Financial Issue Instruments, Structured

Transcription

1 Financial Issue Instruments, Structured October 8, 2010 Products and Real Estate (FSR) Capital Markets Accounting Developments Advisory Issue December 13, 2010 Analysis of ASU Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses Overview In response to the global economic downturn and the perceived need for increased transparency, the Financial Accounting Standards Board (the FASB ) issued Accounting Standards Update (the ASU ), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, on July 21, The ASU amends current guidance to allow financial statement users to better assess an entity s exposure to credit risk of financing receivables and the adequacy of an entity s allowance for credit losses. The amendments in the ASU apply to both public and private entities. The impact of the ASU will depend heavily on the significance of financing receivables to an entity s operations. For public companies, the disclosures as of the balance sheet date are effective for fiscal years and interim periods ending after December 15, The disclosures for reporting period activity (i.e., allowance rollforward and modification disclosures) are effective for interim and annual periods beginning after December 15, The ASU encourages but does not require comparative disclosures at initial adoption. Comparative disclosures are required for the reporting periods that begin after the initial adoption. For nonpublic entities, all disclosures are effective for periods ending after December 15, FSR observation: Comparative data may be challenging for certain entities given the complexities in merging reporting platforms in multiple domestic and foreign locations. Comparative data is not required at initial adoption in to reduce the operational challenges. Accordingly, an entity would be required to provide comparative disclosures related to the income statement only for periods after initial adoption. Disclosures under the ASU are similar to those required under IFRS 7, Financial Instruments: Disclosures. IFRS 7 requires disclosures for all financial instruments and not solely financing receivables. The FASB decided to release amended guidance with a limited scope to improve transparency in an entity s financial statements. FSR observation: Current impairment guidance provides for a probability threshold for the recognition of a credit impairment which may delay the timely recognition of losses. The FASB s Financial Instruments Exposure Draft released in May 2010 proposes a single credit impairment model for all financial instruments and removes the probability threshold.

2 FSR Capital Markets Accounting Developments Advisory The FASB released the ASU to address the immediate need for greater transparency over disclosures related to the allowance for credit losses, rather than wait until the proposed changes to the accounting for financial instruments and impairments were finalized. Recent observations and disclosure timelines One of the objectives of this CMADA is to highlight recent observations regarding the ASU, especially as it relates to its scope. The other objective is to provide more guidance for when specific disclosures go into effect. For more detailed information on the guidance within the ASU, please refer to PwC s DataLine , Disclosure Requirements for Finance Receivables and Allowance for Credit Losses, in the appendix. Recent observations The ASU indicates that the guidance applies to financing receivables. The FASB defines financing receivables as a contractual right to receive money, either on demand or on fixed or determinable dates and is recognized as an asset in the entity s statement of financial position. Some constituents have questioned whether certain receivables should be within the scope of the new disclosure requirements. Specifically, some constituents have questioned whether instruments, such as Receivables from Affiliates, Repurchase Agreements, and Stock Borrowings qualify as financing receivables. The ASU does not explicitly reference these instruments; however, these instruments would be within the definition of financing receivables. Other constituents have raised questions on whether long term receivables that are classified as Current Assets on the balance sheet meet the scope exception for certain short term trade receivables. The FASB s definition of a financing receivable focuses on the contractual arrangements of an instrument. An entity should consider the contractual maturity of an instrument rather than the instrument s current balance sheet classification to determine the applicability of the ASU. The FASB identified certain instruments that would not be considered within the scope of the ASU, including a transferor s interest(s) in securitization transactions that are accounted for as a sale under Topic 860 and purchased beneficial interests in securitized financial assets. If the instruments are classified as something other than a debt security, an entity should evaluate whether these instruments would be scoped into the new disclosure requirements. Further, the FASB also indicated that trade receivables with a contractual maturity of one year or less will not be within the scope of the ASU. The scope exception is for any receivables that arise from the sale of goods or services (with the exception of credit card receivables). The scope exception does not scope out receivables with a maturity of one year or less. The disclosures in the ASU often refer to the loan s Recorded Investment, which the FASB defines as the amount of the investment in the loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment. This definition differs from the FASB s definition of Recorded Investment in Receivable, which the FASB defines as 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 write-down of the investment. The definition of Recorded Investment in Receivable differs from the Net Carrying Amount of the loan since the net carrying amount is net of a valuation allowance while the Recorded Investment in Receivable is not. FSR observation: The ASU refers to the loan s Recorded Investment and it also refers to a recorded investment in a financing receivable. The ASU uses the specific words interchangeably and it is our interpretation that the FASB s intent was for users to use the definition of a Recorded Investment in Receivable. Disclosure requirements The required disclosures in this ASU can be categorized into two main groups: 2 of 21

3 FSR Capital Markets Accounting Developments Advisory Disclosures about the allowance for credit losses, and Disclosures specific to the finance receivables. The tables below summarize the disclosure requirements under the ASU, including the level of required and the effective date for each disclosure. The time frames below (i.e., Q4 2010, Q1 2011) intend to highlight the effective dates for public companies only, since disclosures for non-public entities are required for periods ending after December 15, If the disclosures are new or require additional and relate to a reporting entity s activity during the reporting period, an entity would be required to report the disclosures as of the interim and annual period beginning on or after December 15, 2010 (i.e., first quarter 2011). As such, these particular disclosures are identified in the Q column. If the disclosures do not relate to activity during the reporting period, disclosures are effective for interim and annual reporting periods ending on or after December 15, 2010 and are identified in the Q column. Non-accrual and past due financing receivables 1 The guidance in paragraphs A through 50-8 applies to non-accrual and past due financing receivables and the guidance in paragraph A applies to the disclosure requirements for charged off uncollectible trade accounts receivables. The ASU is clear that these specific disclosures do not apply to loans acquired with deteriorated credit quality. Required disclosures Disclosure The policy for placing financing receivables, if applicable, on nonaccrual status The policy for recording payments received on nonaccrual financing receivables, if applicable The policy for resuming accrual of interest The policy for determining past due or delinquency status The Recorded Investment in financing receivables on nonaccrual status The Recorded Investment in financing receivables past due 90 days or more and still accruing An analysis of the age of the Recorded Investment in financing receivables that are past due at the end of the reporting period The policy for charging off uncollectible trade receivables that have a contractual maturity of one year or less and arose from the sale of goods or services (excluding for credit card receivables) disclosure Level of Q Yes Class Yes Yes Not Specified N/A Q These disclosures do not apply to the following financing receivables: (i) receivables measured at fair value with changes in fair value reported in earnings, (ii) receivables measured at the lower of cost or fair value, or (iii) trade accounts receivable, except for credit card receivables, with a contractual maturity of one year or less and that arose from the sale of goods or services. 3 of 21

4 FSR Capital Markets Accounting Developments Advisory Allowance for Credit Losses Related to Financing Receivables 2 The guidance in paragraphs A through applies to disclosures related to the allowance for credit losses related to financing receivables. Required disclosures Disclosure A description of the entity s accounting policies and methodology used to estimate the allowance for credit losses, including all of the following: 1. A description of the factors that influenced management s judgment, including: (i) historical losses and (ii) existing economic conditions. 2. A discussion of risk characteristics relevant to each portfolio segment 3. Identification of any changes to the entity s accounting policies or methodology from the prior period and the entity s rationale for the change. (1) A description of the policy for charging off uncollectible financing receivables The activity in the allowance for credit losses for each period, including: 1. The balance in the allowance at the beginning and end of each period 2. Current period provision (2) 3. Direct write-downs charged against the allowance 4. Recoveries of amounts previously charged off. The quantitative effects of changes identified in (1) and (2) above. The amount of any significant purchases of financing receivables during each reporting period The amount of any significant sales of financing receivables or reclassifications of financing receivables to held for sale during each reporting period The balance in the allowance at the end of each reporting period disaggregated on the basis of impairment methodology (3) Level of Q4 disclosure 2010 Yes Portfolio Segment Yes No Portfolio Segment Yes Q No Portfolio Segment Yes Yes Portfolio Segment Yes Yes Portfolio Segment Yes Yes Portfolio Segment Yes No Portfolio Segment Yes 2 The ASU indicates that the following financing receivables are excluded from these disclosures: (i) receivables measured at fair value with changes in fair value recorded in earnings, (ii) receivables measured at the lower of cost or fair value, (iii) trade accounts receivable with a contractual maturity of one year or less (except for credit card receivables) and that arose from the sale of goods or services and (iv) a lessor's net investments in leveraged leases. 4 of 21

5 FSR Capital Markets Accounting Developments Advisory Required disclosures Disclosure The Recorded Investment in financing receivables at the end of each period related to the balance in the allowance disaggregated by impairment methodology (4) Detailed disaggregated information by impairment methodology for (3) and (4) above: 1. Amounts collectively evaluated for impairment 2. Amounts individually evaluated for impairment 3. Amounts related to loans acquired with deteriorated credit quality Impaired loans disclosure Level of Q Yes Portfolio Segment Yes Yes Portfolio Segment Yes Q The guidance in paragraphs A through prescribes the disclosures required for impaired financing receivables that are individually evaluated for impairment. Required disclosures Disclosure Disclose the accounting for impaired loans Disclose the amount of impaired loans The Recorded Investment of impaired loans: 1. The amount of that Recorded Investment for which there is a related allowance for credit losses and the amount of that allowance 2. The amount of the Recorded Investment for which there is no related allowance for credit losses The total unpaid principal balance of the impaired loans Management s policy for recognizing interest income on impaired loans, including how cash receipts are recorded For each period for which results of operations are presented: 1. The average Recorded Investment in the impaired loans 2. The related amount of interest income recognized during the time the loans were impaired 3. The amount of interest income recognized using a cash-basis method of accounting, during the time they were impaired, if practicable disclosure Level of Q Yes Class Yes Q of 21

6 FSR Capital Markets Accounting Developments Advisory Required disclosures Disclosure The entity s policy for determining which loans the entity assesses for impairment under ASC The factors considered in determining that the loan is impaired disclosure Level of Q Yes Class Yes Yes Class Yes Q Credit quality of financing receivables 3 The guidance in paragraphs through applies to disclosures related to the credit quality of certain financing receivables. The ASU indicates that a credit quality indicator, a statistic about the credit quality of the financing receivables, should be leveraged when assessing the credit quality of financing receivables. An entity will need to apply judgment to determine the appropriate credit quality indicator for each class of financing receivables. The FASB included the following specific examples of a credit quality indicator: Consumer credit risk scores Credit rating agency ratings An entity s internal credit risk grades Loan to value ratios Collateral Collection experiences Other internal metrics Required disclosures Disclosure An entity shall provide quantitative and qualitative information by class about the credit quality of financing receivables, including: 1. A description of the credit quality indicator 2. The Recorded Investment in finance receivables by credit quality indicator 3. The date or range of dates the information was updated for a credit quality indicator If internal risk ratings are disclosed then the entity shall provide qualitative information on how those internal ratings relate to the likelihood of loss disclosure Level of Q Yes Class Yes Yes Class Yes Q The ASU indicates that the following financing receivables are excluded from these disclosures: (i) receivables measured at fair value with changes in fair value recorded in earnings, (ii) receivables measured at the lower of cost or fair value, and trade accounts receivable (except for credit card receivables) with a contractual maturity of one year or less and that arose from the sale of goods or services. 6 of 21

7 FSR Capital Markets Accounting Developments Advisory Modifications 4 The guidance in paragraphs through applies to disclosures related to a creditor s troubled debt restructurings ( TDR ) of financing receivables, which includes a creditor s modification of a lease receivable that meets the definition of a TDR. The FASB released an Exposure Draft, Clarifications to Accounting for Troubled Debt Restructurings by Credits, on October 12, 2010 to address concerns raised by several stakeholders about diversity in practice related to identifying TDRs. The comment period for the TDR Exposure Draft ends December 13, Required disclosures Disclosure For each period for which the income statement is presented, an entity shall disclose the following about troubled debt restructurings of finance receivables that occurred during the period: 1. Qualitative and quantitative information including both of the following: a. How the finance receivables were modified b. The financial effects of the modifications 2. Qualitative information about how such modifications are factored into the determination of the allowance for credit losses For each period for which a statement of income is presented, an entity shall disclose the following for finance receivables modified as troubled debt restructurings within the previous 12 months and for which there was a payment default during the period: 1. Qualitative and quantitative information about those defaulted financing receivables, including both of the following: a. The types of financing receivables that defaulted b. The amount of financing receivables that defaulted 2. Qualitative information about how such defaults are factored into the determination of the allowance for credit losses disclosure Yes Yes Level of 1(a) and 1(b) - Class 2 - Portfolio Segment 1(a) and 1(b) - Class 2 - Portfolio Segment Yes Yes Q Q The following disclosure requirements are not applicable for TDRs of financing receivables: (i) receivables measured at fair value with changes in fair value recorded in earnings, (ii) receivables measured at the lower of cost or fair value, (iii) trade accounts receivable (except for credit card receivables) with a contractual maturity of one year or less and that arose from the sale of goods or services, and loans acquired with deteriorated credit quality that are accounted for within a pool. 7 of 21

8 FSR Capital Markets Accounting Developments Advisory Questions regarding this advisory may be directed to: David Lukach Frank Gaetano Frank Serravalli Sergey Volkov Frederick Elmy Susan Cosper Mary Bertels Capital Markets Accounting Developments Advisory is produced by PricewaterhouseCoopers (PwC) Financial Instruments, Structured Products and Real Estate (FSR) to apprise PwC clients and friends on the latest news on significant accounting, auditing and regulatory matters PricewaterhouseCoopers LLP. All rights reserved. PwC refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 8 of 21

9 FSR Capital Markets Accounting Developments Advisory Appendix 9 of 21

10 DataLine A look at current financial reporting issues No July 29, 2010 What's inside: Overview... 1 At a glance... 1 The main details... 1 Key provisions... 2 Scope and definitions... 2 Disclosures... 4 Effective date... 7 Clarification on ASC 450 loss contingency disclosures... 8 Questions... 8 Appendix A: Finance receivable and allowance for credit loss disclosures... 9 Disclosure Requirements for Finance Receivables and Allowance for Credit Losses A Summary of ASU Overview At a glance The FASB has issued Accounting Standards Update ( ASU ) to address concerns about the sufficiency, transparency, and robustness of credit risk disclosures for finance receivables and the related allowance for credit losses. The ASU requires that entities disclose information at disaggregated levels, specifically defined as portfolio segments and classes. Among other things, the expanded disclosures include roll-forward schedules of the allowance for credit losses and information regarding the credit quality of receivables (including their aging) as of the end of a reporting period. Certain finance receivables that were modified during a reporting period and those that were previously modified and have re-defaulted require enhanced disclosures. The new disclosure requirements apply to all entities that have lending arrangements in the form of receivables or a lessor s right to lease payments (other than operating leases) with maturities greater than one year. For public entities, the new disclosures are required for interim and annual periods ending after December 15, 2010, although the disclosures of reporting period activity (i.e., allowance roll-forward and modification disclosures) are required for interim and annual periods beginning after December 15, For nonpublic entities, all disclosures are effective for interim and annual periods ending after December 15, The main details.1 The recent economic downturn and credit crisis heightened the need for increased transparency of companies credit risk exposures related to finance receivables. Difficulty in applying ASC , Loss Contingencies (originally FAS 5), and ASC , Receivables (originally FAS 114), has resulted in numerous areas of diversity in practice, including inconsistent disclosures in both form and content. Many companies elected to increase transparency through expanded MD&A and National Professional Services Group CFOdirect Network Dataline 1

11 supplemental investor materials. Consequently, the FASB added a project to its agenda in January 2007 to address the need for increased transparency and explore possible enhancements to the disclosure requirements..2 As a result of its project, ASU , Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, was released by the FASB on July 21, The ASU makes significant changes to the disclosure requirements, including calling for further of the information presented to enhance the reader s understanding of the credit risk associated with finance receivables. PwC observation: Completing this project ahead of the project on accounting for financial instruments sends a clear signal that the FASB believes there is an immediate need for greater transparency of a company s exposure to credit losses from lending arrangements..3 The objective of the new disclosure requirements is for a creditor to provide financial statement users with information that will enable them to understand the following: The nature of credit risk inherent in the creditor s portfolio of financing receivables The way credit risk is analyzed in arriving at the allowance for credit losses The changes in the allowance for credit losses and reasons for the changes PwC observation: The comparability of accounting and disclosures of credit risk and losses, both within a company s loan/lease portfolio and between entities, is reduced as a consequence of the current mixed accounting model for finance receivables under US GAAP. For example, the accounting for credit risk is different for a finance receivable that is originated by an entity and accounted for under ASC 450 and ASC than a finance receivable acquired by the entity at a discount and accounted for under ASC (originally SOP 03-3). The new requirements focus on reserves and credit indicators associated with segmented groups of finance receivables to increase the comparability of information about credit risks. However, given the current mixed accounting model, the new quantitative disclosures may not present a company s credit exposures with sufficient transparency. Thus, companies may need to provide additional contextual information to help financial statement users understand the various models employed, classifications made, and judgments reached by management. This may be especially true for instruments, such as purchased credit impaired (PCI) receivables accounted for under ASC , where the related credit quality and impairment are assessed differently given that a portion of the credit impairment is reflected in the price paid for those receivables..4 The staff of the Securities and Exchange Commission ( SEC staff ) also requested additional disclosure and more transparency regarding the allowance for loan losses and other credit information. The SEC staff views the requirements of this ASU to be a significant improvement compared with current practice. National Professional Services Group CFOdirect Network Dataline 2

12 Key provisions Scope and definitions.5 The scope of the ASU covers all finance receivables (defined in paragraph 7 below) held by creditors that prepare US GAAP financial statements. The disclosures apply to both interim and annual reporting periods..6 Several new terms, which are critical to the application of this ASU, were defined by the FASB and are summarized in the following paragraphs..7 A finance receivable is defined as a contractual right to receive money, on demand or on fixed or determinable dates, that is recognized as an asset in the creditor s balance sheet, whether originated or acquired by the creditor. Accounts receivable with terms exceeding one year are considered finance receivables subject to the provisions of the new requirements. Other in-scope lending arrangements include notes receivable, PCI receivables, and receivables relating to lessors rights to payments from leases (other than operating leases) that have been recorded as assets (i.e., leveraged, direct financing, and sales-type leases)..8 Specific scope exceptions from the new disclosure quantitive requirements include: Trade accounts receivable with contractual maturities of one year or less that arose from sale of goods or services (this scope exception does not include credit card receivables) Debt securities Unconditional promises to give that are assets of a not-for-profit entity and are due in one year or less Acquired beneficial interest or the transferor beneficial interest in the transferred financial assets Receivables measured at fair value with changes in fair value recorded in earnings and receivables measured the lower of cost or fair value PwC observation: Entities with significant lease contracts may find the application of the new disclosure requirements challenging. For example, sales-type leases may require additional disclosures about the impact of impairments recorded on those leases if a significant percentage of the impairment of leased equipment was attributable to a reduction in the estimated residual value of the equipment rather than to credit concerns about the lessee. Further, leveraged leases are within the scope of this ASU, but that is only with respect to the disclosures for credit quality and not with respect to the allowance disclosure. This exception is because a cumulative catch-up adjustment is recorded whenever there is a total change in cash flows pertaining to a lease and the result is that there is no allowance for credit losses. Accordingly, entities with significant lease portfolios should carefully consider how to make these disclosures meaningful given the specialized accounting required for certain types of leases..9 A portfolio segment is defined as the level at which a creditor develops and documents a systematic methodology to determine its allowance for credit losses. The portfolio segment is generally the starting point when determining the level of required by this standard. A portfolio segment could be finance receivables categorized by type, industry, or other risk (such as risk rating)..10 A class of finance receivable is defined as a level of information (below a portfolio segment) that enables a reader to understand the nature and extent of exposure to National Professional Services Group CFOdirect Network Dataline 3

13 credit risk arising from finance receivables. The principal determination of classes is based on the all of following: Initial measurement attribute (i.e., amortized cost, purchased credit impaired, etc.) An entity s method for assessing and monitoring credit risk PwC observation: Judgment will be required in determining the proper level of. The inclusion of examples in the ASU may influence the standardization of these groups within this framework. Entities should not feel bound by the groupings in the examples and base their determination of portfolio segments and classes on their business model and industry, and how they manage their portfolios. Some crossover between portfolio segments and classes may occur. For example, portfolio segments may include segments such as Commercial and Consumer finance receivables. Classes within those segments may include Commercial Real Estate, Commercial Real Estate Construction, etc. However, some companies may have Commercial Real Estate as a portfolio segment with Commercial Real Estate Construction as a class. Judgment will be required to determine the right balance between the inclusion of too much detail by being too disaggregated and not enough detail by being too aggregated. In determining the level of disclosure, it is important to remember the objective of the ASU..11 A credit quality indicator is defined as a statistic about the credit quality of finance receivables (i.e., consumer credit risk score, credit rating agency ratings, management s internal credit risk grades, loan-to-value ratios, collateral, etc.). Disclosures.12 The required disclosures in this ASU can generally be categorized into two main groups: disclosures about the allowance for credit losses and disclosures specific to the finance receivables..13 The principal objectives of the disclosure requirements for the allowance for credit losses are to enable financial statement users to understand: The risk characteristics of the portfolio segments used in estimating the allowance The factors and methodologies used in estimating the allowance for each portfolio segment The activity in both the finance receivables and the allowance for each portfolio segment Disclosures about the allowance for credit losses.14 The disclosures for the allowance for credit losses are required to include the following and should be presented at the portfolio segment level. (Additional allowance-related disclosure requirements are described below under Modifications and Impaired finance receivables. See also Appendix A in this document.) Allowance policy This should include a detailed description of the accounting policies and methodology used to estimate the allowance for credit losses, including factors that influence management s judgment and risk elements specific to each portfolio segment. Changes to allowance policy Any changes to an allowance accounting policy or methodology from the prior period should be identified, quantified and discussed, including management s rationale for making the changes. National Professional Services Group CFOdirect Network Dataline 4

14 Charge-off policy In addition to describing the policy for charging off uncollectible finance receivables, the policy for uncollectable trade receivables that have a contractual maturity of one year or less and arose from the sale of goods and services should be disclosed. Allowance roll-forward The roll-forward should include the activity in the allowance for credit losses for the period, including balances at the beginning and end of the reporting period, current period provisions, charge-offs, and recoveries. Impairment methodology The balance at the end of the reporting period for the allowance for credit losses and the related carrying amount of financing receivables should be disclosed by impairment methodology (individual vs. collectively assessed and allowance for PCI receivables). Disclosures specific to the finance receivables.15 The disclosures required for finance receivables include the following requirements. Finance receivable-specific disclosures are generally required to be shown at the class level, unless otherwise noted (see also Appendix A in this document). Credit quality - Credit quality indicators Provide qualitative and quantitative information about the receivables as of the end of the reporting period, including: Description and amount describe the credit quality indicator, and disclose the carrying amount of finance receivables by indicator. Updates Provide the date or range of dates indicating when the credit quality indicators were last updated. Internal quality indicators if internal credit quality indicators are disclosed, provide information on how those indicators relate to the likelihood of loss. The FASB debated whether credit quality disclosures should be made for PCI receivables and decided that financial statement users would benefit from additional information about such receivables. The board believes that given the flexibility in what management can use as a credit quality indicator (i.e., internal vs. external), management should be able to provide useful information about these receivables. PwC observation: Credit quality disclosures, such as credit scores and internal quality indicators, should be consistent with the indicators that management monitors and updates on a regular basis. Some may hesitate to disclose internal quality indicators because of the propriety of certain processes as well as the difficulty in explaining how those internal measures are used. In addition, entities often use more than one indicator, and it may be difficult to capture in a disclosure how multiple indicators interact with each other. The requirement to disclose a credit quality indicator appears to be focused on a single indicator, but we believe that multiple indicators can be provided if doing so will increase the transparency of management s evaluation of the risk in the portfolios and provide meaningful information to financial statement users. Modifications - Modified finance receivables Provide information about troubled debt restructurings and a creditor s modification of lease receivables that meets the definitions of a trouble debt restructuring. These include the following disclosures by class: Qualitative information about how the finance receivables were modified National Professional Services Group CFOdirect Network Dataline 5

15 Quantitative information about the extent and financial effects of modifications made during the period Leases have been historically scoped out of the troubled debt restructuring guidance, but after a brief debate, additional clarification was provided that leases that are modified and fit the criteria for trouble debt restructurings should be included in these disclosures. The board felt that providing qualitative and quantitative information regarding such lease modifications would be useful in providing context to an entity s credit exposures on these types of contracts. - Modifications and the allowance Provide qualitative information by portfolio segment explaining how modifications are factored into the determination of the allowance for credit losses. - Subsequent defaults on modified loans Provide information about troubled debt restructurings and modifications of lease receivables that meet the definition of a trouble debt restructuring within the previous 12 months for which there was a payment default in the current period by class including: The types of financing receivables that defaulted and the amount. Qualitative information by portfolio segment about how subsequent defaults are factored into the determination of the allowance for credit losses - PCI receivables the disclosures about modified finance receivables and subsequent defaults of modified finance receivables would not include PCI loans accounted for within a pool under ASC PwC observation: Market events and government programs in recent years have increased the number of finance receivable modifications. Financial statement users have been asking for increased transparency into such modifications to better understand what types of modifications entities are making, how those modifications impact the entity s credit exposure and related credit allowance and how successful were these modifications. We understand that disclosures about modifications and subsequent defaults are something the SEC staff and the banking regulators feel very strongly about. The FASB debated what should be required, recognizing that the term modification could be interpreted quite broadly. The board agreed that these disclosures should be limited to modifications qualifying as troubled debt restructuring. Impaired finance receivables The information for these receivables should be provided by class of finance receivables. - Impairment policy Disclose management s policy for determining which finance receivables the creditor individually assesses for impairment. - Interest income policy Disclose management s policy for recognizing interest income on impaired finance receivables, including how cash receipts are recorded. - Impaired with allowance For each statement of financial position presented, disclose the total carrying amount of impaired finance receivables for (1) receivables for which there is a related allowance and (2) receivables for which there is no allowance. Also, disclose the total unpaid principal balance of impaired finance receivables. - Impairment considerations Provide the factors that management used to determine that the finance receivables are impaired. National Professional Services Group CFOdirect Network Dataline 6

16 - Average carrying value and interest For each period where results of operations are presented, disclose the average carrying amount of the impaired finance receivables, as well as the related amount of interest income recognized during the time within the period the receivables were impaired. Also, disclose the amount of interest income recognized using a cash-basis method during the time within the period the finance receivables were impaired, if practicable. Past-due and nonaccrual status of financing receivables The disclosures required for past-due and nonaccrual status are not required for PCI receivables accounted for under ASC Delinquency policy Disclose management s policy for determining past-due or delinquency status. - Past due For finance receivables that are past due as determined by management s policy, disclose an analysis of the age of the carrying amount of the receivables at the end of the reporting period. - Ninety days past due Disclose the carrying amount of finance receivables that are past due 90 days or more, at the end of the reporting period, and are still accruing interest. - Nonaccrual policy Disclose management s policy for placing finance receivables on nonaccrual status, recording payments received on nonaccrual receivables, and resuming accrual of interest. - Nonaccrual balance Disclose the carrying amount of finance receivables on nonaccrual status as of each balance sheet date presented. Other - Finance receivable activity Disclose significant purchases and sales of finance receivables during the period (shown separately) and the carrying amount at the end of the period at the portfolio segment level. The carrying amount is also required to be further segregated by impairment methodology (individual vs. collectively assessed and PCI receivables). PwC observation: Approximately half of the disclosure requirements listed above are new. Those that are not new are required to be presented on a more disaggregated basis by class or portfolio segment, which will require additional effort. To report some of this information at this level of detail, entities may need to modify IT systems, processes, and internal control policies and procedures. Effective date.16 For public companies, the disclosures to be presented as of the balance sheet date are effective for fiscal years and interim periods ending after December 15, The disclosures of reporting period activity (i.e., allowance roll-forward and modification disclosures) are effective for interim and annual periods beginning after December 15, The ASU encourages but does not require disclosures for earlier periods presented for comparative purposes at initial adoption. Comparative disclosures are required for the reporting periods ending after initial adoption. For nonpublic entities, all disclosures are effective for interim and annual periods ending after December 15, PwC observation: National Professional Services Group CFOdirect Network Dataline 7

17 Given that the effort to provide these new disclosures is likely to be significant, the delay in the effective date for the activity-related disclosures will give entities an opportunity to make reporting systems changes, if necessary. Clarification on ASC 450 loss contingency disclosures.17 The ASU includes a clarification on the disclosures required by ASC through 50-6 (originally paragraph 10 of FAS 5). The FASB indicated that these disclosures are not required for the allowance for credit losses based on the fact that the estimations are normal, recurring, and inherent to determining the allowance for credit losses. The FASB also notes that the new disclosures required by this ASU are sufficiently detailed and will provide additional insight into both the credit quality of an entity s finance receivable portfolio and the allowance for loan losses. Questions.18 PwC clients that have questions about this DataLine should contact their engagement partner. Engagement teams that have questions should contact a member of the Financial Instruments team in the National Professional Services Group ( ). National Professional Services Group CFOdirect Network Dataline 8

18 Appendix A: Finance receivable and allowance for credit loss disclosures (continued) This appendix summarizes the disclosure requirements promulgated under the ASU and identifies the prescribed level of. The disclosures are required for all interim and annual reporting periods for which a statement of financial position and a statement of financial performance are presented. Engagement teams should refer to the PwC Automated Disclosure Checklist for listing of additional receivable-related disclosure requirements that are located in other sections within the FASB Codification. Required Disclosures Level of Disaggregation Disclosure Disaggregation Non Accrual and Past Due 5 ASC a. The policy for placing financing receivables, if applicable on nonaccrual status Class No Yes b. The policy for recording payments received on nonaccrual financing receivables, if applicable Class No Yes c. The policy for resuming accrual of interest Class No Yes e. The policy for determining past due or delinquency status Class No Yes ASC a. The recorded investment in financing receivables on nonaccrual status Class No Yes b. The recorded investment in financing receivables past due 90 days or more and still accruing Class No Yes ASC A ASC A Provide an analysis of the age of the recorded investment in financing receivables that are past due at the end of the reporting period The policy for charging off uncollectible trade receivables that have a contractual maturity of one year or less and arose from the sale of goods or services (excluding for credit card receivables) Class Yes Yes Not specified Yes N/A Allowance for Credit Losses 6,7 ASC B a. Description of accounting policies and methodology used to estimate the allowance for credit Portfolio Segment Yes Yes losses, including all of the following: 1. A description of the factors that influenced management s judgment including historical losses Portfolio Segment Yes Yes and existing economic conditions 2. A discussion of the risk characteristics relevant to each portfolio segment Portfolio Segment Yes Yes 3. Identification of any changes to accounting policies or methodology from the prior period Portfolio Segment Yes Yes and rational for the change b. A description of the policy for charging off uncollectible financing receivables Portfolio Segment No Yes c. The activity in the allowance for credit losses for each period, including the following: Portfolio Segment No Yes 1. The balance in the allowance at the beginning and end of each period Portfolio Segment No Yes 2. The current period provision Portfolio Segment No Yes 5 The guidance in paragraph through A does not apply to loans acquired with deteriorated credit quality. 6 These disclosures do not apply to lessor's net investments in leveraged leases. 7 These disclosures do not apply to receivables measured at fair value, with changes in fair value reported in earnings, receivables measured at the lower of cost or fair value, and trade accounts receivable with a contractual maturity of one year or less that arose from the sale of goods or services. National Professional Services Group CFOdirect Network Dataline 9

19 Appendix A: Finance receivable and allowance for credit loss disclosures (continued) Level of Required Disclosures Disaggregation Disclosure Disaggregation 3. Direct write downs charged against the allowance Portfolio Segment No Yes 4. Recoveries of amounts previously charged off Portfolio Segment No Yes d. The quantitative effects of changes identified in item (a)(3) and (c)(2) Portfolio Segment Yes Yes e. The amount of any significant purchases of financing receivables during each reporting period Portfolio Segment Yes Yes f. The amount of any significant sales of financing receivables or reclassifications of financing Portfolio Segment Yes Yes receivables to held for sale during each reporting period g. The balance in the allowance at the end of each reporting period disaggregated on the basis of Portfolio Segment No Yes impairment methodology h. The recorded investment in financing receivables at the end of each period related to the balance in the allowance disaggregated by impairment methodology Portfolio Segment Yes Yes ASC C To disaggregate the information required by impairment methodology (items (g) and (h) above), Portfolio Segment Yes Yes an entity shall disclose the following amounts: a. Amounts collectively evaluated for impairment Portfolio Segment Yes Yes b. Amounts individually evaluated for impairment Portfolio Segment Yes Yes c. Amounts related to loans acquired with deteriorated credit quality Portfolio Segment Yes Yes Impaired Finance Receivables 8 ASC A a. Disclose the accounting for impaired loans Class No Yes b. Disclose the amount of impaired loans Class No Yes ASC a. As of the date of each statement of financial position: 3. The recorded investment of impaired loans and both of the following: Class No Yes i. The amount of that recorded investment for which there is a related allowance for credit Class No Yes losses and the amount of that allowance ii. The amount of the recorded investment for which there is no related allowance for credit Class No Yes losses 4. The total unpaid principal balance of the impaired loans Class Yes Yes b. Management s policy for recognizing interest income on impaired loans, including how cash Class No Yes receipts are recorded c. For each period for which results of operations are presented: 1. The average recorded investment in the impaired loans Class No Yes 2. The related amount of interest income recognized during the time within the period that the Class No Yes loans were impaired 3. The amount of interest income recognized using a cash-basis method of accounting, during the time within the period they were impaired, if practicable Class No Yes 8 Definition of impaired loan is included in ASC through (individually evaluated for impairment). National Professional Services Group CFOdirect Network Dataline 10

20 Appendix A: Finance receivable and allowance for credit loss disclosures (continued) Level of Required Disclosures Disaggregation Disclosure Disaggregation d. The entity s policy for determining which loans the entity assess for impairment under ASC 310- Class Yes Yes e. The factors considered in determining that the loan is impaired Class Yes Yes Credit Quality 9 ASC An entity shall provide quantitative and qualitative information by class about the credit quality of Class Yes Yes financing receivables, including all of the following: a. A description of the credit quality indicator Class Yes Yes b. The recorded investment in finance receivables by credit quality indicator Class Yes Yes c. The date or range of dates in which the information was updated for that credit quality indicator Class Yes Yes ASC Modifications 5 If internal risk ratings are disclosed then the entity shall provide qualitative information on how those internal ratings relate to the likelihood of loss An entity shall provide information that enables the user to do both of the following for all finance receivables, except PCI receivables accounted for in a pool: Class Yes Yes ASC ASC For each period for which the income statement is presented, an entity shall disclose the following about troubled debt restructurings of finance receivables that occurred during the period: a. Qualitative and quantitative information including both of the following: Class Yes Yes 1. How the finance receivables were modified Class Yes Yes 2. The financial effects of the modifications Class Yes Yes b. Qualitative information about how such modifications are factored into the determination of the allowance for credit losses Portfolio Segment Yes Yes For each period for which a statement of income is presented, an entity shall disclose the following for finance receivables modified as troubled debt restructurings within the previous 12 months and for which there was a payment default during the period: a. Qualitative and quantitative information about those defaulted financing receivables, including both of the following: 1. The types of financing receivables that defaulted Class Yes Yes 2. The amount of financing receivables that defaulted Class Yes Yes b. Qualitative information about how such defaults are factored into the determination of the allowance for credit losses Portfolio Segment Yes Yes 9 These disclosures do not apply to receivables measured at fair value, with changes in fair value reported in earnings, receivables measured at the lower of cost or fair value, and trade accounts receivable with a contractual maturity of one year or less that arose from the sale of goods or services. National Professional Services Group CFOdirect Network Dataline 11