{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/310/10/#25-recognition","source":"FASB Accounting Standards Codification, Basic View","usage":"Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective.","topic":"310","topic_title":"Receivables","subtopic":"310-10","subtopic_title":"Overall","section":{"number":"25","label":"25 Recognition","anchor":"25-recognition","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"310-10-25-1","para":"25-1","html":"The General Subsections provide recognition guidance organized as follows:
- a
Recognition of certain types of receivables
- b
Recognition of interest and fees for certain types of receivables.
The following guidance addresses issues related to recognition of various types of receivables, specifically:
- a
Factoring arrangements
- b
- c
Standby commitments
- d
Credit card portfolio purchased
- e
Secured loans.
Such receivables may be originated by an entity or purchased from a third party.
Transfers of receivables under factoring arrangements meeting the sale criteria of paragraph 860-10-40-5 shall be accounted for by the factor as purchases of receivables. The acquisition of receivables and accounting for purchase discounts such as factoring commissions shall be recognized in accordance with Subtopic 310-20. Factoring commissions under these arrangements shall be recognized over the period of the loan contract in accordance with that Subtopic. That period begins when a finance company or an entity with financing activities including trade receivables funds a customer's credit and ends when the customer's account is settled. Each lender in a syndication shall account for the amounts it is owed by the borrower. Repayments by the borrower may be made to a lead lender that then distributes the collections to the other lenders of the syndicate. In those circumstances, the lead lender is simply functioning as a servicer and, therefore, shall not recognize the aggregate loan as an asset.
See paragraph
860-10-55-61 for guidance on accounting for loan participations.
Paragraph 815-10-15-70 states that commitments to purchase or sell mortgage loans or other types of loans at a future date must be evaluated under the definition of a derivative instrument to determine whether Subtopic 815-10 applies. This paragraph applies only to a standby commitment to purchase loans and only if that commitment is within the scope of this Subtopic. It does not apply to other customary kinds of commitments to purchase loans, nor does it apply to commitments to originate loans. If the settlement date is within a reasonable period, for example, a normal loan commitment period, and the entity has the intent and ability to accept delivery without selling assets, a standby commitment within the scope of this Subtopic shall be viewed as part of the normal production of loans. However, if the settlement date is not within a reasonable period, or the entity does not have the intent and ability to accept delivery without selling assets, the standby commitment shall be accounted for as a written put option. When an entity purchases a credit card portfolio that includes the cardholder relationships at an amount that exceeds the sum of the amounts due under the credit card receivables, the difference between the amount paid and the sum of the balances of the credit card loans at the date of purchase (the premium) shall be allocated between the cardholder relationships acquired and the loans acquired. The premium relating to the cardholder relationships represents an identifiable intangible asset that shall be accounted for in accordance with Topic 350. Transfers not meeting the sale criteria in paragraph 860-10-40-5 shall be accounted for as secured loans, that is, loans collateralized by customer accounts or receivables. Paragraph 860-30-25-5 provides additional guidance in those situations. The following guidance addresses the recognition of interest income and certain fees for various types of receivables, specifically:
- a
Interest income on receivables
- b
Impact of rebates on accrued interest income
- c
Prepayment fees
- d
Delinquency fees.
Such interest or fees may relate to receivables that are originated by the entity or purchased from a third party.
See Subtopic 835-30 for guidance on the imputation of interest for receivables that represent contractual rights to receive money or contractual obligations to pay money on fixed or determinable dates, whether or not there is any stated provision for interest. Accrual of interest income on installment loans or trade receivables shall not be affected by the possibility that rebates may be calculated on a method different from the interest method, except that the possibility of rebates affects the accounting resulting from the application of paragraph 310-20-35-18(a). Differences between rebate calculations and accrual of interest income merely adjust original estimates of interest income and shall be recognized in income when loans or trade receivables are prepaid or renewed. Prepayment penalties shall not be recognized in income until loans or trade receivables, if applicable, are prepaid, except that the existence of prepayment penalties may affect the accounting resulting from the application of paragraph 310-20-35-18(a). Delinquency fees shall be recognized in income when chargeable, assuming collectibility is reasonably assured.
This Subsection provides recognition guidance for
acquisition, development, and construction arrangements, specifically:
- a
- b
Characteristics implying investment in real estate or joint ventures
- c
Characteristics implying loans
- d
Accounting for an arrangement as a
loan or an investment in real estate
- e
Participations in acquisition, development, and construction arrangements.
The extent of participation in expected residual profit and its forms may vary. An example of a simple form might be one in which the contractual interest and fees, if any, on a condominium project are considered to be at fair market rates. The expected sales prices are sufficient to cover at least principal, interest, and fees, and the lender shares in an agreed proportion, for example, 20 percent, 50 percent, or 90 percent, of any profit on sale of the units.
A slightly different form of arrangement may produce approximately the same result. For example, the interest rate and/or fees may be set at a level higher than in the preceding example, and the lender may receive a smaller percentage of any profit on sale of the units. Thus, a greater portion of the expected sales price is required to cover the contractual interest and/or fees, leaving a smaller amount to be allocated between the lender and the borrower. The lender's share of expected residual profit in such an arrangement may be approximately the same as in the preceding example.
A different arrangement may cause the same result if the interest rate and/or fees are set at a sufficiently high level and the lender does not share in any proportion of profit on sale of the units. Another variation in these arrangements is one in which the lender shares in gross rents or net cash flow from a commercial project, for example, an office building or an apartment complex.
The profit participation agreement may or may not be part of the mortgage loan agreement.
In an acquisition, development, and construction arrangement in which the lender participates in expected residual profit, in addition to the lender's participation in expected residual profit, the following characteristics suggest that the risks and rewards of the arrangement are similar to those associated with an investment in real estate or joint venture: - a
The lender agrees to provide all or substantially all necessary funds to acquire, develop, or construct the property. The borrower has title to but little or no equity in the underlying property.
- b
The lender funds the commitment or origination fees or both by including them in the amount of the loan.
- c
The lender funds all or substantially all interest and fees during the term of the loan by adding them to the loan balance.
- d
The lender's only security is the acquisition, development, and construction project. The lender has no recourse to other assets of the borrower, and the borrower does not guarantee the debt. - e
In order for the lender to recover the investment in the project, the property must be sold to independent third parties, the borrower must obtain refinancing from another source, or the property must be placed in service and generate sufficient net cash flow to service debt principal and interest.
- f
The arrangement is structured so that foreclosure during the project's development as a result of delinquency is unlikely because the borrower is not required to make any payments until the project is complete, and, therefore, the loan normally cannot become delinquent.
Even though the lender participates in expected residual profit, the following characteristics suggest that the risks and rewards of an acquisition, development, and construction arrangement are similar to those associated with a loan: - a
The lender participates in less than a majority of the expected residual profit.
- b
The borrower has an equity investment, substantial to the project, not funded by the lender. The investment may be in the form of cash payments by the borrower or contribution by the borrower of land (without considering value expected to be added by future development or construction) or other assets. The value attributed to the land or other assets should be net of encumbrances. There may be little value to assets with substantial prior liens that make foreclosure to collect less likely. Recently acquired property generally shall be valued at no higher than cost.
- c
The lender has either of the following:
- 1
Recourse to substantial tangible, saleable assets of the borrower, with a determinable sales value, other than the acquisition, development, and construction project that are not pledged as collateral under other loans
- 2
An irrevocable letter of credit from a creditworthy, independent third party provided by the borrower to the lender for a substantial amount of the loan over the entire term of the loan.
- d
A take-out commitment for the full amount of the lender's loans has been obtained from a creditworthy, independent third party. Take-out commitments often are conditional. If so, the conditions should be reasonable and their attainment probable. - e
Noncancelable sales contracts or lease commitments from creditworthy, independent third parties are currently in effect that will provide sufficient net cash flow on completion of the project to service normal loan amortization, that is, principal and interest. Any associated conditions should be probable of attainment.
Some acquisition, development, and construction arrangements include personal guarantees of the borrower and/or a third party. The existence of a personal guarantee alone rarely provides a sufficient basis for concluding that an acquisition, development, and construction arrangement should be accounted for as a loan. In instances where the substance of the guarantee and the ability of the guarantor to perform can be reliably measured, and the guarantee covers a substantial amount of the loan, concluding that an acquisition, development, and construction arrangement supported by a personal guarantee should be accounted for as a loan may be justified.
The substance of a personal guarantee depends on all of the following: - a
The ability of the guarantor to perform under the guarantee
- b
The practicality of enforcing the guarantee in the applicable jurisdiction
- c
A demonstrated intent to enforce the guarantee.
Examples of personal guarantees that have the ability to perform would include those supported by liquid assets placed in escrow, pledged marketable securities, or irrevocable letters of credit from a creditworthy, independent third party in amounts sufficient to provide necessary equity support for an acquisition, development, and construction arrangement to be considered a loan. In the absence of such support for the guarantee, the financial statements and other information of the guarantor may be considered to determine the guarantor's ability to perform.
Particular emphasis should be placed on the following factors when considering the financial statements of the guarantor: - a
Liquidity and net worth of the guarantor. There should be evidence of sufficient liquidity to perform under the guarantee. There may be little substance to a personal guarantee if the guarantor's net worth consists primarily of assets pledged to secure other debt.
- b
Guarantees provided by the guarantor to other projects. If the financial statements do not disclose and quantify such information, inquiries should be made as to other guarantees. Also, it may be appropriate to obtain written representation from the guarantor regarding other contingent liabilities.
The enforceability of the guarantee in the applicable jurisdiction should also be determined. Even if the guarantee is legally enforceable, business reasons that might preclude the lender from pursuing the guarantee shall be assessed. Those business reasons could include the length of time required to enforce a personal guarantee, whether it is normal business practice in that jurisdiction to enforce guarantees on similar transactions, and whether the lender must choose between pursuing the guarantee or the project's assets, but cannot pursue both.
Some acquisition, development, and construction arrangements recognize value, not funded by the lender, for the builder's efforts after inception of the arrangement, sometimes referred to as sweat equity. Sweat equity is not at risk by the borrower at the inception of an acquisition, development, and construction project. Consequently, sweat equity shall not be considered a substantial equity investment on the part of the borrower in determining whether the acquisition, development, and construction arrangement should be treated as a loan.
An acquisition, development, and construction arrangement shall be accounted for as follows:
- a
If the lender is expected to receive over 50 percent of the expected residual profit from the project, the lender shall account for income or loss from the arrangement as a real estate investment as specified by Topic 970. - b
If the lender is expected to receive 50 percent or less of the expected residual profit, the entire arrangement shall be accounted for either as a loan or as a real estate joint venture, depending on the circumstances. At least one of the characteristics identified in paragraph 310-10-25-20(b) through (e) or a qualifying personal guarantee shall be present for the arrangement to be accounted for as a loan. Otherwise, real estate joint venture accounting would be appropriate.
If the arrangement is accounted for as a loan, interest and fees shall be recognized as income subject to recoverability. Topic 974 provides guidance that may be relevant in assessing the recoverability of such loan amounts and accrued interest. If the arrangement is accounted for as a real estate joint venture, the provisions of Subtopics 970-323 and 835-20 provide guidance for such accounting. In particular, paragraph 970-835-35-1 provides guidance on the circumstances under which interest income shall not be recognized. Many participations in loans or whole loans are bought and sold. The accounting treatment for a purchase that involves acquisition, development, and construction arrangements shall be based on a review of the transaction at the time of purchase in accordance with this guidance. In applying this guidance, a participant would look to its individual percentage of expected residual profit. For example, a participant who will not share in any of the expected residual profit is not subject to this guidance. However, the responsibility to review collectibility and provide allowances applies equally to purchased acquisition, development, and construction arrangements. Any reciprocal transactions between institutions, including multiparty transactions, shall be viewed in their entirety and accounted for in accordance with their combined effects.