Financial Instruments: Credit Losses (Portfolio 5187)

Bloomberg BNA Tax and Accounting Portfolio 5187, Financial Instruments: Credit Losses, examines how a creditor accounts for credit losses on certain nonderivative financial instruments. To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial.

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Bloomberg BNA Tax and Accounting Portfolio 5187, Financial Instruments: Credit Losses, examines how a creditor accounts for credit losses on certain nonderivative financial instruments. The manuscript focuses on authoritative generally accepted accounting principles (GAAP) in the United States as set out in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 326, Financial Instruments—Credit Losses (the credit loss guidance).

This Portfolio does all of the following:

• Paraphrases the authoritative GAAP;
• Offers insight into the rationale for, and practical consequences of, the authoritative guidance;
• Provides context for and observations about illustrative examples set out in the authoritative guidance;
• At a high-level, notes how International Financial Reporting Standards compare and contrast with authoritative GAAP.

The analysis is drawn from review of authoritative GAAP, but also from the supporting project materials of the Financial Accounting Standards Board—for example, the basis for the board's conclusions and related dissents, exposure drafts, comment letters, and other project documentation.

This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5187, Green, Financial Instruments: Credit Losses (Accounting Policy and Practice Series). Within the Accounting Policy and Practice Portfolio Series, however, references to the Portfolios will include only the Portfolio numbers and titles.


James F. Green

Jim is an Illinois CPA who helps people understand generally accepted accounting principles and related subjects. Jim has applied, helped set, and offered insights into GAAP and other professional requirements for over 30 years—

• Analyzing accounting and other principles for clients in industry and public practice;
• Helping the Financial Accounting Foundation create the FASB Accounting Standards Codification® through his analysis, authoring, and editing;
• Developing and communicating accounting technical positions—including positions on financial instruments, derivatives, hedging, securitizations, and foreign currency translation—as a partner in Arthur Andersen's Professional Standards Group;
• Writing guidance on accounting, auditing, and regulatory matters as staff of several financial services committees of the American Institute of Certified Public Accountants;
• Representing the AICPA on accounting and auditing issues before the United States Congress and federal regulatory agencies; and,
• Auditing financial statements as a manager at KPMG.

Jim has a BBA in accounting from the College of William and Mary in Virginia. Jim speaks English and Spanish and devotes his volunteer time to literacy and hunger issues.

Table of Contents

Detailed Analysis
I. Conceptual Overview
Introductory Material
A. Expected Credit Loss Model
B. Impairment Model for Debt Securities Available for Sale
C. Purchased Credit-Deteriorated Financial Assets
D. Terms and Usage
1. Authoritative GAAP
2. Credit Loss Guidance, Expected Credit Loss Model, Impairment Model
3. Creditor Versus Entity
4. Materiality and Significance
5. Definitions Involving Financial Instruments
a. Financial Instrument, Financial Asset, and Financial Liability
(1) Units of Account
(2) Financial Instrument Attributes/Risk Characteristics
(a) Conforming Loan Limits
(b) Vintage
(c) Related Party Transactions
b. Loan, Debt Security, and Financing Receivable
(1) Loan
(2) Debt Security
(3) Financing Receivables
(a) Class of Financing Receivable
6. Amortized Cost Basis
7. Fair Value
8. Related Parties
E. Transition Resource Group
II. Scope of the Expected Credit Loss Model
Introductory Material
A. Entity Scope of the Expected Credit Loss Model
1. Entities That Report Debt Securities at Fair Value Through Income
2. Not-for-Profit Entities That Present Operating Measures
3. Public Business Entities
a. Business Entities
b. Publicly Accountable Entities
c. Institutions of Higher Education
B. Item Scope of the Expected Credit Loss Model
1. Nonderivative Financial Assets in Scope
a. Net Investments in Leases
b. Receivables from Revenue and Other Income
(1) Rights Under Customer Contracts
(2) Receivables From Revenue Not Subject to Customer Contracts Guidance
(3) Receivables From Sales of Nonfinancial Assets
(4) Receivables From Involuntary Conversions
c. Reinsurance Recoverables
(1) Unit of Account
d. Receivables Under Securities Lending or Repurchase Agreements
e. Debt Securities Held to Maturity
2. Nonderivative Financial Liabilities in Scope
a. Written Financial Guarantees
b. Written Loan Commitments
3. Unit of Account for Disclosure Requirements
4. Portfolio Segment
III. Measuring Expected Credit Losses
Introductory Material
A. Unit of Account
1. Example—Change From Collective Estimate to Individual Estimate
B. Methods for Estimating Expected Credit Losses
1. Discounted Cash Flow Methods
a. Effective Interest Rates
(1) Effective Interest Rates on Purchased Credit-Deteriorated Financial Assets
(2) Effective Interest Rates as Implicit in Leases
(3) Effective Interest Rates Affected by Fair Value Hedges
(4) Variable Interest Rates
b. Effects of Passage of Time
2. Methods Other than Discounted Cash Flows
a. Components of Amortized Cost Basis
b. Loss-Rate Method
3. Qualitative Considerations
C. Initial Recognition and Measurement
1. Purchased Credit-Deteriorated Financial Assets
a. Example on Identifying Purchased Credit-Deteriorated Financial Assets
2. Trade Date Versus Settlement Date
3. The Fair Value Option
D. Subsequent Accounting
1. Changes in Recognition: Decision to Sell
2. Derecognition
a. Derecognition of Credit Loss Allowances
b. Derecognition of Credit Loss Liabilities
E. Appropriate Information
1. Priority of Information
F. Remaining Life
1. Prepayments
2. Additional Life
G. Historical Credit Loss Experience
1. Adjustments for Forecasts and Current Conditions
a. Forecast Period
H. If the Risk of Loss Is Remote
I. Credit Enhancements
1. Freestanding Credit Enhancements
2. Mitigating Effects of a Credit Enhancement
3. Netting Arrangements
J. If Foreclosure Is Probable
K. Shortcuts
1. Shortcut—Operation or Sale of Collateral
a. Costs to Sell
2. Shortcut—Collateral Maintenance Provisions
L. Financial Liabilities
1. Example—Unconditionally Cancelable Lending Commitments
IV. Presentation of Expected Credit Losses
A. Presentation of Credit Loss Allowances
B. Presentation of Credit Loss Liabilities
V. Disclosures about Expected Credit Losses
Introductory Material
A. Credit Quality Information
1. Objectives
2. Scope
3. Requirement
a. Public Business Entities: Origination-Year Breakdown
(1) Identifying the Origination Year
b. Credit Quality Indicators
(1) Authoritative Quantitative Table Example
B. Credit Loss Allowance
1. Methods, Inputs, and Related Changes
2. Rollforward of Credit Loss Allowance
C. Past-Due Status
D. Nonaccrual Status
1. Amounts Related to Nonaccrual Status
2. Accounting Policies Related to Nonaccrual Status
E. Purchased Credit-Deteriorated Financial Assets
F. Collateral-Dependent Financial Assets
G. Commitments and Guarantees
VI. Impairment Model for Debt Securities Available for Sale
Introductory Material
A. Entity Scope of the Impairment Model
1. Entities That Report Debt Securities at Fair Value Through Income
2. Not-for-Profit Entities That Present Operating Measures
B. Item Scope of the Impairment Model
1. Certain Prepayable Beneficial Interests
2. Unit of Account
C. Purchased Credit-Deteriorated Debt Securities
D. Identifying Whether Impairment Exists
E. Identifying Credit Losses
1. Impairment is Not Due to Credit Losses
2. Impairment is Due to Credit losses
3. Appropriate Information
F. Holding Gains (Losses)
G. Presentation
1. Balance Sheet Presentation
2. Accumulated Other Comprehensive Income
H. Disclosures About Debt Securities Available for Sale
1. Unrealized Losses Not Attributable to Credit Losses
a. Unrealized Losses Table
(1) Major Security Type
(2) Continuous Unrealized Loss Position
b. Unrealized Losses Narrative
c. Unrealized Losses Illustration
2. Credit Loss Allowance for Debt Securities Available for Sale
a. Accounting Policy, Methods, and Inputs
(1) Time Value of Money
b. Rollforward of Credit Loss Allowance
3. Credit-Deteriorated Debt Securities Available for Sale Bought During the Period
VII. Adopting the Credit Loss Guidance
Introductory Material
A. Adoption Date
B. Transition by Cumulative-Effect Adjustment
1. Transition Shortcuts
a. Purchased Credit-Deteriorated Financial Assets
b. Debt Securities With Nontemporary Impairment
c. Public Business Entities: Origination-Year Breakdown
C. Disclosures About Adoption

Working Papers

Worksheet 1 Loss-Rate Approach For Group Of Financial Assets
Worksheet 2 Loss-Rate Approach For An Individual Financial Asset
Worksheet 3 Estimate Of Expected Credit Losses Using Vintage Year Information
Worksheet 4 Provision Matrix For Expected Credit Losses
Worksheet 5 Purchased Credit-Deteriorated Loan Receivable Examples
Worksheet 6 Disclosure Checklist: Expected Credit Loss Model
Worksheet 7 Transition Shortcut For Origination-Year Disclosures