summary Why Is the FASB Issuing This Accounting Standards Update (Update)? Current generally accepted accounting principles (GAAP) require an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Both financial institutions and users of their financial statements expressed concern that current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the probable threshold. The global financial crisis underscored those concerns because users analyzed credit losses by utilizing forward-looking information to assess an entity s allowance for credit losses on the basis of their own expectations. Consequently, in the lead-up to the financial crisis, users were making estimates of expected credit losses and devaluing financial institutions before accounting losses were recognized, highlighting the different information needs of users from what was required by GAAP. Similarly, financial institutions expressed frustration during this period because they could not record credit losses that they were expecting but had not yet met the probable threshold. In 2008, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) established a Financial Crisis Advisory Group (FCAG) to advise the Boards on improvements to financial reporting in response to the financial crisis. The FCAG identified as a weakness in current GAAP the delayed recognition of credit losses that results in the potential overstatements of assets. As a result, the FCAG recommended exploring more forward-looking alternatives to the incurred loss methodology. The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Who Is Affected by the Amendments in This Update? The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in 1

8 leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this Update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. There is diversity in practice in applying the incurred loss methodology, which means that before transition some entities may be more aligned, under current GAAP, than others to the new measure of expected credit losses. What Are the Main Provisions? Assets Measured at Amortized Cost The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The allowance for credit losses for purchased financial assets with a more-thaninsignificant amount of credit deterioration since origination (PCD assets) that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. Interest income for PCD assets should be recognized based on the effective interest rate, excluding the discount embedded in the purchase price that is attributable to the acquirer s assessment of credit losses at acquisition. Available-for-Sale Debt Securities Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. 2

9 Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available for sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value. The allowance for credit losses for purchased available-for-sale securities with a more-than-insignificant amount of credit deterioration since origination is determined in a similar manner to other available-for-sale debt securities; however, the initial allowance for credit losses is added to the purchase price rather than reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded in credit loss expense. Interest income should be recognized based on the effective interest rate, excluding the discount embedded in the purchase price that is attributable to the acquirer s assessment of credit losses at acquisition. How Do the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Are They an Improvement? Assets Measured at Amortized Cost Current GAAP includes multiple credit impairment objectives for instruments within the scope of this Update. The previous objectives generally delayed recognition of the full amount of credit losses until the loss was probable of occurring. The amendments in this Update are an improvement because they eliminate the probable initial recognition threshold in current GAAP and, instead, reflect an entity s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The amendments in this Update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. It is not the Board s expectation that an entity will need to create an economic forecast over the entire contractual life of long-dated financial assets. Therefore, the amendments in this Update allow an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of 3

10 prepayments) for periods that are beyond the time frame for which the entity is able to develop reasonable and supportable forecasts. The Board does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate. The Board expects that an entity can leverage its current systems and methods for recording the allowance for credit losses. However, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. The accounting for purchased credit impaired financial assets under current GAAP has been criticized as complex and difficult to apply. The accounting for those assets under the amendments in this Update will make the allowance for credit losses more comparable between originated assets and purchased financial assets, as well as reduce complexity with the accounting for interest income. The amendments in this Update retain many of the disclosure amendments in Accounting Standards Update No , Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination (or vintage). The vintage information will be useful for financial statement users to better assess changes in underwriting standards and credit quality trends in asset portfolios over time and the effect of those changes on credit losses. However, the disaggregation by year of origination will be optional for entities that are not public business entities. Available-for-Sale Debt Securities Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments in this Update require that credit losses be presented as an allowance rather than as a writedown. This approach is an improvement to current GAAP because an entity will be able to record reversals of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur. Current GAAP prohibits reflecting those improvements in currentperiod earnings. 4

11 The amendments in this Update indicate that an entity should not use the length of time a security has been in an unrealized loss position to avoid recording a credit loss. In addition, in determining whether a credit loss exists, the amendments in this Update also remove the requirements to consider the historical and implied volatility of the fair value of a security and recoveries or declines in fair value after the balance sheet date. The accounting for purchased credit impaired available-for-sale debt securities have similar complex accounting requirements under current GAAP as the accounting for other purchased credit impaired financial assets. Consistent with the accounting for amortized cost assets, the revised accounting under the amendments will increase the comparability of the allowance for credit losses across originated and purchased available-for-sale debt securities, as well as resolve complexity with the accounting for interest income. When Will the Amendments Be Effective? For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the effective date of this Update. Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to improvements in cash flows expected to be collected should continue to be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements 5

12 in cash flows after the date of adoption should be recorded in earnings when received. The Board determined that financial assets for which the guidance in Subtopic , Receivables Loans and Debt Securities Acquired with Deteriorated Credit Quality, has previously been applied should prospectively apply the guidance in this Update for PCD assets. A prospective transition approach should be used for PCD assets where upon adoption, the amortized cost basis should be adjusted to reflect the addition of the allowance for credit losses. This transition relief will avoid the need for a reporting entity to reassess its purchased financial assets that exist as of the date of adoption to determine whether they would have met at acquisition the new criteria of more-thaninsignificant credit deterioration since origination. The transition relief also will allow an entity to accrete the remaining noncredit discount (based on the revised amortized cost basis) into interest income at the effective interest rate at the adoption date of this Update. The same transition requirements should be applied to beneficial interests that previously applied Subtopic or have a significant difference between contractual cash flows and expected cash flows. 6

13 Amendments to the FASB Accounting Standards Codification Introduction 1. The Accounting Standards Codification is amended as described in paragraphs In some cases, to put the change in context, not only are the amended paragraphs shown but also the preceding and following paragraphs. Terms from the Master Glossary are in bold type. Added text is underlined, and deleted text is struck out. Amendments to Master Glossary 2. Add the new Master Glossary term Purchased Financial Assets with Credit Deterioration, with a link to transition paragraph , as follows: Purchased Financial Assets with Credit Deterioration Acquired individual {add glossary link to 1 st definition link}financial assets{add glossary link to 1 st definition link} (or acquired groups of financial assets with similar risk characteristics) that as of the date of acquisition have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer s assessment. See paragraph for more information on the meaning of similar risk characteristics for assets measured on an amortized cost basis. 3. Supersede the following Master Glossary terms, with a link to transition paragraph , as follows: Collateral-Dependent Loan A loan for which the repayment is expected to be provided solely by the underlying collateral. Recorded Investment in the Receivable The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct writedown of the investment. 4. Amend the following Master Glossary terms, with a link to transition paragraph , as follows: 7

14 Amortized Cost Basis The amortized cost basis is the amount at which an 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, previous other-than-temporary impairments recognized in earnings (less any cumulative-effect adjustments) writeoffs, foreign exchange, and fair value hedge accounting adjustments. Class of Financing Receivable A group of financing receivables determined on the basis of both all of the following: a. Initial measurement attribute (for example, amortized cost or purchased credit impaired) b. a. Risk characteristics of the financing receivable c. b. An entity s method for monitoring and assessing credit risk. See paragraphs through and through and Credit Quality Indicator A statistic about the credit quality of a financial asset financing receivables. Effective Interest Rate The rate of return implicit in the loan financial asset, that is, the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the financial asset loan. 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. Holding Gain or Loss The net change in fair value of a security. The holding gain or loss does not include dividend or interest income recognized but not yet received, writeoffs, or the allowance for credit losses or write-downs for other-than-temporary impairment. Loan Commitment Loan commitments are legally binding commitments to extend credit to a counterparty under certain prespecified terms and conditions. They have fixed 8

15 expiration dates and may either be fixed-rate or variable-rate. Loan commitments can either be either of the following: a. Revolving (in which the amount of the overall line of credit commitment is reestablished upon repayment of previously drawn amounts) b. Nonrevolving (in which the amount of the overall line of credit commitment is not reestablished upon repayment of previously drawn amounts). Loan commitments can be distributed through syndication arrangements, in which one entity acts as a lead and an agent on behalf of other entities that will each extend credit to a single borrower. Loan commitments generally permit the lender to terminate the arrangement under the terms of covenants negotiated under the agreement. This is not an authoritative or all-encompassing definition. Portfolio Segment The level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. See paragraphs and through Remeasurement Event A remeasurement (new basis) event is an event identified in other authoritative accounting literature, other than the measurement of an impairment under Topic 321 or credit loss under Topic 326 recognition of an other-than-temporary impairment, that requires a financial instrument to be remeasured to its fair value at the time of the event but does not require that financial instrument to be reported at fair value continually with the change in fair value recognized in earnings. Examples of remeasurement events are business combinations and significant modifications of debt as discussed in paragraph Amend the General Note to Section 35, Subsequent Measurement, as follows: General Note: The Subsequent Measurement Section provides guidance on an entity s subsequent measurement and subsequent recognition of an item. Situations that may result in subsequent changes to carrying amount include impairment, credit losses, fair value adjustments, depreciation and amortization, and so forth. Amendments to Subtopic Amend paragraph , with a link to transition paragraph , as follows: Balance Sheet Overall 9

16 Other Presentation Matters > Valuation Allowances Asset valuation allowances for losses such as those on receivables and investments shall be deducted from the assets or groups of assets to which the allowances relate. See paragraph for a related disclosure requirement. Amendments to Subtopic Amend paragraphs A and B and supersede paragraph A, with a link to transition paragraph , as follows: Comprehensive Income Overall Other Presentation Matters > > Items within Other Comprehensive Income A Items of other comprehensive income include the following: a. Foreign currency translation adjustments (see paragraph ) b. Gains and losses on foreign currency transactions that are designated as, and are effective as, economic hedges of a net investment in a foreign entity, commencing as of the designation date (see paragraph (a)) c. Gains and losses on intra-entity foreign currency transactions that are of a long-term-investment nature (that is, settlement is not planned or anticipated in the foreseeable future), when the entities to the transaction are consolidated, combined, or accounted for by the equity method in the reporting entity s financial statements (see paragraph (b)) d. Gains and losses (effective portion) on derivative instruments that are designated as, and qualify as, cash flow hedges (see paragraph (c)) e. Unrealized {add glossary link}holding gains and losses{add glossary link} on available-for-sale debt securities (see paragraph ) f. Unrealized holding gains and losses that result from a debt security being transferred into the available-for-sale category from the held-tomaturity category (see paragraph (c)) 10

17 g. Subparagraph superseded by Accounting Standards Update No Amounts recognized in other comprehensive income for debt securities classified as available-for-sale and held-to-maturity related to an other-than-temporary impairment recognized in accordance with Section if a portion of the impairment was not recognized in earnings h. Subparagraph superseded by Accounting Standards Update No Subsequent decreases (if not an other-than-temporary impairment) or increases in the fair value of available-for-sale debt securities previously written down as impaired (see paragraph ) i. Gains or losses associated with pension or other postretirement benefits (that are not recognized immediately as a component of net periodic benefit cost) (see paragraph (j)) j. Prior service costs or credits associated with pension or other postretirement benefits (see paragraph (j)) k. Transition assets or obligations associated with pension or other postretirement benefits (that are not recognized immediately as a component of net periodic benefit cost) (see paragraph (j)). l. Changes in fair value attributable to instrument-specific credit risk of liabilities for which the fair value option is elected (see paragraph ). Additional classifications or additional items within current classifications may result from future accounting standards A Paragraph superseded by Accounting Standards Update No An entity shall only determine reclassification adjustments for amounts recognized in other comprehensive income related to other-than-temporary impairments of debt securities classified as held-to-maturity if the loss is realized as a result of a sale of the security or an additional credit loss occurs. If the security is sold, Section provides guidance on the effect of changes in circumstances that would not call into question the entity s intent to hold other debt securities to maturity in the future. If the held-to-maturity debt security is not sold and additional credit losses do not occur, the amount recognized in other comprehensive income shall be accounted for in accordance with Section Implementation Guidance and Illustrations > Illustrations > > Example 2: Presenting Accumulated Other Comprehensive Income > > > Disclosure of Changes in Accumulated Other Comprehensive Income Balances 11

18 B The presentation of unrealized gains and losses on available-forsale debt securities illustrated in paragraphs through 55-15A is aggregated for simplicity and, therefore, does not necessarily comply with all of the disclosures that may be required in Topic 320 or 326 (for example, disclosures about {add glossary link to available-for-sale securities}availablefor-sale{add glossary link to available-for-sale securities}{add glossary link to 1 st definition}debt securities{add glossary link to 1 st definition} with an allowance for credit losses other-than-temporary-impairments in paragraph A). Amendments to Subtopic Amend paragraph , with a link to transition paragraph , as follows: Statement of Cash Flows Overall Other Presentation Matters > Classification > > Acquisitions and Sales of Certain Securities and Loans Some loans are similar to debt securities in a trading account in that they are originated or purchased specifically for resale and are held for short periods of time. Cash receipts and cash payments resulting from acquisitions and sales of loans also shall be classified as operating cash flows if those loans are acquired specifically for resale and are carried at fair value or at the lower of amortized cost basis or fair value. For example, mortgage loans held for sale are required to be reported at the lower of amortized cost basis or fair value in accordance with Topic 948. Amendments to Subtopic Amend paragraph , with a link to transition paragraph , as follows: Interim Reporting Overall Disclosure 12

19 > Disclosure of Summarized Interim Financial Data by Publicly Traded Companies Many publicly traded companies report summarized financial information at periodic interim dates in considerably less detail than that provided in annual financial statements. While this information provides more timely information than would result if complete financial statements were issued at the end of each interim period, the timeliness of presentation may be partially offset by a reduction in detail in the information provided. As a result, certain guides as to minimum disclosure are desirable. (It should be recognized that the minimum disclosures of summarized interim financial data required of publicly traded companies do not constitute a fair presentation of financial position and results of operations in conformity with generally accepted accounting principles [GAAP].) If publicly traded companies report summarized financial information at interim dates (including reports on fourth quarters), the following data should be reported, as a minimum: a. Sales or gross revenues, provision for income taxes, net income, and comprehensive income b. Basic and diluted earnings per share data for each period presented, determined in accordance with the provisions of Topic 260 c. Seasonal revenue, costs, or expenses (see paragraph ) d. Significant changes in estimates or provisions for income taxes (see paragraphs , , and ) e. Disposal of a component of an entity and unusual or infrequently occurring items (see paragraphs A and ) f. Contingent items (see paragraph ) g. Changes in accounting principles or estimates (see paragraphs through 45-16) h. Significant changes in financial position (see paragraph ) i. All of the following information about reportable operating segments determined according to the provisions of Topic 280, including provisions related to restatement of segment information in previously issued financial statements: 1. Revenues from external customers 2. Intersegment revenues 3. A measure of segment profit or loss 4. Total assets for which there has been a material change from the amount disclosed in the last annual report 5. A description of differences from the last annual report in the basis of segmentation or in the measurement of segment profit or loss 6. A reconciliation of the total of the reportable segments measures of profit or loss to the entity s consolidated income before income taxes and discontinued operations. However, if, for example, an entity allocates items such as income taxes to segments, the entity may choose to reconcile the total of the segments measures of 13

20 profit or loss to consolidated income after those items. Significant reconciling items shall be separately identified and described in that reconciliation. j. All of the following information about defined benefit pension plans and other defined benefit postretirement benefit plans, disclosed for all periods presented pursuant to the provisions of Subtopic : 1. The amount of net periodic benefit cost recognized, for each period for which a statement of income is presented, showing separately the service cost component, the interest cost component, the expected return on plan assets for the period, the gain or loss component, the prior service cost or credit component, the transition asset or obligation component, and the gain or loss recognized due to a settlement or curtailment 2. The total amount of the employer s contributions paid, and expected to be paid, during the current fiscal year, if significantly different from amounts previously disclosed pursuant to paragraph Estimated contributions may be presented in the aggregate combining all of the following: i. Contributions required by funding regulations or laws ii. Discretionary contributions iii. Noncash contributions. k. The information about the use of fair value to measure assets and liabilities recognized in the statement of financial position pursuant to Section l. The information about derivative instruments as required by Sections , , , , and m. The information about financial instruments as required by Section n. The information about certain investments in debt and equity securities as required by Sections , , and o. The information about credit losses and other-than-temporary impairments as required by Topic 326 on measurement of credit losses Sections , , and and impairments as required by Section p. All of the following information about the credit quality of financial assets financing receivables and the allowance for credit losses determined in accordance with the provisions of Subtopic on financial instruments measured at amortized cost Topic 310: 1. Nonaccrual and past due financial assets financing receivables (see paragraphs through A through 50-7B) 2. Allowance for expected credit losses related to financial assets financing receivables (see paragraphs through A through 50-11C) 14

21 3. Subparagraph superseded by Accounting Standards Update No Impaired loans (see paragraphs A through 50-15) 4. Credit-quality information related to instruments within the scope of Subtopic financing receivables (see paragraphs through through 50-30) 5. Modifications of financing receivables (see paragraphs through 50-34). q. The gross information and net information required by paragraphs through r. The information about changes in accumulated other comprehensive income required by paragraphs A and through 45-17B. s. The carrying amount of foreclosed residential real estate property as required by the last sentence of paragraph and the amount of loans in the process of foreclosure as required by paragraph If summarized financial data are regularly reported on a quarterly basis, the foregoing information with respect to the current quarter and the current year-todate or the last 12 months to date should be furnished together with comparable data for the preceding year. Amendments to Subtopic Amend paragraphs , through 35-48, , , , , , and through 50-34, supersede paragraphs through and their related headings, and its related heading, A through 45-6 and their related headings, A, A through and their related headings, A through 50-11C and their related heading, through and their related headings, , through and their related heading, through and their related headings, and through and their related headings, and add paragraphs A through 35-53C and their related heading, with a link to transition paragraph , as follows: Receivables Overall Overview and Background The Receivables Topic includes the following Subtopics: a. Overall b. Nonrefundable Fees and Other Costs 15

22 c. Subparagraph superseded by Accounting Standards Update No Loans and Debt Securities Acquired with Deteriorated Credit Quality d. Troubled Debt Restructurings by Creditors. Subsequent Measurement General Paragraph superseded by Accounting Standards Update No This Subsection provides the following subsequent measurement guidance: a. Loan impairment b. Credit losses for loans and trade receivables c. Credit losses for standby letters of credit and certain loan commitments d. Subsequent measurement of specific types of receivables. > Impairment of Loans and Receivables Paragraph superseded by Accounting Standards Update No Subtopic provides the basic guidance for recognition of impairment losses for all receivables (except those receivables specifically addressed by other Topics, such as debt securities). This Subsection provides more specific guidance on measurement and disclosure for a subset of the population of loans. That subset consists of loans that are identified for evaluation and that are individually deemed to be impaired (because it is probable that the creditor will be unable to collect all the contractual interest and principal payments as scheduled in the loan agreement). It also includes all loans that are restructured in a troubled debt restructuring involving a modification of terms, except for those loans that are excluded from the scope of this guidance, as discussed in paragraph (b) through (d) Paragraph superseded by Accounting Standards Update No This Subsection addresses both the impairment concepts applicable to all receivables, with references to the guidance in Subtopic where appropriate, and the impairment concepts related to loans that are identified for evaluation and that are individually deemed to be impaired, as discussed in paragraph > > General Concepts Paragraph superseded by Accounting Standards Update No The following provides an overview of generally accepted accounting principles (GAAP) for loan impairment: a. It is usually difficult, even with hindsight, to identify any single event that made a particular loan uncollectible. However, the concept in GAAP is 16

23 that impairment of receivables shall be recognized when, based on all available information, it is probable that a loss has been incurred based on past events and conditions existing at the date of the financial statements. b. Losses shall not be recognized before it is probable that they have been incurred, even though it may be probable based on past experience that losses will be incurred in the future. It is inappropriate to consider possible or expected future trends that may lead to additional losses. Recognition of losses shall not be deferred to periods after the period in which the losses have been incurred. c. GAAP does not permit the establishment of allowances that are not supported by appropriate analyses. The approach for determination of the allowance shall be well documented and applied consistently from period to period. d. Under Subtopic , the threshold for recognition of impairment shall be the same whether the creditor has many loans or has only one loan. Paragraph requires that if the conditions of paragraph are met, accrual shall be made even though the particular receivables that are uncollectible may not be identifiable. e. The guidance in this Subsection is more specific than Subtopic in that it requires certain methods of measurement for loans that are individually considered impaired, but it does not fundamentally change the recognition criteria for loan losses. > > Impairment of Receivables Paragraph superseded by Accounting Standards Update No The following discusses the general principles for measurement impairment of receivables under Subtopic , specifically: a. Applicability b. Losses from uncollectible receivables. > > > Applicability Paragraph superseded by Accounting Standards Update No A creditor needs to apply judgment based on individual facts and circumstances to determine what represents large groups of smaller-balance homogeneous loans. Paragraphs through would apply to those groups of smaller-balance loans as well as loans that are not identified for evaluation or that are evaluated but are not individually considered impaired. > > > Losses from Uncollectible Receivables Paragraph superseded by Accounting Standards Update No The conditions under which receivables exist usually involve some degree of uncertainty about their collectibility, in which case a contingency exists. 17

24 Paragraph superseded by Accounting Standards Update No Subtopic requires recognition of a loss when both of the following conditions are met: a. Information available before the financial statements are issued or are available to be issued (as discussed in Section ) indicates that it is probable that an asset has been impaired at the date of the financial statements. b. The amount of the loss can be reasonably estimated Paragraph superseded by Accounting Standards Update No Losses from uncollectible receivables shall be accrued when both of the preceding conditions are met. Those conditions may be considered in relation to individual receivables or in relation to groups of similar types of receivables. If the conditions are met, accrual shall be made even though the particular receivables that are uncollectible may not be identifiable Paragraph superseded by Accounting Standards Update No If, based on current information and events, it is probable that the entity will be unable to collect all amounts due according to the contractual terms of the receivable, the condition in paragraph (a) is met. As used here, all amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments will be collected as scheduled according to the receivable s contractual terms. However, a creditor need not consider an insignificant delay or insignificant shortfall in amount of payments as meeting the condition in paragraph (a). Whether the amount of loss can be reasonably estimated (the condition in paragraph (b)) will normally depend on, among other things, the experience of the entity, information about the ability of individual debtors to pay, and appraisal of the receivables in light of the current economic environment. In the case of an entity that has no experience of its own, reference to the experience of other entities in the same business may be appropriate Paragraph superseded by Accounting Standards Update No The inability to make a reasonable estimate of the amount of loss from uncollectible receivables (that is, failure to satisfy the condition in paragraph (b)) precludes accrual and may, if there is significant uncertainty as to collection, suggest that the cost recovery method, the cash-basis method, or some other method shall be used. > > Loans That Are Identified for Evaluation or That Are Individually Considered Impaired Paragraph superseded by Accounting Standards Update No The following addresses impairment of loans that are identified for evaluation or that are individually considered impaired, specifically: a. Applicability 18

25 b. Identifying loans for evaluation c. Assessing whether a loan is impaired d. Measurement of impairment e. Interaction with loss contingencies f. Changes in the net carrying amount of an impaired loan. > > > Applicability Paragraph superseded by Accounting Standards Update No This guidance applies to all creditors. It addresses the accounting by creditors for impairment of a loan by specifying how allowances for credit losses related to certain loans shall be determined. The accounting for impaired loans shall be consistent among all creditors and for all types of lending except for loans that are measured at fair value or at the lower of cost or fair value in accordance with specialized industry practice. Therefore, this guidance applies to all loans that are identified for evaluation, uncollateralized as well as collateralized, except the following: a. Large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. Those loans may include but are not limited to credit card, residential mortgage, and consumer installment loans. b. Loans that are measured at fair value or at the lower of cost or fair value, for example, in accordance with Topic 948 or other specialized industry practice. c. Subparagraph superseded by Accounting Standards Update No d. Debt securities as defined in Topic 320. This guidance does not address when a creditor should record a direct writedown of an impaired loan, nor does it address how a creditor should assess the overall adequacy of the allowance for credit losses. > > > Identifying Loans for Evaluation Paragraph superseded by Accounting Standards Update No This guidance does not specify how a creditor should identify loans that are to be evaluated for collectibility. A creditor shall apply its normal loan review procedures in making that judgment. Sources of information useful in identifying loans for evaluation include the following: a. A specific materiality criterion b. Regulatory reports of examination c. Internally generated listings such as watch lists, past due reports, overdraft listings, and listings of loans to insiders d. Management reports of total loan amounts by borrower e. Historical loss experience by type of loan 19

26 f. Loan files lacking current financial data related to borrowers and guarantors g. Borrowers experiencing problems such as operating losses, marginal working capital, inadequate cash flow, or business interruptions h. Loans secured by collateral that is not readily marketable or that is susceptible to deterioration in realizable value i. Loans to borrowers in industries or countries experiencing economic instability j. Loan documentation and compliance exception reports Paragraph superseded by Accounting Standards Update No After a loan has been individually identified for evaluation, a creditor shall not aggregate loans with common risk characteristics when assessing whether loans are impaired. Only if a creditor can identify which individual loans (if any) are impaired (because it is probable that the creditor will be unable to collect all the contractual interest and principal payments as scheduled in the loan agreement) shall an allowance be measured for individual loans under this Subsection. > > > Assessing Whether a Loan Is Impaired Paragraph superseded by Accounting Standards Update No A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. See Subtopic for specific application of this guidance to loans restructured in a troubled debt restructuring Paragraph superseded by Accounting Standards Update No This guidance does not specify how a creditor should determine that it is probable that it will be unable to collect all amounts due according to the contractual terms of a loan. A creditor shall apply its normal loan review procedures in making that judgment. An insignificant delay or insignificant shortfall in amount of payments does not require application of this guidance. A loan is not impaired during a period of delay in payment if the creditor expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay. Thus, a demand loan or other loan with no stated maturity is not impaired if the creditor expects to collect all amounts due including interest accrued at the contractual interest rate during the period the loan is outstanding Paragraph superseded by Accounting Standards Update No The term probable is used consistent with its use in Subtopic , which defines probable as an area within a range of the likelihood that a future 20

27 event or events will occur confirming the fact of the loss. That range is from probable to remote, as follows: a. Probable. The future event or events are likely to occur. b. Reasonably possible. The chance of the future event or events occurring is more than remote but less than likely. c. Remote. The chance of the future event or events occurring is slight Paragraph superseded by Accounting Standards Update No The term probable is further described in paragraph , which indicates that the conditions for accrual in paragraph (a) are not intended to be so rigid that they require virtual certainty before a loss is accrued. They require only that it be probable that an asset has been impaired or a liability has been incurred and that the amount of loss be reasonably estimable. Application of the term probable in practice requires judgment, and probable does not mean virtually certain. Probable is a higher level of likelihood than more likely than not. > > > Measurement of Impairment Paragraph superseded by Accounting Standards Update No Measuring impairment of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. Creditors shall have latitude to develop measurement methods that are practical in their circumstances Paragraph superseded by Accounting Standards Update No Some impaired loans have risk characteristics that are unique to an individual borrower, and the creditor shall apply the measurement methods described in paragraphs ; through 35-28; and on a loan-by-loan basis. However, some impaired loans may have risk characteristics in common with other impaired loans. A creditor may aggregate those loans and may use historical statistics, such as average recovery period and average amount recovered, along with a composite effective interest rate as a means of measuring impairment of those loans Paragraph superseded by Accounting Standards Update No When a loan is impaired (see paragraphs through 35-17), a creditor shall measure impairment based on the present value of expected future cash flows discounted at the loan s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan s observable market price, or the fair value of the collateral if the loan is a collateral-dependent loan. If that practical expedient is used, Topic 820 shall apply Paragraph superseded by Accounting Standards Update No If a creditor uses the fair value of the collateral to measure impairment 21

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