ASC 326-20
Measured at Amortized Cost
326 Financial Instruments—Credit Losses
Source downloaded: .Record version b68e8a34397a. Effective date must be checked in the source.
ASC 326-20 is the CECL (current expected credit loss) model for financial assets measured at amortized cost, net investments in leases, off-balance-sheet credit exposures, and reinsurance recoverables. At every reporting date an entity records an allowance (a valuation account deducted from amortized cost) equal to management's current estimate of all credit losses expected over the contractual term, based on past events, current conditions, and reasonable and supportable forecasts, with a reversion to historical loss information beyond the forecastable period (326-20-30-1, 30-6, 30-9). Assets are pooled when they share similar risk characteristics and evaluated individually only when they do not (326-20-30-2).
Key points (7)
- The allowance for credit losses is a valuation account deducted from (or added to) amortized cost to present the net amount expected to be collected, and expected recoveries of amounts previously written off may be included but cannot exceed amounts written off or expected to be written off (326-20-30-1).
- Expected credit losses are measured collectively when similar risk characteristics exist and individually when they do not; an asset may never be in both a pool and an individual assessment (326-20-30-2; risk characteristics listed at 326-20-55-5).
- No single method is required—discounted cash flow, loss-rate, roll-rate, probability-of-default, or aging schedule methods are all permitted; if DCF is used, expected cash flows are discounted at the asset's effective interest rate and the allowance equals amortized cost less the present value of expected cash flows (326-20-30-3 through 30-4).
- Losses are estimated over the contractual term, adjusted for prepayments, and the term is not extended for expected extensions, renewals, or modifications unless the option is in the contract and is not unconditionally cancellable by the entity (326-20-30-6); for a lessor's net investment in a lease, the lease term is the contractual term (326-20-30-6A).
- An entity must use historical loss experience adjusted for current conditions and reasonable and supportable forecasts, may not rely solely on past events, and must revert to historical loss information (immediately, straight-line, or another rational and systematic basis) for periods beyond which it can make reasonable and supportable forecasts (326-20-30-8 through 30-9).
- The estimate must include a measure of credit loss risk even if remote, but zero loss is permitted when historical information adjusted for current conditions and forecasts supports an expectation of zero nonpayment; collateral value alone is not sufficient support (326-20-30-10); credit enhancements are considered but freestanding contracts such as purchased credit default swaps may not offset the estimate (326-20-30-12).
- Practical expedients: measure losses at fair value of collateral when foreclosure is probable (326-20-35-4), for collateral-dependent financial assets when the borrower is in financial difficulty (326-20-35-5), and for continually replenished collateral (326-20-35-6); off-balance-sheet exposures are recorded as a liability over the period of the present contractual obligation unless unconditionally cancellable (326-20-30-11, 326-20-45-2).
For students. CECL replaced the old "incurred loss" trigger: a day-one allowance is required for lifetime expected losses even on a brand-new, performing loan, and even when the risk of loss is remote. The most common misunderstanding is thinking a discounted cash flow model is required (it is not) or that collateral value alone justifies a zero allowance (326-20-30-10).
current expected credit loss (cecl)allowance for credit lossesamortized cost basisreasonable and supportable forecastreversion to historical loss informationcollateral-dependent financial assetpurchased financial assets with credit deteriorationoff-balance-sheet credit exposure
Machine-generated study aid for ASC 326-20. Check the source paragraphs below.
326-20-00Status
Source downloaded: .Record version 3f551dc37927. Effective date must be checked in the source.
326-20-00-1
The following table identifies the changes made to this Subtopic.
326-20-05Overview and Background
Source downloaded: .Record version ec77823410d5. Effective date must be checked in the source.
326-20-05-1
This Subtopic provides guidance on how an entity should measure expected credit losses on financial instruments measured at amortized cost and on leases, off-balance-sheet credit exposures, and reinsurance recoverables.
326-20-15Scope and Scope Exceptions
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Entities
326-20-15-1
The guidance in this Subtopic applies to all entities.
Instruments
326-20-15-2
The guidance in this Subtopic applies to the following items:
- aFinancial assets measured at amortized cost basis, including the following:
- 1
- 2Held-to-maturity debt securities
- 3
- 4
- 5Receivables that relate to repurchase agreements and securities lending agreements within the scope of Topic 860.
- bNet investments in leases recognized by a lessor in accordance with Topic 842 on leases.
- cOff-balance-sheet credit exposures not accounted for as insurance. Off-balance-sheet credit exposure refers to credit exposures on off-balance-sheet loan commitments, standby letters of credit, financial guarantees not accounted for as insurance, and other similar instruments, except for instruments within the scope of Topic 815 on derivatives and hedging.
- dReinsurance recoverables that result from insurance transactions within the scope of Topic 944 on insurance.
326-20-15-3
The guidance in this Subtopic does not apply to the following items:
- aFinancial assets measured at fair value through net income
- bAvailable-for-sale debt securities
- cLoans made to participants by defined contribution employee benefit plans
- dPolicy loan receivables of an insurance entity
- ePromises to give (pledges receivable) of a not-for-profit entity
- fLoans and receivables between entities under common control.
- gReceivables arising from operating leases accounted for in accordance with Topic 842.
326-20-30Initial Measurement
Source downloaded: .Record version 6dbe635f9ea8. Effective date must be checked in the source.
Developing an Estimate of Expected Credit Losses
326-20-30-1
The allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial asset(s) to present the net amount expected to be collected on the financial asset. Expected recoveries of amounts previously written off and expected to be written off shall be included in the valuation account and shall not exceed the aggregate of amounts previously written off and expected to be written off by an entity. At the reporting date, an entity shall record an allowance for credit losses on financial assets within the scope of this Subtopic. An entity shall report in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses for management's current estimate of expected credit losses on financial asset(s).
326-20-30-2
An entity shall measure expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist (as described in paragraph 326-20-55-5). If an entity determines that a financial asset does not share risk characteristics with its other financial assets, the entity shall evaluate the financial asset for expected credit losses on an individual basis. If a financial asset is evaluated on an individual basis, an entity also should not include it in a collective evaluation. That is, financial assets should not be included in both collective assessments and individual assessments.
326-20-30-3
The allowance for credit losses may be determined using various methods. For example, an entity may use discounted cash flow methods, loss-rate methods, roll-rate methods, probability-of-default methods, or methods that utilize an aging schedule. An entity is not required to utilize a discounted cash flow method to estimate expected credit losses. Similarly, an entity is not required to reconcile the estimation technique it uses with a discounted cash flow method.
326-20-30-4
If an entity estimates expected credit losses using methods that project future principal and interest cash flows (that is, a discounted cash flow method), the entity shall discount expected cash flows at the financial asset's effective interest rate. When a discounted cash flow method is applied, the allowance for credit losses shall reflect the difference between the amortized cost basis and the present value of the expected cash flows. If a financial asset is modified and is considered to be a continuation of the original asset, an entity shall use the post-modification contractual interest rate to derive the effective interest rate when using a discounted cash flow method. See paragraph 815-25-35-10 for guidance on the treatment of a basis adjustment related to an existing portfolio layer method hedge. If the financial asset's contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, for example, the prime rate, the London Interbank Offered Rate (LIBOR), or the U.S. Treasury bill weekly average, that financial asset's effective interest rate (used to discount expected cash flows as described in this paragraph) shall be calculated based on the factor as it changes over the life of the financial asset. An entity is not required to project changes in the factor for purposes of estimating expected future cash flows. If the entity projects changes in the factor for the purposes of estimating expected future cash flows, it shall use the same projections in determining the effective interest rate used to discount those cash flows. In addition, if the entity projects changes in the factor for the purposes of estimating expected future cash flows, it shall adjust the effective interest rate used to discount expected cash flows to consider the timing (and changes in the timing) of expected cash flows resulting from expected prepayments in accordance with paragraph 326-20-30-4A. Subtopic 310-20 on receivables—nonrefundable fees and other costs provides guidance on the calculation of interest income for variable rate instruments.
326-20-30-4A
As an accounting policy election for each class of financing receivable or major security type, an entity may adjust the effective interest rate used to discount expected cash flows to consider the timing (and changes in timing) of expected cash flows resulting from expected prepayments.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
105-10-65-10As an accounting policy election for each class of financing receivable or major security type, an entity may adjust the effective interest rate used to discount expected cash flows to consider the timing (and changes in timing) of expected cash flows resulting from expected prepayments. 326-20-30-5
If an entity estimates expected credit losses using a method other than a discounted cash flow method described in paragraph 326-20-30-4, the allowance for credit losses shall reflect the entity's expected credit losses of the amortized cost basis of the financial asset(s) as of the reporting date. For example, if an entity uses a loss-rate method, the numerator would include the expected credit losses of the amortized cost basis (that is, amounts that are not expected to be collected in cash or other consideration, or recognized in income). In addition, when an entity expects to accrete a discount into interest income, the discount should not offset the entity's expectation of credit losses. An entity may develop its estimate of expected credit losses by measuring components of the amortized cost basis on a combined basis or by separately measuring the following components of the amortized cost basis, including all of the following:
- aAmortized cost basis, excluding applicable accrued interest, premiums, discounts (including net deferred fees and costs), foreign exchange, and fair value hedge accounting adjustments (that is, the face amount or unpaid principal balance).
- bPremiums or discounts, including net deferred fees and costs, foreign exchange, and fair value hedge accounting adjustments. See paragraph 815-25-35-10 for guidance on the treatment of a basis adjustment related to an existing portfolio layer method hedge.
- cApplicable accrued interest. See paragraph 326-20-30-5A for guidance on excluding accrued interest from the calculation of the allowance for credit losses.
326-20-30-5A
An entity may make an accounting policy election, at the class of financing receivable or the major security-type level, not to measure an allowance for credit losses for accrued interest receivables if the entity writes off the uncollectible accrued interest receivable balance in a timely manner. This accounting policy election should be considered separately from the accounting policy election in paragraph 326-20-35-8A. An entity may not analogize this guidance to components of amortized cost basis other than accrued interest.
326-20-30-6
An entity shall estimate expected credit losses over the contractual term of the financial asset(s) when using the methods in accordance with paragraph 326-20-30-5. An entity shall consider prepayments as a separate input in the method or prepayments may be embedded in the credit loss information in accordance with paragraph 326-20-30-5. An entity shall consider estimated prepayments in the future principal and interest cash flows when utilizing a method in accordance with paragraph 326-20-30-4. An entity shall not extend the contractual term for expected extensions, renewals, and modifications unless the following applies:
- a
- bThe extension or renewal options (excluding those that are accounted for as derivatives in accordance with Topic 815) are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the entity.
326-20-30-6A
For net investment in leases recognized by a lessor in accordance with Topic 842, instead of applying the guidance in paragraph 326-20-30-6, an entity shall use the lease term as the contractual term.
326-20-30-7
When developing an estimate of expected credit losses on financial asset(s), an entity shall consider available information relevant to assessing the collectibility of cash flows. This information may include internal information, external information, or a combination of both relating to past events, current conditions, and reasonable and supportable forecasts. An entity shall consider relevant qualitative and quantitative factors that relate to the environment in which the entity operates and are specific to the borrower(s). When financial assets are evaluated on a collective or individual basis, an entity is not required to search all possible information that is not reasonably available without undue cost and effort. Furthermore, an entity is not required to develop a hypothetical pool of financial assets. An entity may find that using its internal information is sufficient in determining collectibility.
326-20-30-8
Historical credit loss experience of financial assets with similar risk characteristics generally provides a basis for an entity's assessment of expected credit losses. Historical loss information can be internal or external historical loss information (or a combination of both). An entity shall consider adjustments to historical loss information for differences in current asset specific risk characteristics, such as differences in underwriting standards, portfolio mix, or asset term within a pool at the reporting date or when an entity's historical loss information is not reflective of the contractual term of the financial asset or group of financial assets.
326-20-30-9
An entity shall not rely solely on past events to estimate expected credit losses. When an entity uses historical loss information, it shall consider the need to adjust historical information to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The adjustments to historical loss information may be qualitative in nature and should reflect changes related to relevant data (such as changes in unemployment rates, property values, commodity values, delinquency, or other factors that are associated with credit losses on the financial asset or in the group of financial assets). Some entities may be able to develop reasonable and supportable forecasts over the contractual term of the financial asset or a group of financial assets. However, an entity is not required to develop forecasts over the contractual term of the financial asset or group of financial assets. Rather, for periods beyond which the entity is able to make or obtain reasonable and supportable forecasts of expected credit losses, an entity shall revert to historical loss information determined in accordance with paragraph 326-20-30-8 that is reflective of the contractual term of the financial asset or group of financial assets. An entity shall not adjust historical loss information for existing economic conditions or expectations of future economic conditions for periods that are beyond the reasonable and supportable period. An entity may revert to historical loss information at the input level or based on the entire estimate. An entity may revert to historical loss information immediately, on a straight-line basis, or using another rational and systematic basis.
326-20-30-10
An entity's estimate of expected credit losses shall include a measure of the expected risk of credit loss even if that risk is remote, regardless of the method applied to estimate credit losses. However, an entity is not required to measure expected credit losses on a financial asset (or group of financial assets) in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that nonpayment of the amortized cost basis is zero. Except for the circumstances described in paragraphs , an entity shall not expect nonpayment of the amortized cost basis to be zero solely on the basis of the current value of collateral securing the financial asset(s) but, instead, also shall consider the nature of the collateral, potential future changes in collateral values, and historical loss information for financial assets secured with similar collateral.
326-20-30-10A
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6An entity may elect the practical expedient described in paragraphs and an entity other than a public business entity may elect the accounting policy described in paragraphs when developing an estimate of expected credit losses on current accounts receivable and current contract asset balances arising from transactions accounted for under Topic 606 on revenue from contracts with customers. This includes those asset balances acquired in a transaction accounted for under Topic 805 on business combinations or recognized through the consolidation of a variable interest entity that is not a business as described in paragraph 810-10-30-3 that arose from transactions that the acquiree or variable interest entity accounted for under Topic 606. 326-20-30-10B
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6When elected, the practical expedient and accounting policy election shall be applied consistently to all current accounts receivable and current contract assets described in paragraph 326-20-30-10A. When determining whether an accounts receivable or contract asset balance is a current asset, an entity should use a one-year period unless an entity’s operating cycle exceeds 12 months, in which case the longer period shall be used (see paragraph 210-10-45-3).326-20-30-10C
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6For assets described in paragraph 326-20-30-10A, an entity may elect a practical expedient to assume that current conditions as of the balance sheet date do not change for the remaining life of the asset.326-20-30-10D
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6When developing an estimate of expected credit losses for assets to which the practical expedient is applied, an entity shall continue to adjust historical loss information to reflect current conditions to the extent that historical loss information does not reflect current conditions. For example, an entity that has identified an individual customer that is experiencing financial distress would consider that information in its estimate of expected credit losses for that customer even if that information has not yet affected its historical loss experience (that is, even if the customer has not defaulted as of the balance sheet date). Similarly, an entity that has expanded its credit policies before the balance sheet date to offer credit to lower-credit-quality customers would consider that information in its estimate of expected credit losses even if that change has not yet affected its historical loss experience (that is, even if the new, lower-credit-quality customers have not defaulted as of the balance sheet date). As another example, if an entity determined that economic conditions as of the balance sheet date were different from the conditions that existed over the period during which historical data were collected because of the onset of a severe economic recession before the balance sheet date, the entity should consider whether an adjustment to historical loss information is necessary. See paragraph 326-20-50-12A for related disclosure requirements and paragraphs for an illustrative Example.326-20-30-10E
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6An entity other than a public business entity that elects the practical expedient in paragraphs may also elect an accounting policy when estimating expected credit losses to consider collection activity after the balance sheet date but before the entity’s financial statements are available to be issued (or before any alternative date selected by the entity that is after the balance sheet date but before the financial statements are available to be issued). For example, under this accounting policy election, the allowance for credit losses related to those asset balances described in paragraph 326-20-30-10A that are collected before an entity’s financial statements are available to be issued (or before the alternative date selected by the entity) would be zero. See paragraphs for specific disclosure requirements applicable to this accounting policy election.326-20-30-10F
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6An entity other than a public business entity that applies the practical expedient and the accounting policy election shall estimate its expected credit losses on current accounts receivable and current contract asset balances in the following sequence:- aThe entity shall first consider subsequent collections of those asset balances described in paragraph 326-20-30-10A that were outstanding as of the balance sheet date. No credit loss allowance shall be recorded for asset balances that have been collected before the financial statements are available to be issued (or before the alternative date selected by the entity).
- bThe entity shall then evaluate any remaining uncollected amounts as of the date that the financial statements are available to be issued (or as of the alternative date selected by the entity) using the practical expedient in paragraphs . That evaluation shall be based on the delinquency status of those uncollected balances as of the date that the financial statements are available to be issued (or the alternative date selected by the entity). See paragraphs for an illustrative Example.
326-20-30-10G
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6For entities estimating expected credit losses using an aging schedule (as illustrated in paragraphs ), an entity other than a public business entity that elects to consider subsequent collection activity is permitted, but not required, to update historical loss rates for collection activity after the balance sheet date when determining the allowance for credit losses for amounts outstanding as of the balance sheet date that remain uncollected as of the date that the financial statements are available to be issued (or the alternative date selected by the entity).326-20-30-10H
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6A change in the date through which an entity considers subsequent collection activity when applying the accounting policy election is not a change in an accounting principle in accordance with Topic 250 on accounting changes and error corrections.326-20-30-11
In estimating expected credit losses for off-balance-sheet credit exposures, an entity shall estimate expected credit losses on the basis of the guidance in this Subtopic over the contractual period in which the entity is exposed to credit risk via a present contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the issuer. At the reporting date, an entity shall record a liability for credit losses on off-balance-sheet credit exposures within the scope of this Subtopic. An entity shall report in net income (as a credit loss expense) the amount necessary to adjust the liability for credit losses for management's current estimate of expected credit losses on off-balance-sheet credit exposures. For that period of exposure, the estimate of expected credit losses should consider both the likelihood that funding will occur (which may be affected by, for example, a material adverse change clause) and an estimate of expected credit losses on commitments expected to be funded over its estimated life. If an entity uses a discounted cash flow method to estimate expected credit losses on off-balance-sheet credit exposures, the discount rate used should be consistent with the guidance in Section 310-20-35.
326-20-30-12
The estimate of expected credit losses shall reflect how credit enhancements (other than those that are freestanding contracts) mitigate expected credit losses on financial assets, including consideration of the financial condition of the guarantor, the willingness of the guarantor to pay, and/or whether any subordinated interests are expected to be capable of absorbing credit losses on any underlying financial assets. However, when estimating expected credit losses, an entity shall not combine a financial asset with a separate freestanding contract that serves to mitigate credit loss. As a result, the estimate of expected credit losses on a financial asset (or group of financial assets) shall not be offset by a freestanding contract (for example, a purchased credit-default swap) that may mitigate expected credit losses on the financial asset (or group of financial assets).
Purchased Financial Assets with Credit Deterioration
326-20-30-13
An entity shall record the allowance for credit losses for purchased financial assets with credit deteriorationand purchased seasoned loansin accordance with paragraphs , 326-20-30-12, and 326-20-30-14. Additionally, expected recoveries of amounts previously written off and expected to be written off shall be included in determining the allowance for credit losses in accordance with paragraph 326-20-30-1 for purchased seasoned loans and paragraph 326-20-30-13A for purchased financial assets with credit deterioration. An entity shall add the allowance for credit losses at the date of acquisition to the purchase price to determine the initial amortized cost basis for purchased financial assets with credit deterioration and purchased seasoned loans. Any noncredit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration or purchased seasoned loans shall be allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined on a collective basis shall be allocated to individual assets to appropriately allocate any noncredit discount or premium.
An entity shall record the allowance for credit losses for purchased financial assets with credit deterioration in accordance with paragraphs , 326-20-30-12, and 326-20-30-13A. An entity shall add the allowance for credit losses at the date of acquisition to the purchase price to determine the initial amortized cost basis for purchased financial assets with credit deterioration. Any noncredit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration shall be allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined on a collective basis shall be allocated to individual assets to appropriately allocate any noncredit discount or premium.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7| Editor's Note: The content of paragraph 326-20-30-13 will change upon transition, together with a change in the heading noted below. |
| > Purchased Financial Assets with Credit Deterioration and Purchased Seasoned Loans |
326-20-30-13A
The allowance for credit losses for purchased financial assets with credit deterioration shall include expected recoveries of amounts previously written off and expected to be written off by the entity and shall not exceed the aggregate of amounts previously written off and expected to be written off by the entity.
- aIf the entity estimates expected credit losses using a method other than a discounted cash flow method in accordance with paragraph 326-20-30-4, expected recoveries shall not include any amounts that result in an acceleration of the noncredit discount.
- bThe entity may include increases in expected cash flows after acquisition.
326-20-30-14
If an entity estimates expected credit losses using a discounted cash flow method, the entity shall discount expected credit losses at the rate that equates the present value of the purchaser's estimate of the asset's future cash flows with the purchase price of the asset. If an entity estimates expected credit losses using a method other than a discounted cash flow method, the entity shall estimate expected credit losses on the basis of the unpaid principal balance (face value) of the financial asset(s). See paragraphs for implementation guidance and examples.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7If an entity estimates expected credit losses using a discounted cash flow method for purchased financial assets with credit deterioration and purchased seasoned loans, the entity shall discount expected credit losses at the rate that equates the present value of the purchaser's estimate of the asset's future cash flows with the purchase price of the asset. If an entity estimates expected credit losses using a method other than a discounted cash flow method, the entity shall estimate expected credit losses on the basis of the unpaid principal balance (face value) of the financial asset(s), unless the entity elects the accounting policy election in paragraph 326-20-35-1A for purchased seasoned loans. See paragraphs for implementation guidance and examples.326-20-30-15
An entity shall account for purchased financial assets that do not have a more-than-insignificant deterioration in credit quality since origination in a manner consistent with originated financial assets in accordance with paragraphs and 326-20-30-12. An entity shall not apply the guidance in paragraphs for purchased financial assets that do not have a more-than-insignificant deterioration in credit quality since origination.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7An entity shall account for purchased financial assets that do not have a more-than-insignificant deterioration in credit quality since origination or are not purchased seasoned loans in a manner consistent with originated financial assets in accordance with paragraphs and 326-20-30-12.326-20-30-16
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7A purchased seasoned loan is a loan that meets either of the following criteria and is not a purchased financial asset with credit deterioration or a financial asset listed in paragraph 326-20-30-19:- aThe loan is obtained through a business combination accounted for using the acquisition method in accordance with Subtopic 805-20.
- bThe loan is (i) obtained through a transfer that is not a business combination accounted for using the acquisition method in accordance with Subtopic 805-20 or (ii) initially recognized through the consolidation of a variable interest entity in accordance with paragraph 810-10-30-3. In addition, the loan must meet both of the following criteria:
- 1The loan is obtained more than 90 days after its origination date.
- 2The transferee was not involved with the origination of the loan. See paragraph 326-20-30-17 for guidance on how to assess whether the transferee was involved with the origination of the loan.
- 1
326-20-30-17
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7The transferee is more likely to be involved with the origination of a loan when the transfer of that loan is effected through the terms of an existing contractual relationship, financing arrangement, purchase commitment, or other agreement with the entity that originated and transferred the loan. The transferee is involved with the origination of a loan when either of the following occurs:- aWithin 90 days after the loan origination date, the transferee has direct or indirect exposure to the economic risks and rewards of ownership.
- bThe transferee has substantive influence on the offering, arranging, underwriting, or other nonadministrative lending activity performed by the originator (the transferor) related to the initial extension of credit to a debtor.
326-20-30-18
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7When the transferee acquires a group of loans under paragraph 326-20-30-16(b), it shall evaluate the guidance in paragraph 326-20-30-17 on an individual loan basis.326-20-30-19
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7Purchased seasoned loans do not include the following:- aCredit cards
- b
- cTrade receivables arising from transactions accounted for under Topic 606 on revenue from contracts with customers.
326-20-35Subsequent Measurement
Source downloaded: .Record version dd625ee83fbd. Effective date must be checked in the source.
Reporting Changes in Expected Credit Losses
326-20-35-1
At each reporting date, an entity shall record an allowance for credit losses on financial assets (including purchased financial assets with credit deterioration) within the scope of this Subtopic. An entity shall compare its current estimate of expected credit losses with the estimate of expected credit losses previously recorded. An entity shall report in net income (as a credit loss expense or a reversal of credit loss expense) the amount necessary to adjust the allowance for credit losses for management's current estimate of expected credit losses on financial asset(s). The method applied to initially measure expected credit losses for the assets included in paragraph 326-20-30-14 generally would be applied consistently over time and shall faithfully estimate expected credit losses for financial asset(s).
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7At each reporting date, an entity shall record an allowance for credit losses on financial assets (including purchased financial assets with credit deteriorationand purchased seasoned loans) within the scope of this Subtopic. An entity shall compare its current estimate of expected credit losses with the estimate of expected credit losses previously recorded. An entity shall report in net income (as a credit loss expense or a reversal of credit loss expense) the amount necessary to adjust the allowance for credit losses for management's current estimate of expected credit losses on financial asset(s). Except for purchased seasoned loans that are subject to the guidance in paragraph 326-20-35-1B, the method applied to initially measure expected credit losses for the assets included in paragraph 326-20-30-14 generally would be applied consistently over time and shall faithfully estimate expected credit losses for financial asset(s).326-20-35-1A
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7If an entity estimates expected credit losses on purchased seasoned loans using a method other than a discounted cash flow method described in paragraph 326-20-30-4, the entity may elect to measure an allowance for credit losses on purchased seasoned loans using the amortized cost basis and apply the guidance in paragraph 326-20-30-2 as of each balance sheet date after the acquisition date. An entity shall elect this option on an acquisition-by-acquisition basis in the period that the acquisition occurs and apply it to all purchased seasoned loans recognized in that acquisition. The effect of electing this option shall be recorded in net income as a credit loss expense.326-20-35-1B
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7If an entity elects the option in paragraph 326-20-35-1A, the initial amortized cost basis measured in accordance with paragraph 326-20-30-13 and effective interest rate measured in accordance with paragraph 310-10-35-53B as of the acquisition date shall not be remeasured in connection with electing this option. In addition, expected credit losses shall be measured consistently for the remaining life of the purchased seasoned loans.326-20-35-2
An entity shall evaluate whether a financial asset in a pool continues to exhibit similar risk characteristics with other financial assets in the pool. For example, there may be changes in credit risk, borrower circumstances, recognition of writeoffs, or cash collections that have been fully applied to principal on the basis of nonaccrual practices that may require a reevaluation to determine if the asset has migrated to have similar risk characteristics with assets in another pool, or if the credit loss measurement of the asset should be performed individually because the asset no longer has similar risk characteristics.
326-20-35-3
An entity shall adjust at each reporting period its estimate of expected credit losses on off-balance-sheet credit exposures. An entity shall report in net income (as credit loss expense or a reversal of credit loss expense) the amount necessary to adjust the liability for credit losses for management's current estimate of expected credit losses on off-balance-sheet credit exposures at each reporting date.
Financial Assets Secured by Collateral
326-20-35-4
Regardless of the initial measurement method, an entity shall measure expected credit losses based on the fair value of the collateral at the reporting date when the entity determines that foreclosure is probable. The entity shall adjust the fair value of the collateral for the estimated costs to sell if it intends to sell rather than operate the collateral. When an entity determines that foreclosure is probable, the entity shall remeasure the financial asset at the fair value of the collateral at the reporting date (less costs to sell, if applicable) so that the reporting of a credit loss is not delayed until actual foreclosure. An entity also shall consider any credit enhancements that meet the criteria in paragraph 326-20-30-12 that are applicable to the financial asset when recording the allowance for credit losses. An allowance for credit losses that is added to the amortized cost basis of the financial asset(s) shall not exceed amounts previously written off.
326-20-35-5
An entity may use, as a practical expedient, the fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the allowance for credit losses for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the entity's assessment as of the reporting date (collateral-dependent financial asset). If an entity uses the practical expedient on a collateral-dependent financial asset and repayment or satisfaction of the asset depends on the sale of the collateral, the fair value of the collateral shall be adjusted for estimated costs to sell. However, the entity shall not incorporate in the net carrying amount of the financial asset the estimated costs to sell the collateral if repayment or satisfaction of the financial asset depends only on the operation, rather than on the sale, of the collateral. When the fair value (less costs to sell, if applicable) of the collateral at the reporting date exceeds the amortized cost basis of the financial asset, an entity shall adjust the allowance for credit losses to present the net amount expected to be collected on the financial asset equal to the fair value (less costs to sell, if applicable) of the collateral as long as the allowance that is added to the amortized cost basis of the financial asset(s) does not exceed amounts previously written off. If the fair value of the collateral is less than the amortized cost basis of the financial asset for which the practical expedient has been elected, an entity shall recognize an allowance for credit losses on the collateral-dependent financial asset, which is measured as the difference between the fair value of the collateral, less costs to sell (if applicable), at the reporting date and the amortized cost basis of the financial asset. An entity also shall consider any credit enhancements that meet the criteria in paragraph 326-20-30-12 that are applicable to the financial asset when recording the allowance for credit losses.
326-20-35-6
For certain financial assets, the borrower may be contractually required to continually adjust the amount of the collateral securing the financial asset(s) as a result of fair value changes in the collateral. In those situations, if an entity reasonably expects the borrower to continue to replenish the collateral to meet the requirements of the contract, an entity may use, as a practical expedient, a method that compares the amortized cost basis with the fair value of collateral at the reporting date to measure the estimate of expected credit losses. An entity may determine that the expectation of nonpayment of the amortized cost basis is zero if the fair value of the collateral is equal to or exceeds the amortized cost basis of the financial asset and the entity reasonably expects the borrower to continue to replenish the collateral as necessary to meet the requirements of the contract. If the fair value of the collateral at the reporting date is less than the amortized cost basis of the financial asset and the entity reasonably expects the borrower to continue to replenish the collateral as necessary to meet the requirements of the contract, the entity shall estimate expected credit losses for the unsecured amount of the amortized cost basis. The allowance for credit losses on the financial asset is limited to the difference between the fair value of the collateral at the reporting date and the amortized cost basis of the financial asset.
Loans Subsequently Identified for Sale
326-20-35-7
Once a decision has been made to sell loans not currently classified as held for sale, those loans shall be transferred into the held-for-sale classification. See paragraph 310-10-35-48A for guidance on transfers of nonmortgage loans between classifications and see Topic 948 for guidance on transfers of mortgage loans between classifications. The application of the writeoff guidance in paragraph 326-20-35-8 may result in a portion of the amortized cost basis being written off before the loan has been transferred to the held-for-sale classification.
Writeoffs of Financial Assets
326-20-35-8
Writeoffs of financial assets, which may be full or partial writeoffs, shall be deducted from the allowance. The writeoffs shall be recorded in the period in which the financial asset(s) are deemed uncollectible.
326-20-35-8A
An entity may make an accounting policy election, at the class of financing receivable or the major security-type level, to write off accrued interest receivables by reversing interest income or recognizing credit loss expense or a combination of both. This accounting policy election should be considered separately from the accounting policy election in paragraph 326-20-30-5A. An entity may not analogize this guidance to components of amortized cost basis other than accrued interest.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
105-10-65-10An entity may make an accounting policy election, at the class of financing receivable or the major security-type level, to write off accrued interest receivables by reversing interest income or recognizing credit loss expense or a combination of both. This accounting policy election should be considered separately from the accounting policy election in paragraph 326-20-30-5A. An entity may not analogize this guidance to components of amortized cost basis other than accrued interest.Interest Income on Purchased Financial Assets with Credit Deterioration
326-20-35-10
This Subtopic does not address how a creditor shall recognize interest income. See paragraphs for guidance on recognition of interest income on purchased financial assets with credit deteriorationand purchased seasoned loans. See paragraph 310-10-35-53C for additional guidance on recognition of interest income on purchased financial assets with credit deterioration. See paragraph 326-20-45-3 for presentation guidance.
This Subtopic does not address how a creditor shall recognize interest income. See paragraphs for guidance on recognition of interest income on purchased financial assets with credit deterioration. See paragraph 326-20-45-3 for presentation guidance.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
326-10-65-7| Editor's Note: The content of paragraph 326-20-35-10 will change upon transition, together with a change in the heading noted below. |
| > Interest Income on Purchased Financial Assets with Credit Deterioration and Purchased Seasoned Loans |
326-20-45Other Presentation Matters
Source downloaded: .Record version eca63ac5ec12. Effective date must be checked in the source.
326-20-45-1
For financial assets measured at amortized cost within the scope of this Subtopic, an entity shall separately present on the statement of financial position, the allowance for credit losses that is deducted from the asset's amortized cost basis.
326-20-45-2
For off-balance-sheet credit exposures within the scope of this Subtopic, an entity shall present the estimate of expected credit losses on the statement of financial position as a liability. The liability for credit losses for off-balance-sheet financial instruments shall be reduced in the period in which the off-balance-sheet financial instruments expire, result in the recognition of a financial asset, or are otherwise settled. An estimate of expected credit losses on a financial instrument with off-balance-sheet risk shall be recorded separate from the allowance for credit losses related to a recognized financial instrument.
326-20-45-3
When a discounted cash flow approach is used to estimate expected credit losses, the change in present value from one reporting period to the next may result not only from the passage of time but also from changes in estimates of the timing or amount of expected future cash flows. An entity that measures credit losses based on a discounted cash flow approach is permitted to report the entire change in present value as credit loss expense (or reversal of credit loss expense). Alternatively, an entity may report the change in present value attributable to the passage of time as interest income. See paragraph 326-20-50-12 for a disclosure requirement applicable to entities that choose the latter alternative and report changes in present value attributable to the passage of time as interest income.
326-20-45-4
The fair value of the collateral of a collateral-dependent financial asset may change from one reporting period to the next. Changes in the fair value of the collateral shall be reported as credit loss expense or a reversal of credit loss expense when the guidance in paragraphs is applied.
326-20-45-5
An entity may make an accounting policy election, at the class of financing receivable or major security-type level, to present separately on the statement of financial position or within another statement of financial position line item the accrued interest receivable balance, net of the allowance for credit losses (if any). An entity that presents the accrued interest receivable balance, net of the allowance for credit losses (if any), within another statement of financial position line item shall apply the disclosure requirements in paragraph 326-20-50-3A.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
105-10-65-10An entity may make an accounting policy election, at the class of financing receivable or major security-type level, to present separately on the statement of financial position or within another statement of financial position line item the accrued interest receivable balance, net of the allowance for credit losses (if any). An entity that presents the accrued interest receivable balance, net of the allowance for credit losses (if any), within another statement of financial position line item shall apply the disclosure requirements in paragraph 326-20-50-3A.326-20-50Disclosure
Source downloaded: .Record version d62153f38e30. Effective date must be checked in the source.
326-20-50-1
For instruments within the scope of this Subtopic, this Section provides the following disclosure guidance on credit risk and the measurement of expected credit losses:
- aCredit quality information
- bAllowance for credit losses
- cPast-due status
- dNonaccrual status
- e
- fCollateral-dependent financial assets
- gOff-balance-sheet credit exposures.
326-20-50-2
The disclosure guidance in this Section should enable a user of the financial statements to understand the following:
- aThe credit risk inherent in a portfolio and how management monitors the credit quality of the portfolio
- bManagement's estimate of expected credit losses
- cChanges in the estimate of expected credit losses that have taken place during the period.
326-20-50-3
For financing receivables, the disclosure guidance in this Subtopic requires an entity to provide information by either portfolio segment or class of financing receivable. Net investment in leases are within the scope of this Subtopic, and the disclosure requirements for financing receivables shall be applied to net investment in leases (including the unguaranteed residual asset). For held-to-maturity debt securities, the disclosure guidance in this Subtopic requires an entity to provide information by major security type. Paragraphs provide implementation guidance about the terms portfolio segment and class of financing receivable. When disclosing information, an entity shall determine, in light of the facts and circumstances, how much detail it must provide to satisfy the disclosure requirements in this Section. An entity must strike a balance between not obscuring important information as a result of too much aggregation and not overburdening financial statements with excessive detail that may not assist a financial statement user in understanding the entity's financial assets and allowance for credit losses. For example, an entity should not obscure important information by including it with a large amount of insignificant detail. Similarly, an entity should not disclose information that is so aggregated that it obscures important differences between the different types of financial assets and associated risks.
326-20-50-3A
An entity that makes an accounting policy election to present the accrued interest receivable balance within another statement of financial position line item as described in paragraph 326-20-45-5 shall disclose the amount of accrued interest, net of the allowance for credit losses (if any), and shall disclose in which line item on the statement of financial position that amount is presented.
326-20-50-3B
As a practical expedient, an entity may exclude the accrued interest receivable balance that is included in the amortized cost basis of financing receivables and held-to-maturity securities for the purposes of the disclosure requirements in paragraphs . If an entity applies this practical expedient, it shall disclose the total amount of accrued interest excluded from the disclosed amortized cost basis.
326-20-50-3C
An entity that makes the accounting policy election in paragraph 326-20-30-5A shall disclose its accounting policy not to measure an allowance for credit losses for accrued interest receivables. The accounting policy shall include information about what time period or periods, at the class of financing receivable or major security-type level, are considered timely.
326-20-50-3D
An entity that makes the accounting policy election in paragraph 326-20-35-8A shall disclose its accounting policy to write off accrued interest receivables by reversing interest income or recognizing credit loss expense or a combination of both. The entity also shall disclose the amount of accrued interest receivables written off by reversing interest income by portfolio segment or major security type.
Credit Quality Information
326-20-50-4
An entity shall provide information that enables a financial statement user to do both of the following:
- aUnderstand how management monitors the credit quality of its financial assets
- bAssess the quantitative and qualitative risks arising from the credit quality of its financial assets.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, an entity shall provide information that enables a financial statement user to do both of the following:- aUnderstand how management monitors the credit quality of its financial assets
- bAssess the quantitative and qualitative risks arising from the credit quality of its financial assets.
326-20-50-5
To meet the objectives in paragraph 326-20-50-4, an entity shall provide quantitative and qualitative information by class of financing receivable and major security type about the credit quality of financial assets within the scope of this Subtopic (excluding off-balance-sheet credit exposures and repurchase agreements and securities lending agreements within the scope of Topic 860), including all of the following:
- aA description of the credit quality indicator(s)
- bThe amortized cost basis, by credit quality indicator
- cFor each credit quality indicator, the date or range of dates in which the information was last updated for that credit quality indicator.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1To meet the objectives in paragraph 326-20-50-4, an entity shall provide quantitative and qualitative information in interim and annual reporting periods by class of financing receivable and major security type about the credit quality of financial assets within the scope of this Subtopic (excluding off-balance-sheet credit exposures and repurchase agreements and securities lending agreements within the scope of Topic 860), including all of the following:- aA description of the credit quality indicator(s)
- bThe amortized cost basis, by credit quality indicator
- cFor each credit quality indicator, the date or range of dates in which the information was last updated for that credit quality indicator.
326-20-50-6
When disclosing credit quality indicators of financing receivables and net investment in leases (except for reinsurance recoverables and funded or unfunded amounts of line-of-credit arrangements, such as credit cards), a public business entity shall present the amortized cost basis within each credit quality indicator by year of origination (that is, vintage year). For purchased financing receivables and net investment in leases, an entity shall use the initial date of issuance to determine the year of origination, not the date of acquisition. For origination years before the fifth annual period, a public business entity may present the amortized cost basis of financing receivables and net investments in leases in the aggregate. For interim-period disclosures, the current year-to-date originations in the current reporting period are considered to be the current-period originations. A public business entity shall present the gross writeoffs recorded in the current period, on a current year-to-date basis, for financing receivables and net investments in leases by origination year. For origination years before the fifth annual period, a public business entity may present the gross writeoffs in the current period for financing receivables and net investments in leases in the aggregate. The requirement to present the amortized cost basis within each credit quality indicator by year of origination is not required for an entity that is not a public business entity.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1When disclosing credit quality indicators of financing receivables and net investment in leases (except for reinsurance recoverables and funded or unfunded amounts of line-of-credit arrangements, such as credit cards), a public business entity shall present the amortized cost basis within each credit quality indicator by year of origination (that is, vintage year) in interim and annual reporting periods. For purchased financing receivables and net investment in leases, an entity shall use the initial date of issuance to determine the year of origination, not the date of acquisition. For origination years before the fifth annual period, a public business entity may present the amortized cost basis of financing receivables and net investments in leases in the aggregate. For interim-period disclosures, the current year-to-date originations in the current reporting period are considered to be the current-period originations. A public business entity shall present the gross writeoffs recorded in the current period, on a current year-to-date basis, for financing receivables and net investments in leases by origination year. For origination years before the fifth annual period, a public business entity may present the gross writeoffs in the current period for financing receivables and net investments in leases in the aggregate. The requirement to present the amortized cost basis within each credit quality indicator by year of origination is not required for an entity that is not a public business entity.326-20-50-6A
For the purpose of the disclosure requirement in paragraph 326-20-50-6, a public business entity shall present the amortized cost basis of line-of-credit arrangements that are converted to term loans in a separate column (see Example 15 in paragraph 326-20-55-79). A public business entity shall disclose in each reporting period, by class of financing receivable, the amount of line-of-credit arrangements that are converted to term loans in each reporting period and the total of these financing receivables that were written off in the current reporting period in accordance with paragraph 326-20-50-6.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For the purpose of the disclosure requirement in paragraph 326-20-50-6, a public business entity shall present the amortized cost basis of line-of-credit arrangements that are converted to term loans in a separate column (see Example 15 in paragraph 326-20-55-79). A public business entity shall disclose in each interim and annual reporting period, by class of financing receivable, the amount of line-of-credit arrangements that are converted to term loans in each reporting period and the total of these financing receivables that were written off in the current reporting period in accordance with paragraph 326-20-50-6.326-20-50-7
Except as provided in paragraph 326-20-50-6A, a public business entity shall use the guidance in paragraphs when determining whether a modification, extension, or renewal of a financing receivable should be presented as a current-period origination. A public business entity shall use the guidance in paragraphs when determining whether a lease modification should be presented as a current-period origination.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1Except as provided in paragraph 326-20-50-6A, for interim and annual reporting periods, a public business entity shall use the guidance in paragraphs when determining whether a modification, extension, or renewal of a financing receivable should be presented as a current-period origination. A public business entity shall use the guidance in paragraphs when determining whether a lease modification should be presented as a current-period origination.326-20-50-8
If an entity discloses internal risk ratings, then the entity shall provide qualitative information on how those internal risk ratings relate to the likelihood of loss.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If an entity discloses internal risk ratings, then the entity shall provide qualitative information in interim and annual reporting periods on how those internal risk ratings relate to the likelihood of loss. 326-20-50-9
The requirements to disclose credit quality indicators in paragraphs do not apply to receivables measured at the lower of amortized cost basis or fair value, or trade receivables due in one year or less, except for credit card receivables, that result from revenue transactions within the scope of Topic 605 on revenue recognition or Topic 606 on revenue from contracts with customers.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1The requirements to disclose credit quality indicators in paragraphs for interim and annual reporting periods do not apply to receivables measured at the lower of amortized cost basis or fair value, or trade receivables due in one year or less, except for credit card receivables, that result from revenue transactions within the scope of Topic 605 on revenue recognition or Topic 606 on revenue from contracts with customers.Allowance for Credit Losses
326-20-50-10
An entity shall provide information that enables a financial statement user to do the following:
- aUnderstand management's method for developing its allowance for credit losses
- bUnderstand the information that management used in developing its current estimate of expected credit losses
- cUnderstand the circumstances that caused changes to the allowance for credit losses, thereby affecting the related credit loss expense (or reversal) reported for the period.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, an entity shall provide information that enables a financial statement user to do the following:- aUnderstand management's method for developing its allowance for credit losses
- bUnderstand the information that management used in developing its current estimate of expected credit losses
- cUnderstand the circumstances that caused changes to the allowance for credit losses, thereby affecting the related credit loss expense (or reversal) reported for the period.
326-20-50-11
To meet the objectives in paragraph 326-20-50-10, an entity shall disclose all of the following by portfolio segment and major security type:
- aA description of how expected loss estimates are developed
- bA description of the entity's accounting policies and methodology to estimate the allowance for credit losses, as well as a discussion of the factors that influenced management's current estimate of expected credit losses, including:
- 1Past events
- 2Current conditions
- 3Reasonable and supportable forecasts about the future.
- 1
- cA discussion of risk characteristics relevant to each portfolio segment
- dA discussion of the changes in the factors that influenced management's current estimate of expected credit losses and the reasons for those changes (for example, changes in portfolio composition, underwriting practices, and significant events or conditions that affect the current estimate but were not contemplated or relevant during a previous period)
- eIdentification of changes to the entity's accounting policies, changes to the methodology from the prior period, its rationale for those changes, and the quantitative effect of those changes
- fReasons for significant changes in the amount of writeoffs, if applicable
- gA discussion of the reversion method applied for periods beyond the reasonable and supportable forecast period
- hThe amount of any significant purchases of financial assets during each reporting period
- iThe amount of any significant sales of financial assets or reclassifications of loans held for sale during each reporting period.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1To meet the objectives in paragraph 326-20-50-10, an entity shall disclose all of the following by portfolio segment and major security type in interim and annual reporting periods: - aA description of how expected loss estimates are developed
- bA description of the entity's accounting policies and methodology to estimate the allowance for credit losses, as well as a discussion of the factors that influenced management's current estimate of expected credit losses, including:
- 1Past events
- 2Current conditions
- 3Reasonable and supportable forecasts about the future.
- 1
- cA discussion of risk characteristics relevant to each portfolio segment
- dA discussion of the changes in the factors that influenced management's current estimate of expected credit losses and the reasons for those changes (for example, changes in portfolio composition, underwriting practices, and significant events or conditions that affect the current estimate but were not contemplated or relevant during a previous period)
- eIdentification of changes to the entity's accounting policies, changes to the methodology from the prior period, its rationale for those changes, and the quantitative effect of those changes
- fReasons for significant changes in the amount of writeoffs, if applicable
- gA discussion of the reversion method applied for periods beyond the reasonable and supportable forecast period
- hThe amount of any significant purchases of financial assets during each reporting period
- iThe amount of any significant sales of financial assets or reclassifications of loans held for sale during each reporting period.
326-20-50-12
Paragraph 326-20-45-3 explains that a creditor that measures expected credit losses based on a discounted cash flow method is permitted to report the entire change in present value as credit loss expense (or reversal of credit loss expense) but also may report the change in present value attributable to the passage of time as interest income. Creditors that choose the latter alternative shall disclose the amount recorded to interest income that represents the change in present value attributable to the passage of time.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1Paragraph 326-20-45-3 explains that a creditor that measures expected credit losses based on a discounted cash flow method is permitted to report the entire change in present value as credit loss expense (or reversal of credit loss expense) but also may report the change in present value attributable to the passage of time as interest income. Creditors that choose the latter alternative shall disclose the amount recorded to interest income that represents the change in present value attributable to the passage of time in interim and annual reporting periods.326-20-50-12A
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6An entity shall disclose that it has elected the practical expedient described in paragraphs or, for an entity other than a public business entity, that it has elected both the practical expedient and the accounting policy election described in paragraphs . 326-20-50-12B
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6In annual reporting periods, an entity other than a public business entity that has elected the accounting policy described in paragraphs shall disclose the date through which it has considered subsequent collection activity.326-20-50-13
Furthermore, to enable a financial statement user to understand the activity in the allowance for credit losses for each period, an entity shall separately provide by portfolio segment and major security type the quantitative disclosures of the activity in the allowance for credit losses for financial assets within the scope of this Subtopic, including all of the following:
- aThe beginning balance in the allowance for credit losses
- bCurrent-period provision for expected credit losses
- cThe initial allowance for credit losses recognized on financial assets accounted for as purchased financial assets with credit deterioration (including beneficial interests that meet the criteria in paragraph 325-40-30-1A), if applicable
- dWriteoffs charged against the allowance
- eRecoveries collected
- fThe ending balance in the allowance for credit losses.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
220-40-65-1Furthermore, to enable a financial statement user to understand the activity in the allowance for credit losses for each period, an entity shall separately provide by portfolio segment and major security type the quantitative disclosures of the activity in the allowance for credit losses for financial assets within the scope of this Subtopic, including all of the following:- aThe beginning balance in the allowance for credit losses
- bCurrent-period provision for expected credit losses
- cThe initial allowance for credit losses recognized on financial assets accounted for as purchased financial assets with credit deterioration (including beneficial interests that meet the criteria in paragraph 325-40-30-1A), if applicable
- dWriteoffs charged against the allowance
- eRecoveries collected
- fThe ending balance in the allowance for credit losses.
See paragraphs for additional disclosure requirements.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1Furthermore, to enable a financial statement user to understand the activity in the allowance for credit losses for each period, an entity shall separately provide by portfolio segment and major security type the quantitative disclosures of the activity in the allowance for credit losses for financial assets within the scope of this Subtopic, including all of the following in interim and annual reporting periods: - aThe beginning balance in the allowance for credit losses
- bCurrent-period provision for expected credit losses
- cThe initial allowance for credit losses recognized on financial assets accounted for as purchased financial assets with credit deterioration (including beneficial interests that meet the criteria in paragraph 325-40-30-1A), if applicable
- dWriteoffs charged against the allowance
- eRecoveries collected
- fThe ending balance in the allowance for credit losses.
Past Due Status
326-20-50-14
To enable a financial statement user to understand the extent of financial assets that are past due, an entity shall provide an aging analysis of the amortized cost basis for financial assets that are past due as of the reporting date, disaggregated by class of financing receivable and major security type. An entity also shall disclose when it considers a financial asset to be past due.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1To enable a financial statement user to understand the extent of financial assets that are past due, an entity shall provide an aging analysis of the amortized cost basis for financial assets that are past due as of the reporting date, disaggregated by class of financing receivable and major security type. An entity also shall disclose when it considers a financial asset to be past due. The disclosures in this paragraph are required in interim and annual reporting periods.326-20-50-15
The requirements to disclose past-due status in paragraph 326-20-50-14 do not apply to receivables measured at the lower of amortized cost basis or fair value, or trade receivables due in one year or less, except for credit card receivables, that result from revenue transactions within the scope of Topic 605 on revenue recognition or Topic 606 on revenue from contracts with customers.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1The requirements to disclose past-due status in paragraph 326-20-50-14in interim and annual reporting periods do not apply to receivables measured at the lower of amortized cost basis or fair value, or trade receivables due in one year or less, except for credit card receivables, that result from revenue transactions within the scope of Topic 605 on revenue recognition or Topic 606 on revenue from contracts with customers.Nonaccrual Status
326-20-50-16
To enable a financial statement user to understand the credit risk and interest income recognized on financial assets on nonaccrual status, an entity shall disclose all of the following, disaggregated by class of financing receivable and major security type:
- aThe amortized cost basis of financial assets on nonaccrual status as of the beginning of the reporting period and the end of the reporting period
- bThe amount of interest income recognized during the period on nonaccrual financial assets
- cThe amortized cost basis of financial assets that are 90 days or more past due, but are not on nonaccrual status as of the reporting date
- dThe amortized cost basis of financial assets on nonaccrual status for which there is no related allowance for credit losses as of the reporting date.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1To enable a financial statement user to understand the credit risk and interest income recognized on financial assets on nonaccrual status, an entity shall disclose all of the following, disaggregated by class of financing receivable and major security type, in interim and annual reporting periods: - aThe amortized cost basis of financial assets on nonaccrual status as of the beginning of the reporting period and the end of the reporting period
- bThe amount of interest income recognized during the period on nonaccrual financial assets
- cThe amortized cost basis of financial assets that are 90 days or more past due, but are not on nonaccrual status as of the reporting date
- dThe amortized cost basis of financial assets on nonaccrual status for which there is no related allowance for credit losses as of the reporting date.
326-20-50-17
An entity's summary of significant accounting policies for financial assets within the scope of this Subtopic shall include all of the following:
- aNonaccrual policies, including the policies for discontinuing accrual of interest, recording payments received on nonaccrual assets (including the cost recovery method, cash basis method, or some combination of those methods), and resuming accrual of interest, if applicable
- bThe policy for determining past-due or delinquency status
- cThe policy for recognizing writeoffs within the allowance for credit losses.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, an entity's summary of significant accounting policies for financial assets within the scope of this Subtopic shall include all of the following:- aNonaccrual policies, including the policies for discontinuing accrual of interest, recording payments received on nonaccrual assets (including the cost recovery method, cash basis method, or some combination of those methods), and resuming accrual of interest, if applicable
- bThe policy for determining past-due or delinquency status
- cThe policy for recognizing writeoffs within the allowance for credit losses.
326-20-50-18
The requirements to disclose nonaccrual status in paragraphs do not apply to receivables measured at lower of amortized cost basis or fair value, or trade receivables due in one year or less, except for credit card receivables, that result from revenue transactions within the scope of Topic 605 on revenue recognition or Topic 606 on revenue from contracts with customers.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1The requirements to disclose nonaccrual status in paragraphs in interim and annual reporting periods do not apply to receivables measured at lower of amortized cost basis or fair value, or trade receivables due in one year or less, except for credit card receivables, that result from revenue transactions within the scope of Topic 605 on revenue recognition or Topic 606 on revenue from contracts with customers.Purchased Financial Assets with Credit Deterioration
326-20-50-19
To the extent an entity acquired purchased financial assets with credit deterioration during the current reporting period, an entity shall provide a reconciliation of the difference between the purchase price of the financial assets and the par value of the assets, including:
- aThe purchase price
- bThe allowance for credit losses at the acquisition date based on the acquirer's assessment
- cThe discount (or premium) attributable to other factors
- dThe par value.
Collateral-Dependent Financial Assets
326-20-50-20
For a financial asset for which the repayment (on the basis of an entity's assessment as of the reporting date) is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty, an entity shall describe the type of collateral by class of financing receivable and major security type. The entity also shall qualitatively describe, by class of financing receivable and major security type, the extent to which collateral secures its collateral-dependent financial assets, and significant changes in the extent to which collateral secures its collateral-dependent financial assets, whether because of a general deterioration or some other reason.
Off-Balance-Sheet Credit Exposures
326-20-50-21
In addition to disclosures required by other Topics, an entity shall disclose a description of the accounting policies and methodology the entity used to estimate its liability for off-balance-sheet credit exposures and related charges for those credit exposures. Such a description shall identify the factors that influenced management's judgment (for example, historical losses, existing economic conditions, and reasonable and supportable forecasts) and a discussion of risk elements relevant to particular categories of financial instruments.
326-20-50-22
Off-balance-sheet credit exposures refers to credit exposures on off-balance-sheet loan commitments, standby letters of credit, financial guarantees not accounted for as insurance, and other similar instruments, except for instruments within the scope of Topic 815.
326-20-55Implementation Guidance and Illustrations
Source downloaded: .Record version 89d488399911. Effective date must be checked in the source.
Implementation Guidance
326-20-55-1
This Section provides implementation guidance for management's estimate of expected credit losses on financial asset(s). This Section is organized as follows:
- aInformation considered when estimating expected credit losses
- bDeveloping an estimate of expected credit losses
- cNet investment in leases
- dEffect of a fair value hedge on the discount rate when using a discounted cash flow model.
326-20-55-2
In determining its estimate of expected credit losses, an entity should evaluate information related to the borrower's creditworthiness, changes in its lending strategies and underwriting practices, and the current and forecasted direction of the economic and business environment. This Subtopic does not specify a particular methodology to be applied by an entity for determining historical credit loss experience. That methodology may vary depending on the size of the entity, the range of the entity's activities, the nature of the entity's financial assets, and other factors.
326-20-55-3
Historical loss information generally provides a basis for an entity's assessment of expected credit losses. An entity may use historical periods that represent management's expectations for future credit losses. An entity also may elect to use other historical loss periods, adjusted for current conditions, and other reasonable and supportable forecasts. When determining historical loss information in estimating expected credit losses, the information about historical credit loss data, after adjustments for current conditions and reasonable and supportable forecasts, should be applied to pools that are defined in a manner that is consistent with the pools for which the historical credit loss experience was observed.
326-20-55-4
Because historical experience may not fully reflect an entity's expectations about the future, management should adjust historical loss information, as necessary, to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information. In making this determination, management should consider characteristics of the financial assets that are relevant in the circumstances. To adjust historical credit loss information for current conditions and reasonable and supportable forecasts, an entity should consider significant factors that are relevant to determining the expected collectibility. Examples of factors an entity may consider include any of the following, depending on the nature of the asset (not all of these may be relevant to every situation, and other factors not on the list may be relevant):
- aThe borrower's financial condition, credit rating, credit score, asset quality, or business prospects
- bThe borrower's ability to make scheduled interest or principal payments
- cThe remaining payment terms of the financial asset(s)
- dThe remaining time to maturity and the timing and extent of prepayments on the financial asset(s)
- eThe nature and volume of the entity's financial asset(s)
- fThe volume and severity of past due financial asset(s) and the volume and severity of adversely classified or rated financial asset(s)
- gThe value of underlying collateral on financial assets in which the collateral-dependent practical expedient has not been utilized
- hThe entity's lending policies and procedures, including changes in lending strategies, underwriting standards, collection, writeoff, and recovery practices, as well as knowledge of the borrower's operations or the borrower's standing in the community
- iThe quality of the entity's credit review system
- jThe experience, ability, and depth of the entity's management, lending staff, and other relevant staff
- kThe environmental factors of a borrower and the areas in which the entity's credit is concentrated, such as:
- 1Regulatory, legal, or technological environment to which the entity has exposure
- 2Changes and expected changes in the general market condition of either the geographical area or the industry to which the entity has exposure
- 3Changes and expected changes in international, national, regional, and local economic and business conditions and developments in which the entity operates, including the condition and expected condition of various market segments.
- 1
326-20-55-5
In evaluating financial assets on a collective (pool) basis, an entity should aggregate financial assets on the basis of similar risk characteristics, which may include any one or a combination of the following (the following list is not intended to be all inclusive):
- aInternal or external (third-party) credit score or credit ratings
- bRisk ratings or classification
- cFinancial asset type
- dCollateral type
- eSize
- f
- gTerm
- hGeographical location
- iIndustry of the borrower
- jVintage
- kHistorical or expected credit loss patterns
- lReasonable and supportable forecast periods.
326-20-55-6
Estimating expected credit losses is highly judgmental and generally will require an entity to make specific judgments. Those judgments may include any of the following:
- aThe definition of default for default-based statistics
- bThe approach to measuring the historical loss amount for loss-rate statistics, including whether the amount is simply based on the amortized cost amount written off and whether there should be adjustments to historical credit losses (if any) to reflect the entity's policies for recognizing accrued interest
- cThe approach to determine the appropriate historical period for estimating expected credit loss statistics
- dThe approach to adjusting historical credit loss information to reflect current conditions and reasonable and supportable forecasts that are different from conditions existing in the historical period
- eThe methods of utilizing historical experience
- fThe method of adjusting loss statistics for recoveries
- gHow expected prepayments affect the estimate of expected credit losses
- hHow the entity plans to revert to historical credit loss information for periods beyond which the entity is able to make or obtain reasonable and supportable forecasts of expected credit losses
- iThe assessment of whether a financial asset exhibits risk characteristics similar to other financial assets.
326-20-55-7
Because of the subjective nature of the estimate, this Subtopic does not require specific approaches when developing the estimate of expected credit losses. Rather, an entity should use judgment to develop estimation techniques that are applied consistently over time and should faithfully estimate the collectibility of the financial assets by applying the principles in this Subtopic. An entity should utilize estimation techniques that are practical and relevant to the circumstance. The method(s) used to estimate expected credit losses may vary on the basis of the type of financial asset, the entity's ability to predict the timing of cash flows, and the information available to the entity.
326-20-55-8
This Subtopic requires that an entity recognize an allowance for credit losses on net investment in leases recognized by a lessor in accordance with Topic 842 on leases. An entity should include the unguaranteed residual asset with the lease receivable, net of any deferred selling profit, if applicable (that is, the net investment in the lease). When measuring expected credit losses on net investment in leases, the lease term should be used as the contractual term. When measuring expected credit losses on net investment in leases using a discounted cash flow method, the discount rate used in measuring the lease receivable under Topic 842 should be used in place of the effective interest rate.
326-20-55-9
Section 815-25-35 implicitly affects the measurement of credit losses under this Topic by requiring the present value of expected future cash flows to be discounted by the new effective interest rate based on the adjusted amortized cost basis in a hedged loan. When the amortized cost basis of a loan has been adjusted under fair value hedge accounting, the effective interest rate is the discount rate that equates the present value of the loan's future cash flows with that adjusted amortized cost basis. The adjustment under fair value hedge accounting of the loan's carrying amount for changes in fair value attributable to the hedged risk under Section 815-25-35 shall be considered to be an adjustment of the loan's amortized cost basis. Paragraph 815-25-35-11 explains that the loan's original effective interest rate becomes irrelevant once the recorded amount of the loan is adjusted for any changes in its fair value. Paragraph 815-25-35-11 also explains that an entity should not adjust the amortized cost basis or the discount rate of the individual assets or individual beneficial interest included in the closed portfolio for a basis adjustment that is maintained on the closed portfolio basis in accordance with paragraph 815-25-35-1(c).
326-20-55-10
This implementation guidance addresses the meaning of the term portfolio segment. All of the following are examples of portfolio segments:
- aType of financing receivable
- bIndustry sector of the borrower
- cRisk rating.
326-20-55-11
This implementation guidance addresses application of the term class of financing receivable. An entity should base its principal determination of class of financing receivable by disaggregating to the level that the entity uses when assessing and monitoring the risk and performance of the portfolio for various types of financing receivables. In its assessment, the entity should consider the risk characteristics of the financing receivables.
326-20-55-12
In determining the appropriate level of its internal reporting to use as a basis for disclosure, an entity should consider the level of detail needed by a user to understand the risks inherent in the entity's financing receivables. An entity could further disaggregate its financing receivables portfolio by considering numerous factors. Examples of factors that the entity should consider include any of the following:
- aCategorization of borrowers, such as any of the following:
- 1Commercial loan borrowers
- 2Consumer loan borrowers
- 3Related party borrowers.
- 1
- bType of financing receivable, such as any of the following:
- 1Mortgage loans
- 2Credit card loans
- 3Interest-only loans
- 4Finance leases.
- 1
- cIndustry sector, such as either of the following:
- 1Real estate
- 2Mining.
- 1
- dType of collateral, such as any of the following:
- 1Residential property
- 2Commercial property
- 3Government-guaranteed collateral
- 4Uncollateralized (unsecured) financing receivables.
- 1
- eGeographic distribution, including both of the following:
- 1Domestic
- 2International.
- 1
326-20-55-13
An entity also may consider factors related to concentrations of credit risk as discussed in Section 825-10-55.
326-20-55-14
Classes of financing receivables generally are a disaggregation of a portfolio segment. For determining the appropriate classes of financing receivables that are related to a portfolio segment, the portfolio segment is the starting point with further disaggregation in accordance with the guidance in paragraphs . The determination of class for financing receivables that are not related to a portfolio segment (because there is no associated allowance) also should be based on the guidance in those paragraphs.
326-20-55-15
This implementation guidance addresses application of the term credit quality indicator. Examples of credit quality indicators include all of the following:
- aConsumer credit risk scores
- bCredit-rating-agency ratings
- cAn entity's internal credit risk grades
- dDebt-to-value ratios
- eCollateral
- fCollection experience
- gOther internal metrics.
326-20-55-16
An entity should use judgment in determining the appropriate credit quality indicator for each class of financing receivable and major security type. As of the balance sheet date, the entity should use the most current information it has obtained for each credit quality indicator.
Illustrations
326-20-55-17
The following Examples illustrate certain initial and subsequent measurement guidance in this Subtopic to account for expected credit losses on financial assets:
- aExample 1: Estimating expected credit losses using a loss-rate approach (collective evaluation)
- bExample 2: Estimating expected credit losses using a loss-rate approach (individual evaluation)
- cExample 3: Estimating expected credit losses on a vintage-year basis
- dExample 4: Estimating expected credit losses using both a collective method and an individual asset method
- eExample 5: Estimating expected credit losses for trade receivables using an aging schedule
- fExample 6: Estimating expected credit losses—practical expedient for collateral-dependent financial assets
- gExample 7: Estimating expected credit losses—practical expedient for financial assets with collateral maintenance provisions
- hExample 8: Estimating expected credit losses when potential default is greater than zero, but expected nonpayment is zero
- iExample 9: Recognizing writeoffs and recoveries
- jExample 10: Applying expected credit losses to unconditionally cancellable loan commitments
- kExample 11: Identifying purchased financial assets with credit deterioration
- lExample 12: Recognizing purchased financial assets with credit deterioration
- mExample 13: Using a loss-rate approach for determining expected credit losses and the discount rate on a purchased financial asset with credit deterioration
- nExample 14: Using a discounted cash flow approach for determining expected credit losses and the discount rate on a purchased financial asset with credit deterioration
- oExample 15: Disclosing credit quality indicators of financing receivables by amortized cost basis
- pExample 16: Disclosing past-due status
- qExample 17: Identifying similar risk characteristics in reinsurance recoverables
- rExample 18: Determining the negative allowance for purchased financial assets with credit deterioration with no change in credit conditions
- sExample 19: Determining the negative allowance for purchased financial assets with credit deterioration after a change in credit conditions.
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6The following Examples illustrate certain initial and subsequent measurement guidance in this Subtopic to account for expected credit losses on financial assets:- aExample 1: Estimating expected credit losses using a loss-rate approach (collective evaluation)
- bExample 2: Estimating expected credit losses using a loss-rate approach (individual evaluation)
- cExample 3: Estimating expected credit losses on a vintage-year basis
- dExample 4: Estimating expected credit losses using both a collective method and an individual asset method
- eExample 5: Estimating expected credit losses for trade receivables using an aging schedule
- eeExample 5A: Practical expedient and accounting policy election for estimating expected credit losses on current accounts receivable and current contract assets
- fExample 6: Estimating expected credit losses—practical expedient for collateral-dependent financial assets
- gExample 7: Estimating expected credit losses—practical expedient for financial assets with collateral maintenance provisions
- hExample 8: Estimating expected credit losses when potential default is greater than zero, but expected nonpayment is zero
- iExample 9: Recognizing writeoffs and recoveries
- jExample 10: Applying expected credit losses to unconditionally cancellable loan commitments
- kExample 11: Identifying purchased financial assets with credit deterioration
- lExample 12: Recognizing purchased financial assets with credit deterioration
- mExample 13: Using a loss-rate approach for determining expected credit losses and the discount rate on a purchased financial asset with credit deterioration
- nExample 14: Using a discounted cash flow approach for determining expected credit losses and the discount rate on a purchased financial asset with credit deterioration
- oExample 15: Disclosing credit quality indicators of financing receivables by amortized cost basis
- pExample 16: Disclosing past-due status
- qExample 17: Identifying similar risk characteristics in reinsurance recoverables
- rExample 18: Determining the negative allowance for purchased financial assets with credit deterioration with no change in credit conditions
- sExample 19: Determining the negative allowance for purchased financial assets with credit deterioration after a change in credit conditions.
326-20-55-18
This Example illustrates one way an entity may estimate expected credit losses on a portfolio of loans with similar risk characteristics using a loss-rate approach.
326-20-55-19
Community Bank A provides 10-year amortizing loans to customers. Community Bank A manages those loans on a collective basis based on similar risk characteristics. The loans within the portfolio were originated over the last 10 years, and the portfolio has an amortized cost basis of $3 million.
326-20-55-20
After comparing historical information for similar financial assets with the current and forecasted direction of the economic environment, Community Bank A believes that its most recent 10-year period is a reasonable period on which to base its expected credit-loss-rate calculation after considering the underwriting standards and contractual terms for loans that existed over the historical period in comparison with the current portfolio. Community Bank A's historical lifetime credit loss rate (that is, a rate based on the sum of all credit losses for a similar pool) for the most recent 10-year period is 1.5 percent. The historical credit loss rate already factors in prepayment history, which it expects to remain unchanged. Community Bank A considered whether any adjustments to historical loss information in accordance with paragraph 326-20-30-8 were needed, before considering adjustments for current conditions and reasonable and supportable forecasts, but determined none were necessary.
326-20-55-21
In accordance with paragraph 326-20-55-4, Community Bank A considered significant factors that could affect the expected collectibility of the amortized cost basis of the portfolio and determined that the primary factors are real estate values and unemployment rates. As part of this analysis, Community Bank A observed that real estate values in the community have decreased and the unemployment rate in the community has increased as of the current reporting period date. Based on current conditions and reasonable and supportable forecasts, Community Bank A expects that there will be an additional decrease in real estate values over the next one to two years, and unemployment rates are expected to increase further over the next one to two years. To adjust the historical loss rate to reflect the effects of those differences in current conditions and forecasted changes, Community Bank A estimates a 10-basis-point increase in credit losses incremental to the 1.5 percent historical lifetime loss rate due to the expected decrease in real estate values and a 5-basis-point increase in credit losses incremental to the historical lifetime loss rate due to expected deterioration in unemployment rates. Management estimates the incremental 15-basis-point increase based on its knowledge of historical loss information during past years in which there were similar trends in real estate values and unemployment rates. Management is unable to support its estimate of expectations for real estate values and unemployment rates beyond the reasonable and supportable forecast period. Under this loss-rate method, the incremental credit losses for the current conditions and reasonable and supportable forecast (the 15 basis points) is added to the 1.5 percent rate that serves as the basis for the expected credit loss rate. No further reversion adjustments are needed because Community Bank A has applied a 1.65 percent loss rate where it has immediately reverted into historical losses reflective of the contractual term in accordance with paragraphs . This approach reflects an immediate reversion technique for the loss-rate method.
326-20-55-22
The expected loss rate to apply to the amortized cost basis of the loan portfolio would be 1.65 percent, the sum of the historical loss rate of 1.5 percent and the adjustment for the current conditions and reasonable and supportable forecast of 15 basis points. The allowance for expected credit losses at the reporting date would be $49,500.
326-20-55-23
This Example illustrates one way an entity may estimate expected credit losses on an individual loan using a loss-rate approach when no loans with similar risk characteristics exist.
326-20-55-24
Community Bank B principally provides residential real estate loans to borrowers in the community. In the current year, Community Bank B expanded a program to originate commercial loans. Community Bank B has a few commercial loans outstanding at period end. In evaluating the loans, Community Bank B determines that one of the commercial loans does not share similar risk characteristics with other loans outstanding; therefore, Community Bank B believes that it is inappropriate to pool this commercial loan for purposes of determining its allowance for credit losses. This commercial loan has an amortized cost of $1 million. Historical loss information for commercial loans in the community with similar risk characteristics shows a 0.50 percent loss rate over the contractual term.
326-20-55-25
Community Bank B considers relevant current conditions and reasonable and supportable forecasts that relate to its lending practices and environment and the specific borrower. Community Bank B determines that the significant factors affecting the performance of this loan are borrower-specific operating results and local unemployment rates. Community Bank B considers other qualitative factors including national macroeconomic conditions but determines that they are not significant inputs to the loss estimates for this loan.
326-20-55-26
Community Bank B is able to reasonably forecast local unemployment rates and borrower-specific financial results for one year only. Community Bank B's reasonable and supportable forecasts of those factors indicate that local unemployment rates are expected to remain stable (based on the main employer in the community continuing to operate normally) and that there will be a deterioration in the borrower's financial results (based on an evaluation of rent rolls). Management determines that no adjustment is necessary for local unemployment rates because they are expected to be consistent with the conditions in the 0.50 percent loss-rate estimate. However, the current and forecasted conditions related to borrower-specific financial results are different from the conditions in the 0.50 percent loss-rate estimate, based on borrower-specific information. Community Bank B determines that an upward adjustment of 10 basis points that is incremental to the historical lifetime loss information is appropriate based on those factors. Management estimates the 10-basis-point adjustment based on its knowledge of commercial loan loss history in the community when borrowers exhibit similar declines in financial performance. Management is unable to support its estimate of expectations for local unemployment and borrower-specific financial results beyond the reasonable and supportable forecast period. Under this loss-rate method, Community Bank B applies the same immediate reversion technique as in Example 1, where Community Bank B has immediately reverted into historical losses reflective of the contractual term in accordance with paragraphs .
326-20-55-27
The historical loss rate to apply to the amortized cost basis of the individual loan would be adjusted an incremental 10 basis points to 0.60 percent. The allowance for expected credit losses for the reporting period date would be $6,000.
326-20-55-28
The following Example illustrates one way an entity might estimate the expected credit losses on a vintage-year basis.
326-20-55-29
Bank C is a lending institution that provides financing to consumers purchasing new or used farm equipment throughout the local area. Bank C originates approximately the same amount of loans each year. The four-year amortizing loans it originates are secured by collateral that provides a relatively consistent range of loan-to-collateral-value ratios at origination. If a borrower becomes 90 days past due, Bank C repossesses the underlying farm equipment collateral for sale at auction.
326-20-55-30
Bank C tracks those loans on the basis of the calendar year of origination. The following pattern of credit loss information has been developed (represented by the nonshaded cells in the accompanying table) based on the amount of amortized cost basis in each vintage that was written off as a result of credit losses.
Year of Origination Loss Experience in Years Following Origination Year 1 Year 2 Year 3 Year 4 Total Expected 20X1 $50 $120 $140 $30 $340 - 20X2 $40 $120 $140 $40 $340 - 20X3 $40 $110 $150 $30 $330 - 20X4 $60 $110 $150 $40 $360 - 20X5 $50 $130 $170 $50 $400 - 20X6 $70 $150 $180 $60 $460 $60 20X7 $80 $140 $190 $70 $480 $260 20X8 $70 $150 $200 $80 $500 $430 20X9 $70 $160 $200 $80 $510 $510
326-20-55-31
In estimating expected credit losses on the remaining outstanding loans at December 31, 20X9, Bank C considers its historical loss information. It notes that the majority of losses historically emerge in Year 2 and Year 3 of the loans. It notes that historical loss experience has worsened since 20X3 and that loss experience for loans originated in 20X6 has already equaled the loss experience for loans originated in 20X5 despite the fact that the 20X6 loans will be outstanding for one additional year as compared with those originated in 20X5. In considering current conditions and reasonable and supportable forecasts, Bank C notes that there is an oversupply of used farm equipment in the resale market that is expected to continue, thereby putting downward pressure on the resulting collateral value of equipment. It also notes that severe weather in recent years has increased the cost of crop insurance and that this trend is expected to continue. On the basis of those factors, Bank C determines adjustments to historical loss information for current conditions and reasonable and supportable forecasts. The remaining expected losses (represented by the shaded cells in the table in paragraph 326-20-55-30 in each respective year) reflect those adjustments, and Bank C arrives at expected losses of $60, $260, $430, and $510 for loans originated in 20X6, 20X7, 20X8, and 20X9, respectively. Therefore, the allowance for credit losses for the reporting period date would be $1,260.
326-20-55-32
This Example illustrates a situation in which loans with credit deterioration are evaluated individually because they no longer exhibit risk characteristics similar to other loans. There is no requirement to evaluate financial assets individually when a certain level of credit deterioration has occurred. However, the assessment of whether financial assets exhibit similar risk characteristics should be based on the relevant and appropriate facts and circumstances.
326-20-55-33
An entity may estimate expected credit losses for some financial assets on a collective (pool) basis and may estimate expected credit losses for other assets on an individual basis when similar risk characteristics do not exist. As a result, the method used to estimate expected credit losses for a financial asset may change over time. For example, a pool of homogeneous loans may initially use a loss-rate method, but certain individual loans no longer may have similar risk characteristics because of credit deterioration. When a financial asset no longer shares similar risk characteristics with the original pool of financial assets, an entity should evaluate that financial asset to determine whether it shares risk characteristics similar to other pools of loans. Expected credit losses of that financial asset should be measured individually if there are no similar risk characteristics with other loans. A discounted cash flow approach is one method to estimate expected credit losses of individual loans, but it is not a required method. Paragraphs illustrate those concepts.
326-20-55-34
One loan program from Bank D provides unsecured commercial loans of up to $75,000 to small businesses and entrepreneurs. Given the relative homogeneity of the borrowers (in terms of credit risk) and loans (in terms of type, amount, and underwriting standards) in the program, Bank D manages this loan program on a collective basis. However, Bank D concludes that the loss estimates for loans with credit deterioration is based on borrower-specific facts and circumstances because the repayment of those loans depends on facts and circumstances unique to each borrower. Therefore, Bank D estimates expected credit losses on an individual basis for loans that no longer exhibit similar risk characteristics because of credit deterioration. A loss-rate method for estimating expected credit losses on a pooled basis is applied for the loans in the portfolio segment that continue to exhibit similar risk characteristics.
326-20-55-35
To estimate expected credit losses for individual loans without similar risk characteristics, Bank D uses a discounted cash flow method for each loan. Frequently, Bank D has insight into the likelihood of a credit loss as a result of information provided by the borrower and recent discussions with the borrower given the elevated credit risk for these loans. Under a discounted cash flow method, the allowance for credit losses is estimated as the difference between the amortized cost basis and the present value of cash flows expected to be collected.
326-20-55-36
To estimate expected credit losses for the remainder of the loans that continue to exhibit similar risk characteristics, Bank D considers historical loss information (updated for current conditions and reasonable and supportable forecasts that affect the expected collectibility of the amortized cost basis of the pool) using a loss-rate approach.
326-20-55-37
This Example illustrates one way an entity may estimate expected credit losses for trade receivables using an aging schedule.
326-20-55-38
Entity E manufactures and sells products to a broad range of customers, primarily retail stores. Customers typically are provided with payment terms of 90 days with a 2 percent discount if payments are received within 60 days. Entity E has tracked historical loss information for its trade receivables and compiled the following historical credit loss percentages:
- a0.3 percent for receivables that are current
- b8 percent for receivables that are 1-30 days past due
- c26 percent for receivables that are 31-60 days past due
- d58 percent for receivables that are 61-90 days past due
- e82 percent for receivables that are more than 90 days past due.
326-20-55-39
Entity E believes that this historical loss information is a reasonable base on which to determine expected credit losses for trade receivables held at the reporting date because the composition of the trade receivables at the reporting date is consistent with that used in developing the historical credit-loss percentages (that is, the similar risk characteristics of its customers and its lending practices have not changed significantly over time). However, Entity E has determined that the current and reasonable and supportable forecasted economic conditions have improved as compared with the economic conditions included in the historical information. Specifically, Entity E has observed that unemployment has decreased as of the current reporting date, and Entity E expects there will be an additional decrease in unemployment over the next year. To adjust the historical loss rates to reflect the effects of those differences in current conditions and forecasted changes, Entity E estimates the loss rate to decrease by approximately 10 percent in each age bucket. Entity E developed this estimate based on its knowledge of past experience for which there were similar improvements in the economy.
326-20-55-40
At the reporting date, Entity E develops the following aging schedule to estimate expected credit losses.
Past-Due Status Amortized Cost Basis Credit Loss Rate Expected Credit Loss Estimate Current " $5,984,698 " 0.27% " $16,159 " 1-30 days past due " 8,272 " 7.2% 596 31-60 days past due " 2,882 " 23.4% 674 61-90 days past due 842 52.2% 440 More than 90 days past due " 1,100 " 73.8% 812 " $5,997,794 " " $18,681 "
326-20-55-40A
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6This Example illustrates how to apply the practical expedient and accounting policy election for estimating credit losses on current accounts receivable and current contract assets arising from transactions accounted for under Topic 606 on revenue from contracts with customers in accordance with paragraphs . The accounting policy election to consider subsequent collection activity described in paragraphs is applicable only to entities other than public business entities. Assume that Entity R is not a public business entity and does not have any contract assets. 326-20-55-40B
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R manufactures and sells products to a broad range of customers that are primarily retail stores. Entity R provides customers with payment terms of 30 days. Entity R recognizes revenue and corresponding accounts receivable related to the sale of products in accordance with Topic 606 (referred to as "receivable(s)" in the remainder of this Example). Entity R monitors payment activity and, for purposes of estimating expected credit losses, classifies outstanding receivables on the basis of the number of days past due (delinquency) when a receivable has not been collected in accordance with the payment terms. Delinquent receivables are assessed to determine whether they continue to share similar risk characteristics with other receivables in the portfolio. Entity R uses its historical collection information to calculate a credit loss rate for each portfolio segment of receivables.326-20-55-40C
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6On December 31, 20X0, the outstanding balance and historical credit loss rates for each portfolio segment of Entity R’s receivables are as follows.
Past-Due Status Outstanding Receivables Balance Credit Loss Rate Current " $5,984,698 " 0.3% 1-30 days past due " 8,272 " 8% 31-60 days past due " 2,882 " 26% 61-90 days past due 841 58% 91-120 days past due 554 82% More than 120 days past due 342 99% Total " $5,997,589 "
326-20-55-40D
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R has determined that its historical loss rates are a reasonable basis on which to estimate expected credit losses for outstanding receivables because of the similar risk characteristics of its customers (paragraph 326-20-30-8) and because its payment terms have not changed significantly over time. Management determined that current conditions as of the balance sheet date are consistent with conditions that existed during the period that historical data were collected.326-20-55-40E
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R elects the practical expedient in paragraphs to estimate expected credit losses related to its receivables classified as current in accordance with paragraph 210-10-45-3. The practical expedient allows Entity R to assume that current conditions as of the balance sheet date do not change for the remaining life of the assets. Entity R has determined that the current conditions as of the balance sheet date are consistent with those conditions that existed during the period that the historical data were collected. Accordingly, Entity R determines that no adjustment to its historical loss information is necessary. Entity R develops its estimate of expected credit losses as follows.
Past-Due Status Outstanding Receivables Balance Credit Loss Rate Expected Credit Loss Estimate Current " $5,984,698 " 0.3% " $17,954 " 1-30 days past due " 8,272 " 8% 662 31-60 days past due " 2,882 " 26% 749 61-90 days past due 841 58% 488 91-120 days past due 554 82% 454 More than 120 days past due 342 99% 339 Total " $5,997,589 " " $20,646 "
326-20-55-40F
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R discloses that it has elected the practical expedient to assume that current conditions as of the balance sheet date do not change for the remaining life of the assets in accordance with the requirement in paragraph 326-20-50-12A.326-20-55-40G
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Assume the same facts and circumstances as Case 1, except that Entity R has an outstanding receivable balance of $2,000 aged 30-days past due at the balance sheet date from Customer S, who filed for bankruptcy on December 15, 20X0. The entirety of the balance is not expected to be collected. As a result, Entity R determines that the receivable due from Customer S no longer shares similar risk characteristics with receivables due from other customers. Therefore, Entity R measures expected credit losses from Customer S individually.326-20-55-40H
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R has not identified other information that is expected to affect the collectibility of the remaining portfolio of receivables and estimates expected credit losses on the remaining portfolio collectively using the practical expedient. Entity R develops its estimate of expected credit losses as follows.
Past-Due Status Outstanding Receivables Balance Credit Loss Rate Expected Credit Loss Estimate Current " $5,984,698 " 0.3% " $17,954 " 1-30 days past due " 6,272 " (a) 8% 502 31-60 days past due " 2,882 " 26% 749 61-90 days past due 841 58% 488 91-120 days past due 554 82% 454 More than 120 days past due 342 99% 339 Collectively assessed subtotal " 5,995,589 " " 20,486 " Individually assessed subtotal (Customer S) " 2,000 " " 2,000 " Total " $5,997,589 " " $22,486 " "(a) Outstanding receivable balance reduced by $2,000 to reflect individual assessment of Customer S."
326-20-55-40I
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R discloses that it has elected the practical expedient to assume that current conditions as of the balance sheet date do not change for the remaining life of the assets in accordance with the requirement in paragraph 326-20-50-12A.326-20-55-40J
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Assume the same facts and circumstances as Case 1, except that Entity R also elects to consider collection activity after the balance sheet date when estimating expected credit losses (that is, it elects to apply the accounting policy election in paragraphs ). Entity R considers collection activity through March 1, 20X1, which is the date that the financial statements are available to be issued.326-20-55-40K
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R has not identified other information that is expected to affect the collectibility of its receivables other than the collection activity detailed in paragraph 326-20-55-40L. Entity R has not updated its historical credit loss rates for collection activity after the balance sheet date. 326-20-55-40L
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R’s December 31, 20X0 financial statements are available to be issued on March 1, 20X1. Entity R has observed the following subsequent collection activity for all outstanding receivables as of the balance sheet date (December 31, 20X0). 
Balance Sheet Date Date The Entity Has Selected To Consider Subsequent Collection Activity 12/31/20X0 3/1/20X1 Past-Due Status Outstanding Receivables Balance Collections between Balance Sheet Date and 3/1/20X1 Remaining Balance Uncollected Past-Due Status Credit Loss Rate " (a)" Expected Credit Loss Estimate Current " $5,984,698 " " $(5,925,118)" " $59,580 " 31-60 days past due 26% " $15,491 " 1-30 days past due " 8,272 " " (3,676)" " 4,596 " 61-90 days past due 58% " 2,666 " 31-60 days past due " 2,882 " (441) " 2,441 " 91-120 days past due 82% " 2,002 " 61-90 days past due 841 (300) 541 More than 120 days past due 99% 536 91-120 days past due 554 (149) 405 More than 120 days past due 99% 401 More than 120 days past due 342 (43) 299 More than 120 days past due 99% 296 Total " $5,997,589 " " $(5,929,727)" " $67,862 " " $21,392 " (a) Credit loss rate based on the collection status as of the date the entity has selected to consider subsequent collection activity.
326-20-55-40M
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R discloses that it has elected the practical expedient to assume that current conditions as of the balance sheet date do not change for the remaining life of the assets and the accounting policy election to consider subsequent collection activity, along with the date through which collection activity was considered (in this Case, March 1, 20X1), in accordance with the requirements in paragraphs . 326-20-55-40N
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Assume the same facts and circumstances as Case 1, except that Entity R also elects to consider collection activity after the balance sheet date when estimating expected credit losses (that is, it elects to apply the accounting policy election in paragraphs ). Entity R considers subsequent collection activity through May 31, 20X1.326-20-55-40O
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R has not identified other information that is expected to affect the collectibility of its receivables other than the collection activity detailed in paragraph 326-20-55-40P. Entity R has not updated its historical credit loss rates for collection activity after the balance sheet date.326-20-55-40P
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R’s December 31, 20X0 financial statements are available to be issued on June 15, 20X1. As of May 31, 20X1, Entity R has observed the following collection activity for outstanding receivables as of the balance sheet date (December 31, 20X0). 
Balance Sheet Date Date The Entity Has Selected To Consider Subsequent Collection Activity 12/31/20X0 5/31/20X1 Past-Due Status Outstanding Receivables Balance Collections between Balance Sheet Date and 5/31/20X1 Remaining Balance Uncollected Past-Due Status Credit Loss Rate " (a) " Expected Credit Loss Estimate Current " $5,984,698 " " $(5,968,449)" " $16,249 " More than 120 days past due 99% " $16,087 " 1-30 days past due " 8,272 " " (8,272)" - More than 120 days past due 99% - 31-60 days past due " 2,882 " " (2,279)" 603 More than 120 days past due 99% 597 61-90 days past due 841 (623) 218 More than 120 days past due 99% 216 91-120 days past due 554 (289) 265 More than 120 days past due 99% 262 More than 120 days past due 342 (145) 197 More than 120 days past due 99% 195 Total " $5,997,589 " " $(5,980,057)" " $17,532 " " $17,357 " (a) Credit loss rate based on the collection status as of the date the entity has selected to consider subsequent collection activity.
326-20-55-40Q
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
326-10-65-6Entity R discloses that it has elected the practical expedient to assume that current conditions as of the balance sheet date do not change for the remaining life of the assets and the accounting policy election to consider subsequent collection activity, along with the date through which collection activity was considered (in this Case, May 31, 20X1), in accordance with the requirements in paragraphs . 326-20-55-41
This Example illustrates one way an entity may implement the guidance in paragraph 326-20-35-5 for estimating expected credit losses on a collateral-dependent financial asset for which the borrower is experiencing financial difficulty based on the entity's assessment.
326-20-55-42
Bank F provides commercial real estate loans to developers of luxury apartment buildings. Each loan is secured by a respective luxury apartment building. Over the past two years, comparable standalone luxury housing prices have dropped significantly, while luxury apartment communities have experienced an increase in vacancy rates.
326-20-55-43
At the end of 20X7, Bank F reviews its commercial real estate loan to Developer G and observes that Developer G is experiencing financial difficulty as a result of, among other things, decreasing rental rates and increasing vacancy rates in its apartment building.
326-20-55-44
After analyzing Developer G's financial condition and the operating statements for the apartment building, Bank F believes that it is unlikely Developer G will be able to repay the loan at maturity in 20X9. Therefore, Bank F believes that repayment of the loan is expected to be substantially through the foreclosure and sale (rather than the operation) of the collateral. As a result, in its financial statements for the period ended December 31, 20X7, Bank F utilizes the practical expedient provided in paragraph 326-20-35-5 and uses the apartment building's fair value, less costs to sell, when developing its estimate of expected credit losses.
326-20-55-45
This Example illustrates one way an entity may implement the guidance in paragraph 326-20-35-6 for estimating expected credit losses on financial assets with collateral maintenance provisions.
326-20-55-46
Bank H enters into a reverse repurchase agreement with Entity I that is in need of short-term financing. Under the terms of the agreement, Entity I sells securities to Bank H with the expectation that it will repurchase those securities for a certain price on an agreed-upon date. In addition, the agreement contains a provision that requires Entity I to provide security collateral that is valued daily, and the amount of the collateral is adjusted up or down to reflect changes in the fair value of the underlying securities transferred. This collateral maintenance provision is designed to ensure that at any point during the arrangement, the fair value of the collateral continually equals or is greater than the amortized cost basis of the reverse repurchase agreement.
326-20-55-47
At the end of the first reporting period after entering into the agreement with Entity I, Bank H evaluates the reverse repurchase agreement's collateral maintenance provision to determine whether it can use the practical expedient in accordance with paragraph 326-20-35-6 for estimating expected credit losses. Bank H determines that although there is a risk that Entity I may default, Bank H's expectation of nonpayment of the amortized cost basis on the reverse repurchase agreement is zero because Entity I continually adjusts the amount of collateral such that the fair value of the collateral is always equal to or greater than the amortized cost basis of the reverse repurchase agreement. In addition, Bank H continually monitors that Entity I adheres to the collateral maintenance provision. As a result, Bank H uses the practical expedient in paragraph 326-20-35-6 and does not record expected credit losses at the end of the first reporting period because the fair value of the security collateral is greater than the amortized cost basis of the reverse repurchase agreement. Bank H performs a reassessment of the fair value of collateral in relation to the amortized cost basis each reporting period.
326-20-55-48
This Example illustrates one way, but not the only way, an entity may estimate expected credit losses when the expectation of nonpayment is zero. This example is not intended to be only applicable to U.S. Treasury securities.
326-20-55-49
Entity J invests in U.S. Treasury securities with the intent to hold them to collect contractual cash flows to maturity. As a result, Entity J classifies its U.S. Treasury securities as held to maturity and measures the securities on an amortized cost basis.
326-20-55-50
Although U.S. Treasury securities often receive the highest credit rating by rating agencies at the end of the reporting period, Entity J's management still believes that there is a possibility of default, even if that risk is remote. However, Entity J considers the guidance in paragraph 326-20-30-10 and concludes that the long history with no credit losses for U.S. Treasury securities (adjusted for current conditions and reasonable and supportable forecasts) indicates an expectation that nonpayment of the amortized cost basis is zero, even if the U.S. government were to technically default. Judgment is required to determine the nature, depth, and extent of the analysis required to evaluate the effect of current conditions and reasonable and supportable forecasts on the historical credit loss information, including qualitative factors. In this circumstance, Entity J notes that U.S. Treasury securities are explicitly fully guaranteed by a sovereign entity that can print its own currency and that the sovereign entity's currency is routinely held by central banks and other major financial institutions, is used in international commerce, and commonly is viewed as a reserve currency, all of which qualitatively indicate that historical credit loss information should be minimally affected by current conditions and reasonable and supportable forecasts. Therefore, Entity J does not record expected credit losses for its U.S. Treasury securities at the end of the reporting period. The qualitative factors considered by Entity J in this Example are not an all-inclusive list of conditions that must be met in order to apply the guidance in paragraph 326-20-30-10.
326-20-55-51
This Example illustrates how an entity may implement the guidance in paragraphs relating to writeoffs and recoveries of expected credit losses on financial assets.
326-20-55-52
Bank K currently evaluates its loan to Entity L on an individual basis because Entity L is 90 days past due on its loan payments and the loan no longer exhibits similar risk characteristics with other loans in the portfolio. At the end of December 31, 20X3, the amortized cost basis for Entity L's loan is $500,000 with an allowance for credit losses of $375,000. During the first quarter of 20X4, Entity L issues a press release stating that it is filing for bankruptcy. Bank K determines that the $500,000 loan made to Entity L is uncollectible. Bank K considers all available information that is relevant and reasonably available, without undue cost or effort, and determines that the information does not support an expectation of a future recovery in accordance with paragraph 326-20-30-7. Bank K measures a full credit loss on the loan to Entity L and writes off its entire loan balance in accordance with paragraph 326-20-35-8, as follows:
Credit loss expense "$125,000 " Allowance for credit losses "$125,000 " Allowance for credit losses "$500,000 " Loan receivable "$500,000 "
Cash "$50,000 " Allowance for credit losses (recovery) "$50,000
326-20-55-53
For its March 31, 20X6 financial statements, Bank K estimates expected credit losses on its financial assets and determines that the current estimate is consistent with the estimate at the end of the previous reporting period. During the period, Bank K does not record any change to its allowance for credit losses account other than the recovery of the loan to Entity L. To adjust its allowance for credit losses to reflect the current estimate, Bank K reports the following on March 31, 20X6:
Allowance for credit losses "$50,000 " Credit loss expense "$50,000 "
326-20-55-54
This Example illustrates the application of the guidance in paragraph 326-20-30-11 for off-balance-sheet credit exposures that are unconditionally cancellable by the issuer.
326-20-55-55
Bank M has a significant credit card portfolio, including funded balances on existing cards and unfunded commitments (available credit) on credit cards. Bank M's card holder agreements stipulate that the available credit may be unconditionally cancelled at any time.
326-20-55-56
When determining the allowance for credit losses, Bank M estimates the expected credit losses over the remaining lives of the funded credit card loans. Bank M does not record an allowance for unfunded commitments on the unfunded credit cards because it has the ability to unconditionally cancel the available lines of credit. Even though Bank M has had a past practice of extending credit on credit cards before it has detected a borrower's default event, it does not have a present contractual obligation to extend credit. Therefore, an allowance for unfunded commitments should not be established because credit risk on commitments that are unconditionally cancellable by the issuer are not considered to be a liability.
326-20-55-57
This Example illustrates factors that may be considered when assessing whether the purchased financial assets have more than an insignificant deterioration in credit quality since origination.
326-20-55-58
Entity N purchases a portfolio of financial assets subsequently measured at amortized cost basis with varying levels of credit quality. When determining which assets should be considered to be in the scope of the guidance for purchased financial assets with credit deterioration, Entity N considers the factors in paragraph 326-20-55-4 that are relevant for determining collectibility.
326-20-55-59
Entity N assesses what is more-than-insignificant credit deterioration since origination and considers the purchased assets with the following characteristics to be consistent with the factors that affect collectibility in paragraph 326-20-55-4. Entity N records the allowance for credit losses in accordance with paragraph 326-20-30-13 for the following assets:
- aFinancial assets that are delinquent as of the acquisition date
- bFinancial assets that have been downgraded since origination
- cFinancial assets that have been placed on nonaccrual status
- dFinancial assets for which, after origination, credit spreads have widened beyond the threshold specified in its policy.
326-20-55-60
Judgment is required when determining whether purchased financial assets should be recorded as purchased financial assets with credit deterioration. Entity N's considerations represent only a few of the possible considerations. There may be other acceptable considerations and policies applied by an entity to identify purchased financial assets with credit deterioration.
326-20-55-61
This Example illustrates application of the guidance to an individual purchased financial asset with credit deterioration.
326-20-55-62
Under paragraphs 326-20-30-13 and 310-10-35-53B, for purchased financial assets with credit deterioration, the discount embedded in the purchase price that is attributable to expected credit losses should not be recognized as interest income and also should not be reported as a credit loss expense upon acquisition.
326-20-55-63
Bank O records purchased financial assets with credit deterioration in its existing systems by recognizing the amortized cost basis of the asset, at acquisition, as equal to the sum of the purchase price and the associated allowance for credit loss at the date of acquisition. The difference between amortized cost basis and the par amount of the debt is recognized as a noncredit discount or premium. By doing so, the credit-related discount is not accreted to interest income after the acquisition date.
326-20-55-64
Assume that Bank O pays $750,000 for a financial asset with a par amount of $1 million. The instrument is measured at amortized cost basis. At the time of purchase, the allowance for credit losses on the unpaid principal balance is estimated to be $175,000. At the purchase date, the statement of financial position would reflect an amortized cost basis for the financial asset of $925,000 (that is, the amount paid plus the allowance for credit loss) and an associated allowance for credit losses of $175,000. The difference between par of $1 million and the amortized cost of $925,000 is a non-credit-related discount. The acquisition-date journal entry is as follows:
Loan—par amount "$1,000,000 " Loan—noncredit discount " $75,000 " Allowance for credit losses " 175,000 " Cash " 750,000 "
326-20-55-65
Subsequently, the $75,000 noncredit discount would be accreted into interest income over the life of the financial asset consistent with other Topics. The $175,000 allowance for credit losses should be updated in subsequent periods consistent with the guidance in Section 326-20-35, with changes in the allowance for credit losses on the unpaid principal balance reported immediately in the statement of financial performance as a credit loss expense.
326-20-55-66
This Example illustrates the application of the guidance to determine the expected credit loss using a loss rate for an individual purchased financial asset with credit deterioration. The method applied to initially measure expected credit losses for purchased financial assets with credit deterioration generally would be applied consistently over time and should faithfully estimate expected credit losses for financial assets by applying this Subtopic. This does not mean that the application of a loss-rate approach is an irrevocable election.
326-20-55-67
Bank P purchases a $5 million amortizing nonprepayable loan with a 6 percent coupon rate and original contract term of 5 years. All contractual principal and interest payments due of $1,186,982 for each of the first 3 years of the loan's life have been received, and the loan has an unpaid balance of $2,176,204 at the purchase date at the beginning of Year 4 of the loan's life. The original contractual amortization schedule of the loan is as follows.
" 5,000,000 " 6% 5 "$1,186,982 " Original Amortization Table Period Beginning Balance Total Payment Interest Principal Ending Balance 1 " $5,000,000 " " $1,186,982 " " $300,000 " " $886,982 " " $4,113,018 " 2 " 4,113,018 " " 1,186,982 " " 246,781 " " 940,201 " " 3,172,817 " 3 " 3,172,817 " " 1,186,982 " " 190,369 " " 996,613 " " 2,176,204 " 4 " 2,176,204 " " 1,186,982 " " 130,572 " " 1,056,410 " " 1,119,794 " 5 " 1,119,794 " " 1,186,982 " " 67,188 " " 1,119,794 " - Totals " $5,934,910 " " $934,910 " " $5,000,000 "
326-20-55-68
At the purchase date, the loan is purchased for $1,918,559 because significant credit events have been discovered. The purchaser expects a 10 percent loss rate, based on historical loss information over the contractual term of the loan, adjusted for current conditions and reasonable and supportable forecasts, for groups of similar loans. In accordance with paragraph 326-20-30-14, as a result of the expected credit losses, the allowance is estimated as $217,620 by multiplying the 10 percent loss rate by the unpaid principal balance, or par amount, of the loan (see beginning balance in Year 4 in the table above). The following journal entry is recorded at the acquisition of the loan:
Loan " $2,176,204 " Loan—noncredit discount " $40,025 " Allowance for credit losses " 217,620 " Cash " 1,918,559 "
326-20-55-69
The contractual interest rate is adjusted for the noncredit discount of $40,025 to determine the discount rate (consistent with paragraph 326-20-30-14) of 7.33 percent, which excludes the purchaser's assessment of expected credit losses at the acquisition date. The 7.33 percent (rounded from 7.3344 percent) is computed as the rate that equates the amortized cost of $2,136,179 (computed by adding the purchase price of $1,918,559 to the gross-up adjustment of $217,620) with the net present value of the remaining contractual cash flows on the purchased asset ($1,186,982 in each of Years 4 and 5).
326-20-55-70
A default occurs in the last year of the loan's life. The amortization of the purchased loan would be recorded as follows for the periods after the purchase date in Years 4 and 5 of the loan's life.
Book Amortization Period Beginning Balance (a) Total Payment (b) Writeoff (c) Accrued Interest (d) Reduction (e) Ending Balance (f) 4 " $2,136,179 " "$1,186,982 " "$156,676 " "$1,030,306 " "$1,105,873 " 5 " 1,105,873 " " 969,362 " " $217,620 " " 81,109 " " 1,105,873 " - Totals " $2,156,344 " " $217,620 " " $237,785 " " $2,136,179 " (a) "The amortized cost at the purchase date is determined as the sum of the purchase price of $1,918,559 and the allowance for credit losses of $217,620." (b) The cash received is consistent with the expectations at the purchase date. (c) The writeoff represents the default in the final year of the loan that is written off. (d) The interest income recognized is determined by multiplying the beginning amortized cost by the discount rate of 7.33 percent (as determined in accordance with paragraph 326-20-55-69). (e) "The reduction of amortized cost is determined as the sum of the cash received (b) and writeoffs recognized (c) (if any), less the interest income recognized (d). The writeoff in Year 5 represents the difference between the contractual cash flows of $1,186,982 and the actual cash flows of $969,362." (f) "The ending amortized cost is equal to the beginning amortized cost (a), less the amortized cost reduction (e).
326-20-55-71
The rollforward of the allowance would be as follows.
Beginning allowance for credit losses " $217,620 " " Plus, credit loss expense " - " Less, writeoffs " " (217,620)" Ending allowance for credit losses $-
326-20-55-72
This Example illustrates the application of the guidance to determine the expected credit loss using a discounted cash flow approach for an individual purchased financial asset with credit deterioration. The method applied to initially measure expected credit losses for purchased financial assets with credit deterioration generally would be applied consistently over time and should faithfully estimate expected credit losses for financial assets by applying this Subtopic. This does not mean that the application of a discounted cash flow approach is an irrevocable election.
326-20-55-73
This Example uses the same assumptions as in Example 13, as described in paragraphs .
326-20-55-74
To determine the discount rate in accordance with paragraph 326-20-30-14, the expected cash flows would be estimated and discounted at a rate that equates the purchase price with the present value of expected cash flows. The expected cash flows, including the considerations for current conditions and reasonable and supportable forecasts, are expected to be $1,186,982 in Year 4 and $969,362 in Year 5. The discount rate that equates the purchase price with the cash flows expected to be collected is 8.46 percent (rounded from 8.455 percent). This also is the same rate that equates the amortized cost basis (purchase price plus the acquisition date allowance for credit losses) with the net present value of the future contractual cash flows.
326-20-55-75
To determine the allowance for credit losses at the purchase date, the expected credit loss (that is, the contractual cash that an entity does not expect to collect) is discounted using the discount rate of 8.46 percent. The expected credit loss is $217,620 in Year 5, as determined by finding the difference between the contractual cash flows of $1,186,982 and the expected cash flows of $969,362. The present value of the expected loss at the purchase date is $185,012. The journal entry to record the purchase of this loan is as follows:
Loan " $2,176,204 " Loan—noncredit discount " $72,633 " Allowance for credit losses " 185,012 " Cash " 1,918,559 "
326-20-55-76
The amortization of the loan in the years following the purchase date is as follows.
Book Amortization Period Beginning Balance (a) Total Payment (b) Writeoff (c) Accrued Interest (d) Reduction (e) Ending Balance (f) 4 " $2,103,571 " " $1,186,982 " " $177,857 " " $1,009,125 " " $1,094,446 " 5 " 1,094,446 " " 969,362 " " $217,620 " " 92,536 " " 1,094,446 " - Totals " $2,156,344 " " $217,620 " " $270,393 " " $2,103,571 " (a) "The amortized cost at the purchase date is determined as the sum of the purchase price of $1,918,559 and the allowance for credit losses of $185,012." (b) The cash received is consistent with the expectations at the purchase date. (c) The writeoff represents the default in the final year of the loan that is written off. (d) "The interest income recognized is determined by multiplying the beginning amortized cost by the discount rate of 8.46 percent (as determined in accordance with paragraph 326-20-55-74)." (e) "The reduction of amortized cost is determined as the sum of the cash received (b) and writeoffs recognized (c) (if any), less the interest income recognized (d). The writeoff in Year 5 represents the difference between the contractual cash flows of $1,186,982 and the actual cash flows of $969,362." (f) "The ending amortized cost is equal to the beginning amortized cost (a), less the amortized cost reduction (e)."
326-20-55-77
The Day 1 allowance established at the purchase date was $185,012. The allowance for credit losses was estimated on a discounted cash flow approach and, therefore, the allowance for credit losses needs to be adjusted for the time value of money. The rollforward of the allowance for credit losses is shown below.
Beginning allowance for credit losses " $185,012 " "Plus, credit loss expense" " 15,643 " (a) "Less, writeoffs" - Ending allowance for credit losses (Year 4) " 200,655 " "Plus, credit loss expense" " 16,965 " (a) "Less, writeoffs" " (217,620)" (b) Ending allowance for credit losses (Year 5) $- (a) The provision for credit losses in Years 4 and 5 is determined by multiplying the beginning allowance for credit losses by the discount rate of 8.46 percent to adjust for the time value of money. (b) "The writeoff represents the default in Year 5. The default is the difference between the Year 5 contractual cash flows of $1,186,982 and the actual cash flows received of $969,362.
326-20-55-78
The net income effect of a loss-rate approach illustrated in Example 13 and of a discounted cash flow approach illustrated in this Example is the same ($237,785 net income). The difference between the two approaches is that the Day 1 allowance for credit losses under a discounted cash flow approach explicitly reflects the time value of money. Therefore, it needs to be accreted to the future value of the loss that ultimately will occur. The change in the allowance for credit losses associated with the time value of money can be presented either as credit loss expense or as an adjustment to interest income in accordance with paragraph 326-20-45-3. Therefore, the discounted cash flow approach, over the life of the asset, presents interest income as $270,393 but will require $32,608 ($15,643 in Year 4 plus $16,965 in Year 5) of credit loss expense to be recorded for the time value of money, resulting in net interest income after credit loss expense of $237,785. Under a loss-rate approach as illustrated in Example 13, interest income over the life of the asset is $237,785 but does not require credit loss expense to be recognized.
326-20-55-79
The following Example illustrates the presentation of credit quality disclosures for a financial institution with a narrow range of loan products offered to local customers—both consumer and commercial. Depending on the size and complexity of an entity's portfolio of financing receivables, the entity may present disclosures that are more or less detailed than the following Example. An entity may choose other methods of determining the class of financing receivable and may determine different credit quality indicators that reflect how credit risk is monitored. Some entities may have more than one credit quality indicator for certain classes of financing receivables.
Term Loans Amortized Cost Basis by Origination Year "As of December 31, 20X5" 20X5 20X4 20X3 20X2 20X1 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis Total Residential mortgage: Risk rating: 1–2 internal grade $- $- $- $- $- $- $- $- $- 3–4 internal grade - - - - - - - - - 5 internal grade - - - - - - - - - 6 internal grade - - - - - - - - - - 7 internal grade - - - - - - - - - Total residential mortgage loans $- $- $- $- $- $- $- $- $- Residential mortgage loans: Current-period gross writeoffs $- $- $- $- $- $- $- $- $- Consumer: Risk rating: 1–2 internal grade $- $- $- $- $- $- $- $- $- 3–4 internal grade - - - - - - - - - 5 internal grade - - - - - - - - - 6 internal grade - - - - - - - - - 7 internal grade - - - - - - - - - Total consumer $- $- $- $- $- $- $- $- $- Consumer loans: Current-period gross writeoffs $- $- $- $- $- $- $- $- $- Commercial business: Risk rating: 1–2 internal grade $- $- $- $- $- $- $- $- $- 3–4 internal grade - - - - - - - - - 5 internal grade - - - - - - - - - 6 internal grade - - - - - - - - - 7 internal grade - - - - - - - - - Total commercial business $- $- $- $- $- $- $- $- $- Commercial business loans: Current-period gross writeoffs $- $- $- $- $- $- $- $- $- Commercial mortgage: Risk rating: 1–2 internal grade $- $- $- $- $- $- $- $- $- 3–4 internal grade - - - - - - - - - 5 internal grade - - - - - - - - - 6 internal grade - - - - - - - - - 7 internal grade - - - - - - - - - Total commercial mortgage $- $- $- $- $- $- $- $- $- Commercial mortgage loans: Current-period gross writeoffs $- $- $- $- $- $- $- $- $- -
326-20-55-80
The following table illustrates certain of the disclosures in paragraph 326-20-50-14 by class of financing receivable.
Age Analysis of Past-Due Financial Assets "As of December 31, 20X5, and 20X4" Past Due 30-59 Days 60-89 Days Greater Than 90 Days Total Current Total Amortized Cost > 90 Days and Accruing 20X5 Commercial " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " Commercial real estate: Commercial real estate construction " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Commercial real estate—other " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Consumer: Consumer—credit card " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Consumer—other " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Consumer—auto " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Residential: Residential—prime " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Residential—subprime " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Finance leases " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Total " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " 20X4 Commercial " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " Commercial real estate: Commercial real estate construction " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Commercial real estate—other " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Consumer: Consumer—credit card " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Consumer—other " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Consumer—auto " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Residential: Residential—prime " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Residential—subprime " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Finance leases
326-20-55-81
Reinsurance recoverables may comprise a variety of risks that affect collectibility including:
- aCredit risk of the reinsurer/assuming company
- bContractual coverage disputes between the reinsurer/assuming company and the insurer/ceding company including contract administration issues
- cOther noncontractual, noncoverage issues including reinsurance billing and allocation issues.
326-20-55-82
This Subtopic only requires measurement of expected losses related to the credit risk of the reinsurer/assuming company.
326-20-55-83
In situations in which similar risk characteristics are not present in the reinsurance recoverables, the ceding insurer should measure expected credit losses on an individual basis. Similar risk characteristics may not exist because any one or a combination of the following factors exists, including, but not limited to:
- aCustomized reinsurance agreements associated with individual risk geographies
- bDifferent size and financial conditions of reinsurers that may be either domestic or international
- cDifferent attachment points among reinsurance agreements
- dDifferent collateral terms of the reinsurance agreements (such as collateral trusts or letters of credit)
- eThe existence of state-sponsored reinsurance programs.
326-20-55-84
However, similar risk characteristics may exist for certain reinsurance recoverables because any one or combination of the following exists:
- aReinsurance agreements that have standardized terms
- bReinsurance agreements that involve similar insured risks and underwriting practices
- cReinsurance counterparties that have similar financial characteristics and face similar economic conditions.
326-20-55-85
Judgment should be applied by ceding insurers in determining if and when similar risks exist within their reinsurance recoverables.
326-20-55-86
The following Example illustrates the application of the guidance in paragraph 326-20-30-13A for purchased financial assets with credit deterioration. For purposes of this Example, the acquired portfolio of loans is assumed to share similar risk characteristics and is evaluated for credit losses on a collective basis.
326-20-55-87
Bank Q purchases a portfolio of loans with a par amount of $10 million for $2 million. At acquisition, Bank Q expects to collect $2.5 million on the loan portfolio. Bank Q estimates expected credit losses using a method other than a discounted cash flow method in accordance with paragraph 326-20-30-4. The acquisition-date journal entry is as follows.
Loan—par amount " $10,000,000 " Loan—noncredit discount " $500,000 " Allowance for credit losses " 7,500,000 " Cash " 2,000,000 "
326-20-55-88
After acquisition, Bank Q determines that each loan is deemed uncollectible on an individual unit-of-account basis and, therefore, writes off the loan portfolio. The following journal entries are recorded.
Provision expense " $2,000,000 " Allowance for credit losses " $2,000,000 " Allowance for credit losses " $9,500,000 " Loan—noncredit discount " 500,000 " Loan—par amount " $10,000,000 "
326-20-55-89
Although deemed uncollectible on an individual basis, when grouped together, the group of loans is expected to have some recoveries on an aggregate basis. Therefore, Bank Q records a negative allowance in accordance with paragraph 326-20-30-13A. Because Bank Q's expectation of credit conditions has not changed since acquisition, the expected recoveries of $2.5 million must not result in the acceleration of the noncredit discount that existed immediately before being written off. Therefore, the following journal entry is recorded.
Allowance for credit losses " $2,000,000 " Provision expense " $2,000,000 "
326-20-55-90
Assume the same facts from Example 18. Bank Q subsequently determines that a change in credit conditions has occurred and expects to collect an additional $600,000 (for a total of $3.1 million) on the group of loans. Because Bank Q's expectation of credit conditions has changed and it is determining the amount that it expects to collect using a method other than a discounted cash flow method, the expected recoveries of $3.1 million would be reduced by the noncredit discount of $0.5 million (that has not been accreted). This would result in Bank Q having an overall negative allowance of $2.6 million. Therefore, the following journal entry is recorded.
Allowance for credit losses " $600,000 " Provision expense " $600,000 "
326-20-S00StatusSEC
Source downloaded: .Record version bb4489e46a03. Effective date must be checked in the source.
326-20-S00-1
The following table identifies the changes that have been made to this Subtopic.
| Paragraph | Action | Accounting Standards Update | Date |
| 326-20-S99-1 | Added | Accounting Standards Update No. 2020-02 | 02/06/2020 |
326-20-S99SEC MaterialsSEC
Source downloaded: .Record version 3b59183ccf7a. Effective date must be checked in the source.
SEC Staff Guidance
326-20-S99-1
The following is the text of SAB Topic 6.M, Financial Reporting Release No. 28 - Accounting for Loan Losses by Registrants Engaged in Lending Activities Subject to FASB ASC Topic 326.
- 1. Measuring current expected credit losses
- General: This staff interpretation applies to all registrants that are creditors in loan transactions that, individually or in the aggregate, have a material effect on the registrant's financial condition.FN74
- FASB ASC Subtopic 326-20 addresses the measurement of current expected credit losses for financial assets measured at amortized cost basis, net investments in leases recognized by lessors, reinsurance recoverables, and certain off-balance-sheet credit exposures.FN75
- At each reporting date, an entity shall record an allowance for credit losses on financial assets measured at amortized cost basis and net investments in leases recognized by lessors and shall record a liability for credit losses on certain off-balance-sheet exposures not accounted for as insurance or derivatives, including loan commitments, standby letters of credit, and financial guarantees.FN76
- For financial asset(s), the allowance for credit losses is a valuation account that is deducted from, or added to, the amortized cost basis of the financial asset(s) to present the net amount expected to be collected on the financial asset(s).FN77
- The allowance for credit losses is an estimate of current expected credit losses considering available information relevant to assessing collectibility of cash flows over the contractual term of the financial asset(s).FN78
- Information relevant to establishing an estimate of current expected credit losses includes historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. An entity shall report in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses and liabilities for credit losses on off-balance-sheet credit exposures for management's current estimate of expected credit losses.FN79
- This staff guidance is applicable upon a registrant's adoption of FASB ASC Topic 326.FN80 Upon a registrant's adoption of FASB ASC Topic 326, the staff guidance in SAB Topic 6, Section L: Financial Reporting Release No. 28 - Accounting for Loan Losses by Registrants Engaged in Lending ActivitiesFN81 will no longer be applicable.
- On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC's definition, as well as private companies and not-for-profit entities. Nothing in this staff interpretation should be read to accelerate or delay the effective dates of the standard as modified by the FASB.
- FN74 This staff interpretation relates to Financial Reporting Release No. 28 - Accounting for Loan Losses by Registrants Engaged in Lending Activities, Release No. 33-6679 (Dec. 1, 1986), (hereinafter “FRR 28”).
- FN75 See ASC paragraphs 326-20-15-2 and 326-20-15-3.
- FN76 Ibid.
- FN77 See ASC paragraph 326-20-30-1.
- FN78 As indicated in ASC paragraph 326-20-30-11, the liability for expected credit losses for off-balance-sheet credit exposures shall be based on the contractual period in which the entity is exposed to credit risk via a present obligation to extend credit, unless the obligation is unconditionally cancellable by the issuer.
- FN79 See ASC paragraphs 326-20-30-1, 326-20-30-6, 326-20-30-7 and 326-20-30-11.
- FN80 See ASC paragraphs 326-10-65-1, 326-10-65-2, and 326-10-65-3.
- FN81 Originally added to the Codification of SABs in Topic 6, Section L, by SAB No. 102 - Selected Loan Loss Allowance Methodology and Documentation Issues, 66 FR 36457 (July 12, 2001).
- 2. Development, governance, and documentation of a systematic methodology
- Facts: Registrant A is developing (or subsequently reviewing) its allowance for credit losses methodology for its loan portfolio.
- Question 1: What are some of the factors or elements that the staff normally would expect Registrant A to consider when developing (or subsequently performing an assessment of) its methodology for determining its allowance for credit losses under GAAP?
- Interpretive Response: The staff normally would expect a registrant to have a systematic methodology to address the development, governance, and documentation to determine its provision and allowance for credit losses.
- It is critical that allowance for credit losses methodologies incorporate management's current judgments about the credit losses expected from the existing loan portfolio, including reasonable and supportable forecasts about changes in credit quality of these portfolios, on a disciplined and consistently-applied basis.
- A registrant's allowance for credit losses methodology is influenced by entity-specific factors, such as an entity's size, organizational structure, access to information, business environment and strategy, management's risk assessment, complexity of the loan portfolio, loan administration procedures, and management information systems. Management is responsible for the estimate of expected credit losses, and therefore also responsible for determining whether any allowance methodologies developed by third parties are consistent with GAAP.
- While different registrants may use different methods,FN82 there are certain common elements that the staff would expect in any methodology:
- • Identify relevant risk characteristics and pool loans on the basis of similar risk characteristics;FN83
- • Consider available information relevant to assessing the collectibility of cash flows;FN84
- • Consider expected credit losses over the contractual termFN85 of all existing loans (whether on an individual or group basis), and measure expected credit losses on loans on a collective (pool) basis when similar risk characteristics exist;FN86
- • Require that analyses, estimates, reviews, and other allowance for credit losses methodology functions be performed by competent and well-trained personnel;
- • Be based on reliable and relevant data and an analysis of current conditions and reasonable and supportable forecasts;
- • Include a systematic and logical method to consolidate the loss estimates that allows for the allowance for credit losses balance to be recorded in accordance with GAAP.
- The staff believes an entity's management should review, on a periodic basis, whether its methodology for determining its allowance for credit losses is appropriate. Additionally, for registrants that have audit committees, the staff believes that oversight of the financial reporting and auditing of the allowance for credit losses by the audit committee can strengthen the registrant's process for determining its allowance for credit losses.
- A systematic methodology that is properly designed and implemented should result in a registrant's best estimate of its allowance for credit losses.FN87 Accordingly, the staff normally would expect registrants to adjust their allowance for credit losses balance, either upward or downward, in each period for differences between the results of the systematic methodology and the unadjusted allowance for credit losses balance in the general ledger.FN88
- Question 2: In the staff's view, what aspects of a registrant's allowance for credit losses internal accounting controls would need to be appropriately addressed in its written policies and procedures?
- Interpretive Response: Registrants may utilize a wide range of policies, procedures, and control systems in their allowance for credit losses processes, and these policies, procedures, and systems are tailored to the size and complexity of the registrant and its loan portfolio.
- However, the staff believes that, in order for a registrant's allowance for credit losses methodology to be effective, the registrant's written policies and procedures for the systems and controls that maintain an appropriate allowance for credit losses would likely address the following:
- • The roles and responsibilities of the registrant's departments and personnel (including the lending function, credit review, financial reporting, internal audit, senior management, audit committee, board of directors, and others, as applicable) who determine or review, as applicable, the allowance for credit losses to be reported in the financial statements;
- • The registrant's selected methods and policies for developing the allowance for credit losses and determining significant judgments;
- • The description of the registrant's systematic methodology, which should be consistent with the registrant's accounting policies for determining its allowance for credit losses (see Question 4 below for further discussion); and
- • How the system of internal controls related to the allowance for credit losses process provides reasonable assurance that the allowance for credit losses is in accordance with GAAP.
- The staff normally would expect internal accounting controlsFN89 for the allowance for credit losses estimation process to:
- • Include measures to provide reasonable assurance regarding the reliability and integrity of information and compliance with laws, regulations, and internal policies and procedures;FN90 and
- • Operate at a level of precision sufficient to provide reasonable assurance that the registrant's financial statements are prepared in accordance with GAAP.
- Question 3: Assume the same facts as in Question 1. What would the staff normally expect Registrant A to include in its documentation of its allowance for credit losses methodology?
- Interpretive Response: In FRR 28, the Commission provided guidance for documentation of loan loss provisions and allowances for registrants engaged in lending activities. The staff believes that appropriate written supporting documentation for the provision and allowance for credit losses facilitates review of the allowance for credit losses process and reported amounts, builds discipline and consistency into the allowance for credit losses methodology, and helps to evaluate whether relevant factors are appropriately considered in the allowance analysis.
- The staff, therefore, normally would expect a registrant to document the relationship between its detailed analysis of the characteristics and credit quality of the portfolio and the amount of the allowance for credit losses reported in each period.FN91
- The staff normally would expect registrants to maintain written supporting documentation for the following decisions and processes:
- • Policies and procedures over the systems and controls that maintain an appropriate allowance for credit losses;
- • Allowance for credit losses methodology and key judgments, including the data used, assessment of risk, and identification of significant assumptions in the allowance estimation process;
- • Summary or consolidation of the allowance for credit losses balance;
- • Validation of the allowance for credit losses methodology; and
- • Periodic adjustments to the allowance for credit losses.
- Question 4: What elements of a registrant's allowance for credit losses methodology would the staff normally expect to be described in the registrant's written policies and procedures?
- Interpretive Response: The staff normally would expect a registrant's written policies and procedures to describe the primary elements of its allowance for credit losses methodology. The staff normally would expect that, in order for a registrant's allowance for credit losses methodology to be effective, the registrant's written policies and procedures would describe all primary elements needed to support a disciplined and consistently-applied methodology, which may include, but is not limited to:FN92
- • How portfolio segments are determined (e.g., by loan type, industry, risk rating, etc.)FN93 and the methodology used for each portfolio segment;FN94
- • The approach used to pool loans based on similar risk characteristics;
- • For accounting policy or practical expedient elections set forth in FASB ASC Subtopic 326-20, documentation of the elections made;
- • The method(s) used to determine the contractual term of the financial assets, including consideration of prepayments and when the contractual term is extended;FN95
- • If a loss-rate method is used, the historical data used to develop the components of the loss rate and how that rate is applied to the amortized cost basis of the financial asset as of the reporting date;FN96
- • The method for estimating expected recoveries when measuring the allowance for credit losses;FN97
- • The approach used to determine the appropriate historical period for estimating expected credit loss statistics;
- • The approach used to determine the reasonable and supportable period;
- • The approach used to adjust historical information for current conditions and reasonable and supportable forecasts;FN98
- • How the entity plans to revert to historical credit loss information for periods beyond which the entity is able to make or obtain reasonable and supportable forecasts of expected credit losses;FN99 and
- • The approach used to determine when a purchased financial asset would qualify to be accounted for as a purchased financial asset with credit deterioration.FN100
- FN82 ASC paragraph 326-20-30-3 states that “the allowance for credit losses may be determined using various methods. For example, an entity may use discounted cash flow methods, loss-rate methods, roll-rate methods, probability-of-default methods, or methods that utilize an aging schedule.”
- FN83 See ASC paragraph 326-20-55-5 for a list of risk characteristics that may be applicable.
- FN84 See ASC paragraph 326-20-30-7.
- FN85 See ASC paragraph 326-20-30-6.
- FN86 See ASC paragraph 326-20-30-2.
- FN87 ASU 2016-13, BC63 states that “the Board decided that an entity should determine at the reporting date an estimate of credit loss that best reflects its expectations (or its best estimate of expected credit loss).”
- FN88 See ASC paragraph 326-20-35-1 and 326-20-35-3. Registrants should also refer to the guidance on materiality in SAB Topic 1.M.
- FN89 Public companies are required to comply with the books and records and internal controls provisions of the Exchange Act. See Sections 13(b)(2) - (7) of the Exchange Act.
- FN90 Section 13(b)(2) - (7) of the Exchange Act.
- FN91 FRR 28, Section II states that “the specific rationale upon which the loan loss allowance and provision amount actually reported in each individual period is based — i.e., the bridge between the findings of the detailed review of the loan portfolio and the amount actually reported in each period — would be documented to help ensure the adequacy of the reported amount, to improve auditability, and to serve as a benchmark for exercise of prudent judgment in future periods.”
- FN92 See also, ASC paragraph 326-20-55-6 for additional judgments a registrant may make.
- FN93 FASB ASC Subtopic 326-20-20 defines a portfolio segment as the “level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses.”
- FN94 See ASC paragraph 326-20-30-3 for examples of expected loss estimation methods that may be used.
- FN95 See ASC paragraph 326-20-30-6.
- FN96 See ASC paragraph 326-20-30-5.
- FN97 See ASC paragraph 326-20-30-1.
- FN98 See ASC paragraph 326-20-30-8 and 326-20-30-9.
- FN99 See ASC paragraph 326-20-30-9.
- FN100 See ASC paragraph .
- 3. Documenting the results of a systematic methodology
- Question 5: What documentation would the staff normally expect a registrant to prepare to support its allowance for credit losses for its loans under FASB ASC Subtopic 326-20?
- Interpretive Response:
- Regardless of the method used to determine the allowance for credit losses under FASB ASC Subtopic 326-20, the staff normally would expect a registrant to demonstrate in its documentation that the loss measurement methods and assumptions used to estimate the allowance for credit losses for its loan portfolio are determined in accordance with GAAP as of the financial statement date.
- The staff normally would expect a registrant to maintain as sufficient evidence written documentation to support its measurement of expected credit losses under FASB ASC Subtopic 326-20. That documentation should reflect the method(s) used to estimate expected credit losses for each portfolio segment.FN101
- The staff normally would expect registrants to follow a systematic and consistently-applied approach to select the most appropriate expected credit loss measurement methods and support its conclusions and rationale with written documentation. Typically, registrants decide the methods to use based on many factors, which vary with their business strategies as well as their information system capabilities.
- As economic and other business conditions change, registrants often modify their business strategies, which may necessitate adjustments to the methods used to estimate expected credit losses. The staff normally would expect a registrant to maintain a process to evaluate whether adjustments to the methodology are necessary and, if so, maintain documentation to support adjustments to the methodology used.
- A registrant's methodology should produce an estimate that is consistent with GAAP. The staff normally would expect that, before employing an expected loss method, a registrant would evaluate and modify, as needed, the method's assumptions related to the current estimate of expected credit losses. Also, the staff expects that registrants would typically document the evaluation, the conclusions regarding the appropriateness of estimating expected credit losses with that method, and the objective support for adjustments to the method or its results.
- A registrant shall measure expected credit losses on a collective (pool) basis when similar risk characteristic(s) exist.FN102 The staff normally would expect a registrant to maintain documentation to support its conclusion that the loans in each pool have similar characteristics.
- One method of estimating expected credit losses for a pool of loans is through the application of loss rates to the pool's aggregate loan balances.FN103 Such loss rates should generally reflect the registrant's historical credit loss experience consistent with the remaining contractual termsFN104 for each pool of loans, adjusted to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated.FN105
- If a registrant utilizes external data, the staff normally would expect that the registrant would demonstrate in its documentation the relevance and reliability of the external data. The registrant should consider whether the external loss experience data comes from loans with credit attributes similar to those of the loans included in the registrant's portfolio and is consistent with the registrant's assumptions regarding current and forecasted economic conditions.FN106 The staff normally would expect a registrant to maintain supporting documentation for assumptions and data used to develop its loss rates, including its evaluation of the relevance and reliability of any external data.
- If a registrant uses the present value of expected future cash flows to measure expected credit losses,FN107 the staff normally would expect supporting documentation for the assumptions and data used to develop the amount and timing of expected cash flows and the effective interest rate used to discount expected cash flows.
- If a registrant uses the fair value of collateral to measure expected credit losses, the staff normally would expect the registrant to document:
- • The basis for its conclusion that the loan qualifies under GAAP for measurement of expected credit losses based on the fair value of the collateral;FN108
- • How it determined the fair value of the collateral, including policies relating to the use of appraisals, valuation assumptions and calculations, the supporting rationale for adjustments to appraised values, if any, and the determination of costs to sell, if applicable; and
- • The recency and reliability of the appraisal or other valuation.
- Regardless of the method used, the underlying assumptions used by registrants to develop expected credit loss measurements should consider current conditions and reasonable and supportable forecasts. The staff normally would expect a registrant to document the factors used in the development of the assumptions and how those factors affected the expected credit loss measurements.FN109 Factors to be considered include the following:
- • Levels of and trends in delinquencies and performance of loans;
- • Levels of and trends in write-offs and recoveries collected;
- • Trends in volume and terms of loans;
- • Effects of any changes in reasonable and supportable economic forecasts;
- • Effects of any changes in risk selection and underwriting standards, and other changes in lending policies, procedures, and practices;
- • Experience, ability, and depth of lending management and other relevant staff;
- • Available relevant information sources that support or contradict the registrant's own forecast;
- • Effects of changes in prepayment expectations or other factors affecting assessments of loan contractual term;
- • Industry conditions; and
- • Effects of changes in credit concentrations.
- Factors affecting collectibility that are not reflected in the registrant's historical loss information should be evaluated to determine whether an adjustment is necessary so that the expected credit loss measurement considers those factors.FN110 For any adjustment of loss measurements based on current conditions and reasonable and supportable forecasts, the staff normally would expect a registrant to maintain sufficient evidence to (a) support the amount of the adjustment and (b) explain why the adjustment is necessary to reflect current conditions and reasonable and supportable forecasts in the expected credit loss measurements. Supporting documentation for adjustments may include relevant economic reports, economic data, and information from individual borrowers.
- The staff normally would expect that, as part of the registrant's allowance for credit losses methodology, it would create a summary of the amount and rationale for the adjustment factor for review by management prior to the issuance of the financial statements. The staff normally would expect the nature of the adjustments, how they were measured or determined, and the underlying rationale for making the changes to the allowance for credit losses balance to be documented. The staff also normally would expect appropriate documentation of the adjustments to be provided to management for review of the final allowance for credit losses amount to be reported in the financial statements.
- Similarly, the staff normally would expect that registrants would maintain documentation to support the identified range and the rationale used for determining which estimate is the best estimate within the range of expected credit losses and that this documentation would also be made available to the registrant's independent accountants. If changes frequently occur during management or credit committee reviews of the allowance for credit losses, management may find it appropriate to analyze the reasons for the frequent changes and to reassess the methodology the registrant uses.
- Facts: Registrant H has completed its estimation of its allowance for credit losses for the current reporting period, in accordance with GAAP, using its established systematic methodology.
- Question 6: What summary documentation would the staff normally expect Registrant H to prepare to support the amount of its allowance for credit losses to be reported in its financial statements?
- Interpretive Response: The staff normally would expect that, to verify that the allowance for credit losses balances are presented fairly in accordance with GAAP and are auditable, management would prepare a document that summarizes the amount to be reported in the financial statements for the allowance for credit losses,FN111 and that such documentation also include sufficient evidence to support the allowance and internal controls over the allowance. Common elements that the staff normally would expect to find documented in allowance for credit losses summaries include:
- • The reasonable and supportable economic forecasts used;
- • The estimate of the expected credit losses using the registrant's methodology or methodologies;
- • A summary of the current allowance for credit losses balance;
- • The amount, if any, by which the allowance for credit losses balance is to be adjusted; and
- • Depending on the level of detail that supports the allowance for credit losses analysis, detailed subschedules of loss estimates that reconcile to the summary schedule.
- Generally, a registrant's review and approval process for the allowance for credit losses relies upon the data provided in these consolidated summaries. There may be instances in which individuals or committees that review the allowance for credit losses methodology and resulting allowance balance identify adjustments that need to be made to the loss estimates to provide a better estimate of expected credit losses. These changes may occur as a result of holistically evaluating the individual components of the estimation process and considering the overall estimate of the allowance for credit losses as a whole or due to information not known at the time of the initial loss estimate. It would be important that these adjustments be consistent with GAAP and be reviewed and approved by appropriate personnel. Additionally, it would typically be appropriate for the summary to provide each subsequent reviewer with an understanding of the support behind these adjustments. Therefore, the staff normally would expect management to document the nature of any adjustments and the underlying rationale for making the changes.
- The staff also normally would expect this documentation to be provided to those among management making the final determination of the allowance for credit losses amount.
- FN101 See supra note 20.
- FN102 See ASC paragraph 326-20-30-2. Also refer to ASC paragraph 326-20-55-5 for a list of risk characteristics that may be applicable.
- FN103 See ASC paragraph for an example illustrating one way an entity may estimate expected credit losses on a portfolio of loans with similar risk characteristics using a loss-rate approach.
- FN104 See ASC paragraph 326-20-30-6 for guidance on determining the contractual term.
- FN105 See ASC paragraph 326-20-30-9 for guidance related to adjusting historical loss information.
- FN106 See ASC paragraph 326-20-30-8.
- FN107 See ASC paragraph 326-20-30-4.
- FN108 See ASC paragraph for guidance regarding when it is appropriate to measure expected credit losses based on the fair value of the collateral as of the reporting date.
- FN109 See ASC paragraph 326-20-55-4 for examples of factors to consider.
- FN110 See ASC paragraph 326-20-30-9 for guidance on when it is not appropriate to make adjustments to historical loss information for forecasted economic conditions.
- FN111 See supra note 16.
- 4. Validating a systematic methodology.
- Question 7: What is the staff's guidance to a registrant on validating, and documenting the validation of, its systematic methodology used to estimate allowance for credit losses?
- Interpretive Response: The staff believes that a registrant's allowance for credit losses methodology is considered reasonable when it results in a valuation account that adjusts the net amount of its existing portfolio to cash flows expected to be collected.FN112
- The staff normally would expect the registrant's systematic methodology to include procedures to assess the continued relevance and reliability of methods, data, and assumptions used to estimate expected cash flows.
- To verify that the allowance for credit losses methodology is reasonable and conforms to GAAP, the staff believes it would be appropriate for management to establish internal control policies, appropriate for the size of the registrant and the type and complexity of its loan products and modeling methods.
- These policies may include procedures for a review, by a party who is independent of the allowance for expected credit losses estimation process, of the allowance methodology and its application in order to confirm its effectiveness.
- While registrants may employ many different procedures when assessing the reasonableness of the design and performance of its allowance for credit losses methodology and appropriateness of the data and assumptions used, the procedures should allow management to determine whether there may be deficiencies in its overall methodology. Examples of procedures may include:
- • A review of how management's prior assumptions (including expectations regarding loan delinquencies, troubled debt restructurings, write-offs, and recoveries) have compared to actual loan performance;
- • A review of the allowance for credit losses process by a party that is independent and possesses competencies on the subject matter. This often involves the independent party reviewing, on a test basis, source documents and underlying data and assumptions to determine that the established methodology develops reasonable loss estimates;
- • A retrospective analysis of whether the models used performed in a manner consistent with the intended purpose of developing an estimate of expected credit losses; and
- • When the fair value of collateral is used, an evaluation of the appraisal process of the underlying collateral. This may be accomplished by periodically comparing the appraised value to the actual sales price on selected properties sold.
- The staff believes that management should support its validation process with documentation of the specific validation procedures performed, including any findings of an independent reviewer. The staff normally would expect that, if the methodology is changed based upon the findings of the validation process, documentation that describes and supports the changes would be maintained.
- FN112 See ASC paragraph 326-20-30-1.
Related subtopics
- 326-10 OverallFinancial Instruments—Credit Losses
- 326-30 Available-for-Sale Debt SecuritiesFinancial Instruments—Credit Losses
- 325-40 Beneficial Interests in Securitized Financial AssetsInvestments—Other
- 310-10 OverallReceivables
- 860-30 Secured Borrowing and CollateralTransfers and Servicing
- 310-20 Nonrefundable Fees and Other CostsReceivables