Defining Issues
KPMG LLP June 2009, No. 09-29
Scope
1
Proposed Disclosures 2
Effective Date
and Transition
5
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Proposed Disclosures
about the Credit Quality of
Financing Receivables and
Allowance for Credit Losses
Companies would have to disclose additional information about the allowance for credit losses and the credit risks inherent in loan and lease portfolios, starting with the first interim or annual reporting period ending after December 15, 2009, if a proposed FASB Statement is adopted without change.1 The disclosures would include information about accounting policies forestimating the allowance for credit losses, qualitative and quantitative information about the credit risk inherent in the financing receivable portfolio, the methods used in determining the components of the allowance for credit losses, and quantitative information about the changes in receivables and the related allowance for credit losses. Comparative disclosures would be required only for periods ending after the proposed effective date.
Comments on the proposal are due by August 24, 2009. Scope
The proposed Statement would apply to all financing receivables held by creditors, including public and nonpublic companies that prepare GAAP financial statements. The disclosures would be required for both interim and annual periods.
This scope depends on the proposal’s definition of financing receivables. For purposes of the proposal, financing receivables include originated or acquired loans. A loan is defined as a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the company’s balance sheet. Other examples of financing receivables include accounts receivable with terms exceeding one year, notes receivable, and receivables relating to lessors’ rights to payments from leveraged, direct financing, or sales-type leases. The proposed Statement’s definition of financing receivables, and therefore the proposal’s scope, explicitly excludes:
•
Account receivables with contractual maturities of one year or less that arose from the sale of goods or services, except for credit card receivables,1 Proposed FASB Statement, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, available at www.fasb.org.
Defining Issues June 2009, No. 09-29 2
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•
Debt securities as defined in Statement 115,2•
Unconditional promises to give that are assets of not-for-profit entities and that are due in one year or less, as discussed in Statement 116,3 and•
Acquired beneficial interests or the transferor’s beneficial interests in transferred financial assets within the scope of EITF 99-20.4Proposed Disclosures
The objective of the proposed Statement is for a company to disclose information that allows financial-statement users to understand the nature of credit risk inherent in the company’s portfolio of financing receivables, how the risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for the changes in both the receivables and the allowance for credit losses.
The proposed disclosures are broken down into these major categories: allowance for credit losses, fair value, credit quality information, impaired financing receivables, and nonaccrual status. Each category would have to be presented separately either by “portfolio segment” or by “class of financing receivable,” terms that are defined in the proposal. The disclosures for allowance for credit losses and fair value are presented by portfolio segment. The disclosures for credit quality information, impaired financing receivables, and nonaccrual status are presented by class of financing receivable.
A portfolio segment is defined as “the level at which a creditor develops and documents a systematic methodology for determining its allowance for credit losses.” A portfolio segment is a higher level of aggregation and generally will have more than one class of financing receivables. Financing receivables within a portfolio segment must be further disaggregated to separately disclose those that are evaluated collectively for impairment under Statement 5 and those that are evaluated individually for impairment under Statement 114.5
Classes of financing receivables would be based on the “level of information that enables” financial-statement users to evaluate the nature and extent of exposure to credit risk from financing receivables. Classes of financing receivables are generally a disaggregation of a portfolio segment.
According to the proposal, classes must segregate financial instruments based on the initial measurement attribute (i.e., amortized cost, fair value, lower of cost or fair value, and present value of amounts to be received) and then further disaggregate the information so that it is presented at the level that management uses when assessing and monitoring the portfolio’s risk and performance. In determining the appropriate level of internal reporting to use as a basis for disclosure, a company would have to consider the level of detail a financial-statement user needs to understand the risks inherent in the portfolio, evaluating at least the following factors:
•
Categorization of borrowers (for example, commercial loans, consumer loans, and related parties),•
Type of financing receivable (for example, mortgage loans, credit card loans, and finance leases),•
Industry sector (for example, real estate and mining),2 FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, available at www.fasb.org. 3 FASB Statement No. 116, Accounting for Contributions Received and Contributions Made, available at www.fasb.org. 4 EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, available at www.fasb.org.
5 FASB Statements No. 5, Accounting for Contingencies, and No. 114, Accounting by Creditors for Impairment of a Loan, both available at www.fasb.org.
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•
Type of collateral (for example, residential property, commercial property, government guaranteed, and unsecured),•
Geographic distribution, including domestic and international, and•
The requirements of the FASB Staff Position on concentration of credit risk, which include factors related to certain loan product terms related to credit risk.6Allowance for Credit Losses. Companies would be required to disclose information that enables financial-statement users to understand the risk characteristics of the portfolio segments used in estimating the allowance for credit losses, the factors and methodologies used in estimating the allowance for each portfolio segment, and the activity in both the receivables and the allowance for each portfolio segment. They would be specifically required to disclose the following for each portfolio segment:
•
A description of the accounting policies and methodology used to estimate the allowance for credit losses that includes a description of the factors that influenced management’s judgment (for example, historical losses and existing economic conditions) and a discussion of risk elements relevant to each portfolio segment. Any changes from prior periods and management’s rationale for the change would have to be disclosed.•
A description of management’s policy for charging off uncollectible financing receivables.•
The activity in the total allowance for credit losses, including the balance in the allowance at the beginning and end of each period, additions charged to operations, direct write-downs charged against the allowance, changes in methods and estimates, if any, and recoveries of amounts previously charged off. This information would be presented both separately by portfolio segment and in the aggregate for impaired financing receivables that are evaluated individually as well as for those evaluated collectively.•
The activity in the financing receivables related to the allowance for credit losses, including the carrying amount at the beginning and end of each period, and the significant changes in the activity that may include originations, portfolio purchases, repayments, direct write-downs charged against financing receivables, and transfers to or from either the collec-tively or the individually impaired balance. All activities that are not considered significant should be aggregated and disclosed as “other.” This information would be presented both separately by portfolio segment and in the aggregate for impaired financing receivables that are evaluated individually as well as for those evaluated collectively.Fair Value. The proposed Statement would require companies to disclose the fair value of loans and the methods and significant assumptions used to estimate the fair value by portfolio segment.
Credit Quality Information. Companies would have to disclose information that enables financial-statement users to assess the quantitative and qualitative risks arising from the credit quality of its financing receivables. The following information would have to be disclosed separately by class of financing receivable:
1. Management’s policy for determining past due or delinquency status (i.e., whether past due status is based on how recently payments have been received or by contractual terms). 2. For financing receivables carried at amortized cost that are neither past due as determined by
management’s policy nor impaired as defined by Statement 114, quantitative and qualitative information about the credit quality of financing receivables at the end of a reporting 6 FASB Staff Position SOP 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk, available at
Defining Issues June 2009, No. 09-29 4
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period, including a description of the credit quality indicator and the carrying amount of the financing receivables by credit quality indicator. If a company uses internal risk ratings or consumer credit risk scores as a credit quality indicator, additional disclosures would be required:
•
A regulated company that discloses a class of financing receivables based internal risk ratings would be required to explain how the company’s internal risk ratings compare with the federal regulatory ratings of pass, special mention, substandard, doubtful, and loss.7•
A company that discloses a class of financing receivables on the basis of consumer credit risk scores would be required to update the consumer credit risk scores annually and disclose the date or range of dates that the scores were last updated.3. For financing receivables carried at a measurement other than amortized cost that are neither past due as determined by management’s policy nor impaired, quantitative information about the credit quality at the end of the reporting period, separately by measurement attribute. 4. For financing receivables that are past due as determined by management’s policy, but not
impaired, an analysis of the age of the carrying amount of financing receivables at the end of the reporting period.
5. The carrying amount at the end of the reporting period of financing receivables past due 90 days or more, but not impaired, for which interest is still accruing.
6. The carrying amount of financing receivables at the end of the reporting period that are now considered current but have been modified in the current year subsequent to being past due. A modification of terms of a financing receivable includes, but is not limited to:
•
Absolute or contingent reduction of the stated interest rate for the remaining original life of the debt,•
Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk,•
Absolute or contingent reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, and•
Absolute or contingent reduction of accrued interest.7. The total of financing receivables disclosed above in (2) through (4) reconciled to the allowance for credit losses for collectively impaired financing receivables by portfolio segment.
Impaired Financing Receivables. Companies would be required to disclose information separately by class of financing receivable that enables financial-statement users to understand the accounting for, and amount of, financing receivables that meet the definition of an impaired loan in Statement 114. These disclosures would include the following:
•
Management’s policy for determining which loans the creditor individually assesses for impairment.•
Management’s policy for recognizing interest income on impaired financing receivables, including how cash receipts are recorded.•
At each balance sheet date, the total carrying amount and the total unpaid principal balance of the impaired financing receivables for financing receivables with no related allowance for 7 These ratings are defined in the Uniform Agreement on the Classification of Assets and Appraisal of Securities Held by Banksand Thrifts issued by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision.
This is a publication of KPMG's Department of Professional Practice 212-909-5600
Contributing authors:
Thomas W. Canfarotta David J. Reavy Enrique M. Tejerina Hillary H. Larson
Earlier editions are available at: www.us.kpmg.com/definingissues Defining Issues® is a registered trademark of KPMG LLP. ©2001-2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 20898NSS
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The factors that the company considered in determining that the financing receivable is impaired.•
For each period: the average carrying amount of the impaired financing receivables during the period, the related amount of interest income recognized during the time within that period the financing receivables were impaired, and, unless not practicable, the amount of interest income recognized using a cash-basis method of accounting during the time within that period that the financing receivables were impaired.If an impaired financing receivable has been restructured in a troubled debt restructuring involving a modification of terms, in years after the restructuring a company would not be required to disclose information about the financing receivable if the restructuring meets the following conditions:
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The restructuring agreement specifies an interest rate equal to or greater than the rate that the creditor was willing to accept at the time of the restructuring for a new financing receivable with comparable risk, and•
The financing receivable is not impaired based on the terms specified by the restructuring agreement.This exception would have to be applied consistently to all loans restructured in a troubled debt restructuring that meet the above criteria.
Nonaccrual Status. Companies would have to disclose the following information separately by class of financing receivable to enable financial-statement users to understand the accounting for, and amount of, financing receivables that are on nonaccrual status:
•
The policy for placing financing receivables on nonaccrual status or discontinuing the accrual of interest and for recording payments received on nonaccrual financing receivables, and the policy for resuming accrual of interest, and•
The carrying amount of financing receivables on nonaccrual status as of each balance- sheet date.Effective Date and Transition
The proposed Statement would be effective beginning with the first interim or annual reporting period ending after December 15, 2009. Early application would be encouraged. The proposal would encourage, but not require, comparative disclosures for earlier periods that ended before initial adoption and would require companies to provide comparative disclosures for periods that end after the proposed effective date.
The descriptive and summary statements in this newsletter are not intended to be a
substitute for the requirements of the proposed Statement or any other applicable or potential accounting literature or SEC regulations. Companies applying GAAP or filing with the SEC should apply the texts of the relevant laws, regulations, and accounting requirements, consider their particular circumstances, and consult their accounting and legal advisors.
