GAAP UPDATE SERVICE Volume 13, Issue 4 February 28, 2013 PRONOUNCEMENT: Proposed Accounting Standards Update (ASU), Financial Instruments—Credit Losses (ASC 825-15) (Part 2) EFFECTIVE DATE: Entities would be required to apply the proposed guidance by making a cumulative-effect adjustment in the balance sheet as of the beginning of the first reporting period in which the guidance would be effective. The effective date will be established when the final guidance is issued. Summary & Highlights The Financial Accounting Standards Board (FASB) issued the proposed Accounting Standards Update (ASU), Financial Instruments—Credit Losses (ASC 825-15), on December 20, 2012. Comments on the proposal, which are due by April 30, 2013, may be submitted in one of the following three ways: 1. Use the electronic feedback form on the FASB’s website at Exposure Documents Open for Comment; 2. Email a letter to director@fasb.org, File Reference No. 2012-260; or 3. Send a letter to “Technical Director, File Reference No. 2012-260, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. This is Part 2 of a two-part series discussing the proposed ASU. In the February 15, 2013 GAAP Update Service, Part 1 covered the following topics: Overview; Scope; Recognition; Subsequent measurement; Other presentation matters; and Disclosure. Part 2 discusses the following topics: Implementation; and Transition. Analysis and Implementation Overview This proposal is a component of the joint project of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (the Boards) to revise and improve their respective guidance on accounting for financial instruments. The project began before the global economic crisis in 2008, which exposed weaknesses in the existing accounting standards. One of those weaknesses is the overstatement of assets due to the delayed recognition of credit losses related to loans and other financial instruments that were not recognized until it is probable that a loss will be incurred. The objective of the project on accounting for the impairment of financial assets is to simplify the accounting guidance and to provide guidance that is useful for decision-making. Currently, there are five different models in U.S. generally accepted accounting principles (GAAP) for accounting for the impairment of financial instruments. A model that includes forward-looking information is needed to assess the impairment of financial instruments. To address that issue, among others, the FASB issued the proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, in May 2010. That document included proposed guidance on classification and measurement, credit impairment, and hedge accounting requirements. Under that proposal, an entity would have been required to recognize a credit impairment when it does not expect to collect all contractual amounts due. The IASB also issued a proposal in November 2009. As a result of the Boards’ considerations of the comments on their respective proposals, they decided to develop a model that varies from the original proposal. In January 2011, the Boards issued a Supplementary Document, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities— Impairment, which was a joint proposal that introduced the concept of two different measurement objectives, one for a “good book” of performing loans and another for a “bad book” of loans. Based on comments received on that proposal, the Boards developed a “three-bucket model,” which would have eliminated an initial recognition threshold, and used two different measurement objectives for the credit impairment allowance that would be subject to the extent of credit deterioration or recovery since a financial instrument’s origination or acquisition. After considerable discussion with stakeholders who raised many concerns about the threebucket model, the FASB decided not to proceed with that model and has agreed on the proposed model, which retains certain sound concepts from other models considered during its discussions and avoids concepts that are complex, inoperable, and believed to be problematic. 2 © 2013 CCH. All Rights Reserved. Proposed ASU The proposed guidance below would be included as new Subtopic ASC 825-15 in the FASB Accounting Standards CodificationTM (ASC) 825, Financial Instruments. Implementation Guidance Estimating expected credit losses. Because estimating expected credit losses requires considerable judgment, the techniques used should be practical and relevant to the particular circumstances. The methods used to make such estimates may vary based on the type of financial asset and the available relevant information. The following are examples of judgments and policy elections that an entity could make for the purpose of developing historical statistics that would be used to estimate its expected credit losses that have been updated for current conditions and supportable forecasts of the future: The definition of “default” used to develop statistics based on defaults; The approach used to measure the amount of a “loss” in the development of statistics based on defaults or the rate of loss, including whether it is based on the amount of amortized cost written off under U.S. GAAP; The method used to weigh historical experience (e.g., on a volume-weighted basis or an equal-weighted basis); The method used to adjust loss statistics for recoveries; and The effect of expected prepayments on the allowance for expected credit losses as of the reporting date. No specific approaches or specific elections are required. Entities would be permitted to develop estimation techniques that would be applied consistently to accurately estimate expected credit losses by using key principles in the proposal. Entities would neither be required to use a probability-weighted discounted cash flow model to estimate expected credit losses nor to reconcile the estimation technique used with a probability-weighted discounted cash flow model. Estimating expected credit losses—time value of money. Under the proposal, an estimate of expected credit losses would be required to reflect the time value of money, explicitly or implicitly. The time value of money is explicitly reflected in: A discounted cash flow model; or Loss statistics based on a ratio of: The amount of amortized cost written off because of credit loss; and The amount of the amortized cost basis of the asset, and by applying the loss statistic after it has been updated for current conditions and reasonable and supportable forecasts of the future to the amortized cost balance as of the reporting date to estimate the portion of the recorded basis of the amortized cost not expected to be recovered because of credit loss. Loss-rate methods, roll-rate methods, probability-of-default methods, and a provision matrix method using loss factors also may be used. For collateral-dependent financial assets, methods comparing the amortized cost basis of an asset to the collateral’s fair value may be used as a practical expedient. Under that method, if repayment or satisfaction of an asset depends on the sale of © 2013 CCH. All Rights Reserved. 3 the collateral, the entity would be required to adjust the collateral’s fair value to consider estimated selling costs (on a discounted basis). If, however, repayment or satisfaction of an asset depends only on the operation of the collateral, rather than its sale, selling costs would not be included in estimated expected credit losses. Estimating expected credit losses—multiple possible outcomes. Under the proposal, an estimate of expected credit losses would always have to consider the possibility that a credit loss will occur and that no credit loss will occur. If a range of at least two outcomes is implicit in the method used, an entity would not have to identify various credit loss scenarios or estimate the weighted probability of expected credit losses. Because some measurement methods (e.g., the loss-rate method, a roll-rate method, a probability-of-default method, and a provision matrix method using loss factors) use a wide-ranging population of actual historical loss data as an input to estimate credit losses, the requirement is met implicitly provided that the actual loss data include items that eventually resulted in a loss and items that resulted in no loss. An entity also would be able to use the fair value of collateral (less estimated selling costs, if applicable), as a practical expedient, to estimate credit losses for collateral-dependent financial assets because several potential outcomes are considered on a market-weighted basis in the fair value of collateral and may result in zero expected credit losses if the collateral’s fair value is greater than the asset’s amortized cost basis. Estimating expected credit losses—lease receivables. An entity would be required to recognize an allowance for all expected credit losses on lease receivables recognized by a lessor in accordance with the guidance in ASC 840, Leases. Instead of using the contractual cash flows and the effective interest rate, the cash flows and discount rate used to measure a lease receivable under ASC 840 would be used to measure expected credit losses on lease receivables that use a discounted cash flow method. Estimating expected credit losses—loan commitments. An entity would be required to recognize all expected credit losses on loan commitments that are measured at fair value and on which qualifying changes in fair value are recognized in net income. To estimate expected credit losses on such loan commitments, an entity would estimate credit losses over the full contractual period that the entity is exposed to credit risk as a result of a present legal obligation to extend credit, unless the issuer can cancel the obligation unconditionally. During the period of exposure, the entity would be required to consider the following in its estimate of expected credit losses: The likelihood that a loan will be funded (it may be affected by a material adverse change clause); and An estimate of expected credit losses on commitments expected to be funded. Estimating expected credit losses—the effect of a fair value hedge on the discount rate if a discounted cash flow model is used. Under the proposal, an entity that uses a discounted cash flow model to estimate expected credit losses would be required to use the financial asset’s effective interest rate. If the carrying amount of a recorded investment in a debt instrument has been adjusted under the guid- 4 © 2013 CCH. All Rights Reserved. ance in ASC 815, Derivatives and Hedging (ASC 815-25-35), for fair value hedge accounting, the effective interest rate would be the discount rate that associates the present value of the debt instrument’s future contractual cash flows with the adjusted recorded investment in the debt instrument. Disclosure—application of the term “portfolio segment.” The following are examples of portfolio segments: Type of debt instrument; Borrower’s industry sector; and Risk rates. Disclosure—application of the term “class of financial asset.” A class of financial assets would be determined based on both of the following criteria: Measurement attribute. Classes of financial assets would first be separated based on the model under which they are measured, for example: Amortized cost; or Fair value with qualifying changes in fair value recognized in other comprehensive income. Entity assessment. Classes would next be separated to a level that an entity uses when it evaluates and monitors a portfolio’s risk and performance for various types of financial assets. A financial asset’s risk characteristics would be considered in this evaluation. To determine which level of its internal reporting to use as a basis for financial statement disclosures, an entity would consider the amount of detail users need to understand the underlying risks of its financial assets. Many factors may be considered in deciding whether an entity needs to disaggregate its portfolio further by the following categories: Categories of users: Commercial loan borrowers; Consumer loan borrowers; or Related party borrowers. Type of financial asset: Mortgage loans; Credit card loans; Interest-only loans; Corporate debt securities; Trade receivables; or Lease receivables. Industry sector: Real estate; or Mining. Type of collateral: Residential property; Commercial property; Government-guaranteed collateral; or Uncollateralized (unsecured) financial assets. © 2013 CCH. All Rights Reserved. 5 Geographic distribution: Domestic; or International. Classes of financial assets are usually separated by portfolio segment, which is the starting point for the decision regarding whether to disaggregate further. Disclosure—application of the term “credit-quality indicator.” The following are examples of credit-quality indicators: Consumer credit risk scores; Credit rating agency ratings; An entity’s internal credit risk grades; Loan-to-value ratios; Collateral; Collection experience; or Other internal metrics. Judgment should be used to determine the applicable credit-quality indicator for each financial asset class. An entity should use the most current information as of the balance sheet date for the credit-quality indicator. Transition and open effective date information. The following is the proposed transition and effective date for the proposed ASU: 1. The proposed guidance would be effective for fiscal years, and interim periods within those years, beginning on a date to be determined by the FASB. 2. The proposed guidance would be applied as a cumulative-effect adjustment to the balance sheet. 3. Early application of the guidance would not be permitted. 4. The following disclosures would be required in the period in which an entity adopts the proposed guidance: (a) The nature of the change in accounting principle with an explanation of the newly adopted accounting principle. (b) The method used to apply the change. (c) The effect of the adoption of a new accounting principle on any line item in the balance sheet, if material, as of the beginning of the first period for which the guidance is effective. The effect on financial statement subtotals need not be presented. (d) The cumulative effect of a change on retained earnings or other components of equity in the balance sheet as of the beginning of the first period for which the guidance is effective. 5. An entity that issues interim financial statements would be required to provide the disclosures in (4) above in each interim financial statement of the year of change and the annual financial statement of the period of the change. 6 © 2013 CCH. All Rights Reserved. About the Author Judith Weiss, CPA, has been attending EITF meetings regularly since 1991. She was a technical manager in the AICPA Accounting Standards Division and a senior manager in the national offices of Deloitte & Touche LLP and Grant Thornton LLP. Ms. Weiss is also one of the authors of the GAAP Guide. LEADING ACCOUNTING INFORMATION AND TOOLS FOR PROFESSIONALS CCH, a Wolters Kluwer business, offers a suite of accounting information and products featuring in-depth analysis, guidance, and solutions in a full range of media—from guides, practice manuals, and treatises to journals, newsletters, and Internet research libraries. Make CCH your source for accounting guidance with comprehensive, timesaving products, including: • Accounting Irregularities and Financial Fraud • Governmental GAAP Guide • CCH Accounting for Income Taxes • Not-for-Profit Reporting • Financial Instruments • SEC Disclosures Checklists • Revenue Recognition Guide • GAAP Financial Statement Disclosures Manual • GAAP Guide To order or for more information on these and other CCH products and services, call 1-800-248-3248 or visit the CCH Online Store at CCHGroup.com. © 2013 CCH. 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It includes all authoritative and proposed accounting, auditing, and SEC literature, plus independent, expert-written interpretive guidance to assist you with your accounting and auditing research needs: accounting for public and nonpublic companies, auditing for public companies, and auditing for nonpublic companies. Material is updated on a daily basis by our outstanding team of content experts, so you stay as current as possible. You’ll learn of newly released literature and deliberations of current financial reporting projects as soon as they occur. You’ll be kept up-to-date on the latest FASB, AICPA, SEC, PCAOB, EITF, GASB and IASB authoritative and proposal stage literature. With Accounting Research Manager, you maximize the efficiency of your research time while enhancing your results. Learn more about our content, our experts, and how you can request a FREE trial by visiting us at www.accountingresearchmanager.com. 8 © 2013 CCH. All Rights Reserved. MGUS Copyright of GAAP Update Service is the property of CCH Incorporated and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. GAAP UPDATE SERVICE Volume 13, Issue 3 February 15, 2013 PRONOUNCEMENT: Proposed Accounting Standards Update (ASU), Financial Instruments—Credit Losses (ASC 825-15) (Part 1) EFFECTIVE DATE: Entities would be required to apply the proposed guidance by making a cumulative-effect adjustment in the balance sheet as of the beginning of the first reporting period in which the guidance would be effective. The effective date will be established when the final guidance is issued. Summary & Highlights The Financial Accounting Standards Board (FASB) issued the proposed Accounting Standards Update (ASU), Financial Instruments—Credit Losses (ASC 825-15), on December 20, 2012. Comments on the proposal are due by April 30, 2013. This is Part 1 of a two-part series discussing the proposed ASU. Part 1 discusses the following topics: Overview; Scope; Recognition; Subsequent measurement; Other presentation matters; and Disclosure. The following topics will be discussed in Part 2: Implementation; Transition; and Questions for respondents on the proposal. Analysis and Implementation Overview This proposal is a component of the joint project of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (the Boards) to revise and improve their respective guidance on accounting for financial instruments. The project began before the global economic crisis in 2008, which exposed weaknesses in the existing accounting standards. One of those weaknesses is the overstatement of assets due to the delayed recognition of credit losses related to loans and other financial instruments that were not recognized until it was probable that a loss will be incurred. The objective of the project on accounting for the impairment of financial assets is to simplify the accounting guidance and to provide guidance that is useful for decision-making. Currently, there are five different models in U.S. generally accepted accounting principles (GAAP) for accounting for the impairment of financial instruments. A model that includes forward-looking information is needed to assess the impairment of financial instruments. To address that issue, among others, the FASB issued proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, in May 2010. That document included proposed guidance on classification and measurement, credit impairment, and hedge accounting requirements. Under that proposal, an entity would have been required to recognize a credit impairment when it does not expect to collect all contractual amounts due. The IASB also issued a proposal in November 2009. As a result of the Boards’ considerations of the comments on their respective proposals, they decided to develop a model that varies from the original proposal. In January 2011, the Boards issued a Supplementary Document, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Impairment, which was a joint proposal that introduced the concept of two different measurement objectives, one for a “good book” of performing loans and another for a “bad book” of loans. Based on comments received on that proposal, the Boards developed a “three-bucket model,” which would have eliminated an initial recognition threshold, and used two different measurement objectives for the credit impairment allowance that would be subject to the extent of credit deterioration or recovery since a financial instrument’s origination or acquisition. After considerable discussion with stakeholders who raised many concerns about the three-bucket model, the FASB decided not to proceed with that model and has agreed on the proposed model, which retains certain sound concepts from other models considered during its discussions and avoids concepts that are complex, inoperable, and believed to be problematic. Proposed ASU The proposed guidance below would be included as new Subtopic ASC 825-15 in the FASB Accounting Standards CodificationTM (ASC) 825, Financial Instruments. 2 © 2013 CCH. All Rights Reserved. Scope The guidance in the proposed ASU applies to all entities holding the following financial assets that are susceptible to losses related to credit risk and are not classified at fair value through net income: (1) debt instruments classified at amortized cost, debt instruments classified at fair value with changes in fair value recognized in other comprehensive income, receivables from revenue transactions under the scope of ASC 605, Revenue Recognition, or reinsurance receivables resulting from insurance transactions under ASC 944, Financial Services—Insurance; (2) lease receivables recognized by a lessor under ASC 840, Leases; or (3) loan commitments. Recognition An allowance for expected credit losses on financial assets, which is a current estimate of all contractual cash flows that an entity does not expect to collect, would be recognized at each reporting date. As a practical expedient, an entity may elect not to recognize expected credit losses for financial assets measured at fair value with qualifying changes in fair value recognized in other comprehensive income if both of the following conditions are met: The individual financial asset’s fair value exceeds or equals the financial asset’s amortized cost basis; and Expected credit losses on the individual asset are insignificant based on a consideration of where that asset’s credit-quality indicator is placed in a range of expected credit losses on the reporting date. Estimating expected credit losses. Under the proposal, an entity would be required to estimate expected credit losses based on relevant information from internal and external sources (e.g., information about past events, historical loss experience with similar assets, or current conditions), as well as the implications for expected credit losses based on reasonable forecasts that can be confirmed. That information would have to include quantitative and qualitative factors (e.g., a current evaluation of borrowers’ creditworthiness and the current and forecasted direction of the economic cycle), corresponding to the reporting entity’s borrowers and the environment in which the entity operates. Information relevant to the estimated collectability of contractual cash flows that is available without excessive cost and effort would be considered. Estimates of expected credit losses would be required to reflect the time value of money explicitly or implicitly. If expected credit losses are estimated using a discounted cash flows model, the discount rate used would be the financial asset’s effective interest rate. Under the proposal, an estimate of expected credit losses would always have to represent the possibility that a credit loss would occur and the possibility that it would not occur, rather than representing a worst-case scenario or a best-case scenario. Estimating expected credit losses based on the most likely outcome (i.e., a statistical calculation) would be prohibited. Estimates would be required to represent how credit enhancements would reduce expected credit losses on financial assets, such as consideration of a guarantor’s financial condition or whether subordinated interests could absorb credit losses on underlying financial assets. However, an entity would not be permitted to combine a financial asset with a separate freestanding contract intended to reduce a credit risk loss in its estimate of expected © 2013 CCH. All Rights Reserved. 3 credit losses. Consequently, an entity would not be permitted to offset a legally detachable and separately exercisable contract (e.g., a credit default swap) that may reduce expected credit losses on a financial asset or a group of financial assets against estimated expected credit losses on the related financial asset or group of financial assets. Recognition of changes in the allowance for expected credit losses. The amount of a credit loss or a reversal of previous amounts recognized in the allowance for expected credit losses required to adjust the allowance in the balance sheet for the current period would be recognized in the income statement as a provision for credit losses. Interest income. Except for the guidance in this section, the proposed guidance in ASC 825-15 would not address how a creditor should recognize interest income. An entity that recognizes interest income on purchased credit-impaired financial assets, which are defined in the ASC Glossary as “[a]cquired individual financial assets…that have experienced a significant deterioration in credit quality since origination, based on the assessment of the acquirer…” would not be permitted to recognize interest income on the discount embedded in the purchase price as a result of the acquirer’s assessment of expected credit losses at the acquisition date. An entity would be required to discontinue the accrual of interest income when it is not probable that the entity will receive substantially all of the principal or substantially all of the interest and would be required to account for payments as follows: 1. Payment of substantially all of the principal is not probable. An entity would be required to recognize all cash receipts from a debt instrument as a reduction in the asset’s carrying amount. Payments received after the carrying amount has been reduced to zero would be recognized in the allowance for expected credit losses as recoveries of amounts written off in previous periods. Payment in excess of amounts written off would be recognized as interest income. 2. Payment of substantially all of the principle is probable but payment of substantially all of the interest is not probable. An entity would be required to recognize interest income on a debt instrument when cash payments are received. Cash receipts in excess of interest income that would be recognized in the period if the asset had not been placed on nonaccrual status would be recognized as a reduction of the asset’s carrying amount. If the conditions in (1) and (2) no longer exist, interest income would be recognized in the manner it had been recognized before those conditions occurred. Subsequent Measurement Writeoffs. When an entity determines that it has no reasonable expectation of future recovery of the carrying amount of a financial asset, it would directly reduce its cost basis in the financial asset or portion thereof in the period in which that determination is made. The entity also would reduce the balance of the allowance for expected credit losses by the amount of the financial asset’s balance that was written off. A recovery of a financial asset that had been written off in a previous period would be recognized as an adjustment of the allowance for expected credit losses only if consideration is received to satisfy some or all of the contractually required payments. 4 © 2013 CCH. All Rights Reserved. Other Presentation Matters The financial statement presentation of estimates of expected credit losses for recognized financial assets under the scope of ASC 825-15 would be as follows: Financial assets measured at amortized cost. The estimate of expected credit losses would be presented in the balance sheet as an allowance reducing the assets’ amortized cost. Financial assets measured at fair value with changes in fair value recognized in comprehensive income. The estimate of expected credit losses would be deducted from the assets’ amortized cost, which is presented on the balance sheet as a net amount. Recognized purchased credit-impaired assets not measured at fair value with all changes in fair value recognized in current income. The estimate of expected credit losses would be presented on the balance sheet as an allowance reducing the sum of the assets’ purchase price and the expected credit losses on the assets at acquisition. Loan commitments. The estimate of expected credit losses would be presented on the balance sheet as a liability. Disclosure The purpose of the proposed disclosures is to help financial statement users to understand the following: The portfolio’s underlying credit risk and how management monitors the portfolio’s credit quality; Management’s estimate of expected credit losses; and Changes in the estimates of expected credit losses that occurred during the period. Information about credit quality. The information disclosed would have to enable users of financial statements to do both of the following: Understand how management manages the credit quality of its debt instruments; and Evaluate the quantitative and qualitative risks resulting from its debt instruments’ credit quality. An entity would be required to provide quantitative and qualitative information by class of financial asset about its credit quality, including the following: A description of the of the credit-quality-indicator; The amortized cost, by credit-quality indicator; and For each credit-quality indicator, the date or range of dates in which the information was last updated for that credit-quality indicator. An entity that discloses information about internal risk ratings would be required to provide qualitative information on how the internal risk ratings are related to the possibility of loss. The above proposed disclosures requirements would not apply to short-term trade receivables related to revenue transactions under ASC 605. © 2013 CCH. All Rights Reserved. 5 Allowance for expected credit losses. The purpose of the proposed disclosures would be to enable financial statement users to understand: How management developed its allowance for expected credit losses; The information management used to develop its current estimate of expected credit losses; and Economic circumstances causing changes in the allowance for expected credit losses, which results in a related credit loss expense or reversal recognized during the period. To meet the objectives discussed above, the following information about an entity’s accounting policies and method used to estimate the allowance for expected credit losses would be disclosed by portfolio segment: How expected estimates are developed; Factors influencing management’s current estimate of expected credit losses, including past events, current conditions, and reasonable and supportable forecasts about the future; Risk characteristics relevant to each portfolio segment; Changes in the factors influencing management’s current estimate of expected credit losses and reasons for those changes (e.g., change in portfolio composition, change in volume of purchased or originated assets, or significant events or conditions affecting the current estimate that were not considered during the previous period); Changes, if any, to the entity’s accounting policies or methods from the prior period and the entity’s rationale for the change, if applicable; Significant changes, if any, in techniques used to make estimates and reasons for the changes, if applicable; and Reasons for significant changes in the amount of writeoffs, if applicable. To help financial statement users to understand activity in the allowance for expected credit losses for each period by portfolio segment, an entity would be required to separately provide the following quantitative disclosures for financial assets classified at amortized cost and financial assets classified at fair value with qualifying changes in fair value recognized in other comprehensive income: Beginning balance in the allowance for expected credit losses; Provision for credit losses in the current period; Writeoffs charged against the allowance; Recoveries of amounts previously written off; and Ending balance in the allowance for expected credit losses. An entity that used the practical expedient discussed above and did not measure expected credit losses for certain financial assets classified at fair value with qualifying changes in fair value recognized in other comprehensive income would be required to disclose the amortized cost balance of those assets at the portfolio segment level. The amortized cost for purchased credit-impaired assets would be the sum of the assets’ purchase price plus the expected credit losses on the assets at acquisition. Roll forward for certain debt instruments. A roll forward of an entity’s portfolio of debt instruments classified at amortized cost would be required from the begin6 © 2013 CCH. All Rights Reserved. ning of the period to the end of the period, separated at the portfolio segment level. It would include the following information: Beginning amortized cost; Originations; Purchases; Sales; Repayments; Writeoffs; and Ending amortized cost. A roll forward of a portfolio of debt instruments classified at fair value with qualifying changes in fair value recognized in other comprehensive income would be required from the beginning of the period to the end of the period separated at the portfolio segment level. Disclosure of the information listed above would be required, at a minimum. The above disclosures would not apply to the following: Receivables as a result of revenue transactions under the scope of ASC 605; Reinsurance receivables as a result of insurance transactions under the scope of ASC 944; and Loan commitments not measured at fair value with changes in fair value recognized at net income. Reconciliation between fair value and amortized cost for debt instruments classified at fair value with qualifying changes in fair value recognized in other comprehensive income. If an entity has not already presented all of the following items on the balance sheet, it would be required to disclose a reconciliation of the difference between the fair value and amortized cost for assets measured at fair value with qualifying changes in fair value recognized in other comprehensive income: Amortized cost; Allowance for expected credit losses; Accumulated amount needed to reconcile amortized cost less the allowance for expected credit losses to fair value; and Fair value. Past due status. To help users understand the extent that an entity’s financial assets are past due, an entity would be required to provide an aging analysis of the amortized cost for debt instruments that are past due as of the reporting date, separated at the portfolio segment level. An entity would also be required to disclose when a debt instrument is considered to be past due. Nonaccrual items. To help users to understand the credit risk and interest income recognized on financial assets on nonaccrual status, an entity would be required to disclose the following information separated at the portfolio segment level: Amortized cost of debt instruments on nonaccrual level as of the beginning of the reporting period and the end of the reporting period; Amount of interest income recognized during the period on nonaccrual instruments; © 2013 CCH. All Rights Reserved. 7 Amortized cost of debt instruments that are 90 days or more past due, but not on nonaccrual status as of the reporting date; and Amortized cost of debt instruments on nonaccrual status for which there are no related expected credit losses at the reporting date because the debt is a fully collateralized financial asset. Purchased credit-impaired financial assets. An entity that has purchased credit-impaired financial assets during a reporting period would be required to provide a reconciliation of the difference between the assets’ purchase price and their par value, including: Purchase price; Discount because of expected credit losses based on the acquirer’s evaluation; Discount or premium because of other factors; and Par value. Collateralized financial assets. An entity would be required to describe the type of collateral by class of financial assets. In addition, a qualitative description would be required of the extent to which an entity’s financial assets are secured by collateral. A qualitative explanation by class of financial asset would be required regarding significant changes in the extent to which collateral secures an entity’s financial assets, which may occur because of general deterioration or some other reason. About the Author Judith Weiss, CPA, has been attending EITF meetings regularly since 1991. She was a technical manager in the AICPA Accounting Standards Division and a senior manager in the national offices of Deloitte & Touche LLP and Grant Thornton LLP. Ms. Weiss is also one of the authors of the GAAP Guide. AC C OUNTING RE SE A RCH MA NAGER ® Accounting Research Manager is the most comprehensive, up-to-date, and objective online resource of financial reporting literature. It includes all authoritative and proposed accounting, auditing, and SEC literature, plus independent, expert-written interpretive guidance to assist you with your accounting and auditing research needs: accounting for public and nonpublic companies, auditing for public companies, and auditing for nonpublic companies. Material is updated on a daily basis by our outstanding team of content experts, so you stay as current as possible. You’ll learn of newly released literature and deliberations of current financial reporting projects as soon as they occur. You’ll be kept up-to-date on the latest FASB, AICPA, SEC, PCAOB, EITF, GASB and IASB authoritative and proposal stage literature. With Accounting Research Manager, you maximize the efficiency of your research time while enhancing your results. Learn more about our content, our experts, and how you can request a FREE trial by visiting us at www.accountingresearchmanager.com. 8 © 2013 CCH. All Rights Reserved. MGUS Copyright of GAAP Update Service is the property of CCH Incorporated and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. 
Purchase answer to see full attachment