New Developments Summary

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1 September 13, 2010 NDS New Developments Summary ASU enhances credit quality disclosures Financing receivables and allowance for credit losses Summary The FASB recently issued Accounting Standards Update (ASU) , Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to enhance the disclosures required for financing receivables (for example, loans, trade accounts receivable, notes receivable, and receivables relating to a lessor s leveraged, direct financing, and sales-type leases) and allowances for credit losses under FASB Accounting Standards Codification 310, Receivables. The amended disclosures are designed to provide more information to financial statement users about the credit quality of a creditor s financing receivables and the adequacy of its allowance for credit losses. Most of the existing disclosures in ASC have been amended to require information on a more disaggregated basis. In addition, the amended guidance in ASU requires disclosure of the following: Information about the credit quality of financing receivables Aging of past due receivables The nature and extent of troubled debt restructurings and their effect on the allowance for credit losses Significant purchases and sales of financing receivables Public entities must begin applying most of the new disclosure requirements for periods ending on or after December 15, 2010, while nonpublic entities are not required to comply until periods ending on or after December 15, Contents A. Introduction... 2 B. Scope... 2 C. Level of disaggregation... 3 D. Disclosures... 3 E. Effective date and transition... 9

2 New Developments Summary 2 A. Introduction The FASB has issued Accounting Standards Update (ASU) , Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to enhance the disclosure requirements in FASB Accounting Standards Codification (ASC or Codification) 310, Receivables. The amended disclosures are designed to provide more information to financial statement users about the credit quality of a creditor s financing receivables and the adequacy of its allowance for credit losses. Specifically, the amendments require all creditors, including public and nonpublic entities, to disclose information that enables financial statement users to understand the following about a creditor s portfolio of financing receivables (for example, loans, trade accounts receivable, notes receivable, and receivables relating to a lessor s leveraged, direct financing, and sales-type leases) and its allowance for losses: The nature of the credit risk inherent in the receivables How the entity analyzes and assesses credit risk to estimate the allowance for credit losses The changes and reasons for those changes in both the receivables and the allowance for credit losses The amended guidance is intended to enhance the consistency and comparability of credit quality and allowance for credit loss disclosures for financing receivables by requiring entities to disclose a greater level of disaggregated information as well as credit quality indicators and information about past due receivables and modifications of financing receivables. These amended disclosure requirements are intended to help users assess an entity s credit risk exposures and its allowance for credit losses. The guidance in ASU addresses only the disclosure requirements associated with the credit quality of financing receivables and the allowance for credit losses. It does not amend the recognition and measurement requirements for financing receivables. The Board separately issued a proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, which addresses measurement and recognition for all financial instruments, including financing receivables. B. Scope The guidance in the ASU adds financing receivable to the ASC Master Glossary, which it defines as a recorded asset representing a contractual right to receive money either on demand or on fixed or determinable dates. Financing receivables include, but are not limited to, loans, trade accounts receivable, notes receivable, and receivables related to a lessor s leveraged, direct financing, and salestype leases. Examples of assets that do not qualify as financing receivables include Not-for-profit entities unconditional promises to give that must be recognized as assets Beneficial interests in securitized financial assets that either are acquired or recognized by a transferor as a result of transfer that meets the requirements for sale accounting under ASC 860, Transfers and Servicing Debt securities accounted for under ASC 320, Investments Debt and Equity Securities The amended guidance applies to all financing receivables except for short-term trade receivables and receivables measured either at fair value or at the lower of cost. The Board decided to

3 New Developments Summary 3 exclude certain instruments from the scope of the amended guidance because of their nature as well as cost versus benefit considerations. C. Level of disaggregation Entities must disaggregate the required disclosures under the amended guidance by portfolio segment or by class. The amended guidance includes definitions for these two levels of disaggregation: Portfolio segment: the level at which an entity develops and documents a systematic methodology for determining its allowance for credit losses (for example, by type of financing receivable, such as mortgage loans and auto loans; by industry; and by risk rates) Portfolio segment The definition of a portfolio segment is consistent with the following existing SEC and other regulatory guidance related to the allowance for credit losses: SEC Staff Accounting Bulletin 102, Selected Loan Loss Allowance Methodology and Documentation Issues 2001 Federal Financial Institutions Examination Council (FFIEC) Interagency Policy Statement on Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation for Banks and Savings Institutions 2002 National Credit Union Administration (NCUA) Interpretive Ruling and Policy Statement (IRPS) on Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation for Credit Unions 2006 FFIEC Interagency Policy Statement on the Allowance for Loan and Lease Losses Class of financing receivable: a group of financing receivables, further disaggregated from the portfolio segment level, that allows the financial statement user to understand the risks inherent in the entity s financing receivables. A class is determined on the basis of all of the following characteristics of financing receivables: Initial measurement attribute, such as amortized cost for originated loans and fair value for loans acquired in a business combination Risk characteristics Entity s method for monitoring and assessing credit risk An entity s management must use judgment in determining the appropriate portfolio segments and classes of financing receivables, keeping in mind the disclosure objectives in the amended guidance. D. Disclosures The amended guidance requires expanded disclosures, which are summarized in the tables below. The tables include the level of disaggregation required for each group of disclosures. These tables focus on the amended and new disclosure requirements in the ASU and therefore do not include all of the disclosures required by ASC Preparers and auditors should refer to the disclosure requirements in the Codification to determine whether disclosures are complete.

4 New Developments Summary 4 Accounting policies for loans and trade receivables Disclosure The entity s policy for charging off uncollectible trade accounts receivable that both (1) have a contractual maturity of one and (2) arose from the sale of goods or Loans and trade receivables, except for credit card receivables Nonaccrual and past due financing receivables Disclosure In the summary of significant accounting policies, information on policies for Placing financing receivables on nonaccrual status, if applicable Recording payments received on nonaccrual financing receivables, if applicable Resuming accrual of interest Determining past due or delinquency status The recorded investment in financing receivables on nonaccrual status All financing receivables shall be disclosed by class except for the following, which are subject to these disclosure requirements but are not required to be disaggregated by class: The recorded investment in financing receivables past due 90 days or more and still accruing An analysis of the ages of the recorded investment in financing receivables past due at the end of the reporting period, as determined under the entity s accounting policy All financing receivables shall be disclosed by class except for the following, which are not subject to this disclosure requirement:

5 New Developments Summary 5 Nonaccrual and past due financing receivables Disclosure Allowance for credit losses related to financing receivables Disclosure by portfolio segment A description of the entity s accounting policies and methodology used to estimate the allowance for credit losses, including A description of the factors that influenced management s judgment, including Historical losses Existing economic conditions A discussion of risk characteristics relevant to each portfolio segment Identification of changes to the accounting policies or methodology from the prior period and the rationale for the change A description of the entity s policy for charging off uncollectible financing receivables Financing receivables, except for A lessor s net investments in leveraged leases A reconciliation showing the activity in the allowance for credit losses for each period, including The beginning and ending balance The current period provision Direct write-downs charged against the allowance Recoveries of amounts previously charged-off The quantitative effect of changes to the accounting policies or methodology from the prior period on the current period provision

6 New Developments Summary 6 Allowance for credit losses related to financing receivables Disclosure by portfolio segment The amount of significant purchases of financing receivables in each reporting period The amount of significant sales of financing receivables or reclassifications of financing receivables to the held-for-sale category in each reporting period The balance in the allowance for credit losses and the related recorded investment in financing receivables at the end of each period, disaggregated based on impairment method (including amounts collectively evaluated for impairment, amounts individually evaluated for impairment, and amounts related to loans acquired with deteriorated credit quality) Impaired loans that are individually evaluated for impairment The accounting for impaired loans The amount of impaired loans All loans that meet the definition of an impaired loan in ASC through and are individually evaluated for impairment The recorded investment in impaired loans as of the date of each statement of financial position, as well as the following information: The amount of recorded investment for which there is a related allowance for credit losses determined under ASC , and the amount of that allowance The amount of recorded investment for which there is no related allowance for credit losses determined under ASC

7 New Developments Summary 7 Impaired loans that are individually evaluated for impairment The total unpaid principal balance on impaired loans The entity s policy for recognizing interest income on impaired loans, and how it records cash receipts For each period an entity presents results of operations, the following information: The average recorded investment in impaired loans The related amount of interest income recognized while the loans were impaired The amount of interest income recognized on a cash basis while the loans were impaired, if practicable The entity s policy for determining which loans to assess for impairment under ASC The factors the entity considered in determining that the loan is impaired Credit quality information Information that enables financial statement users to both (1) understand how and to what extent management monitors the quality of its financing receivables and (2) assess the quantitative and qualitative risks arising from the credit quality of its financing receivables. Therefore, entities must disclose quantitative and qualitative information about the credit Financing receivables, except for

8 New Developments Summary 8 Credit quality information quality of financing receivables, including A description of the credit quality indicator 1 The recorded investment in financing receivables by credit quality indicator The date or range of dates on or during which the information was updated for each credit quality indicator Qualitative information about how internal risk ratings 2 relate to the likelihood of loss, if the entity discloses internal risk ratings Modifications Qualitative and quantitative information about troubled debt restructurings of financing receivables that occurred during each period, including How the entity modified the financing receivables The financial effects of the modifications For each period the entity presents a statement of income, qualitative and quantitative information about financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the period, including the types and amounts of financing receivables that defaulted A creditor s troubled debt restructurings of financing receivables, except for Loans acquired with deteriorated credit quality accounted for within a pool 1 A statistic about the credit quality of financing receivables, such as an external credit rating (AAA or BBB), consumer credit risk scores, an internal credit risk grade (pass, substandard, or special mention), or the level of payment activity (performing or nonperforming) 2 In determining whether to disclose internal risk ratings, entities should consider the objectives of the amended disclosure requirements.

9 New Developments Summary 9 Modifications Disclosure by portfolio segment Qualitative information about how troubled debt restructurings are factored into an entity s determination of the allowance for credit losses For each period the entity presents a statement of income, qualitative information about how payment defaults during the period on financing receivables modified as troubled debt restructurings within the previous 12 months are factored into an entity s determination of the allowance for credit losses A creditor s troubled debt restructurings of financing receivables, except for Loans acquired with deteriorated credit quality accounted for within a pool E. Effective date and transition Public entities must apply the disclosure requirements applicable to period-end balances beginning with the first interim or annual reporting period ending on or after December 15, 2010 (December 31, 2010 for a calendar year-end public entity). Public entities disclosures about activity in the allowance for credit losses by portfolio segment during a reporting period are effective beginning with the first interim or annual reporting period beginning on or after December 15, 2010 (January 1, 2011 for a calendar yearend public entity). Until these disclosure requirements are effective, entities must continue to provide the similar disclosures about activity required under ASC Nonpublic entities must apply all disclosure requirements in the ASU beginning with the first annual reporting period ending on or after December 15, 2011 (December 31, 2011 for a calendar year-end nonpublic entity). Comparative disclosures are encouraged, but not required, for reporting periods ending before adoption of the amended disclosure requirements. Comparative disclosures are required for reporting periods ending after initial adoption Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP bulletin provides information and comments on current accounting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in the bulletin. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this bulletin. For additional information on topics covered in this bulletin, contact your Grant Thornton LLP adviser.