Members of the AICPA Depository Institutions Expert Panel (DIEP) and representatives of the Accounting Standards Executive Committee (AcSEC) and AICPA staff recently discussed an emerging practice issue with the staff of the SEC. The issue relates to accounting in subsequent periods for discount accretion associated with loan receivables acquired in a business combination or asset purchase. At issue is recognition of discount accretion for acquired loan receivables with a fair value (if acquired through a business combination) or relative fair value (if acquired through an asset purchase) that is lower than the contractual amounts due (principal amount) that are not required to be accounted for in accordance with the guidance in FASB Accounting Standards Codification (ASC) 310-30 (originally issued as AICPA Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer). The issue arises for loan receivables that:
- Are acquired in a business combination or asset purchase;
- Result in recognition of a discount attributable, at least in part, to credit quality; and
- Are not subsequently accounted for at fair value.
The discount relating to such acquired loan receivables must be accounted for subsequently through accretion. In absence of further standard setting, for the acquired loan receivables described above the DIEP understands that the SEC Staff would not object to either of the following accounting policies:
- An accounting policy of recognizing discount accretion based on the acquired loan’s contractual cash flows as described in the guidance for accounting for loan origination fees and costs that is included in FASB ASC 310-20 (originally issued as FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases); or
- An accounting policy of recognizing interest income based on the acquired loan’s expected cash flows, as described in the guidance for accounting for loans acquired in a transfer that have deteriorated in credit quality since origination that is included in FASB ASC 310-30. Applying the guidance in FASB ASC 310-30 for interest income would result in recognition of the difference between the initial recorded investment and the loan’s expected principal and interest cash flows using the interest method.
An entity should disclose its accounting policy election and apply that accounting policy consistently. The DIEP further understands that the SEC Staff believes that an entity that has an accounting policy based on expected cash flows should follow all of the accounting and disclosure guidance in FASB ASC 310-30, including, for example, following the guidance on maintaining the integrity of a pool of multiple loans accounted for as a single asset.
The above guidance was stated in an open letter from the AICPA to the SEC’s Office of the Chief Accountant
Jay Hanson, National Director of Accounting for McGladrey & Pullen, LLP, is the chairman of AcSEC. John Keyser, National Director of Financial Institution Services for McGladrey & Pullen, is a member of DIEP.
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