finan service industry

8/7/2019 finan service industry

1/140

2010 Accounting,Financial Reporting, andRegulatory Update

Financial Services Industry


2/140

Contents

Foreword 1

Section 1

Signicant Accounting Developments

Consolidations/Transers o Financial Assets 2

Loan Accounting 9

Accounting or Impairment and TDRs 11

Fair Value Measurements 18

Accounting or Financial Instruments Eects o the FASBs Proposed ASU 23

Financial Reporting Implications o the Dodd-Frank Wall Street Reorm and Consumer Protection Act 34

Section 2

SEC Update and Hot Topics 3

Introduction 39

SEC Issues Various Proposed and Final Rules and Interpretations Aecting Financial Reporting 39

SEC Issues Proposed Rules Addressing Securities and Capital Markets 41

SEC Finalizes Rules Addressing Securities and Capital Markets 42

Recent Legislation 44

SEC Support o Convergence and Global Accounting Standards 45

Section 3

FASB and IASB Update 47

Introduction 47

FASB Accounting Standard Updates 47Proposed FASB Accounting Standard Updates 56

Joint Projects o the FASB and IASB 58

IFRS Update 67

IASB Pending Projects 70

Section 4

Asset Management Sector Supplement 77

Asset Management Accounting Update 77

Regulatory Sector Supplement Asset Management 90

Section 5Banking and Securities Sector Supplement 96

Banking and Securities Accounting Update 96

Regulatory Sector Supplement Banking 98

Regulatory Sector Supplement Securities 106

Section 6

Insurance Sector Supplement 108

Insurance Accounting Update 108

Regulatory Sector Supplement Insurance 113


3/140Contents:

Section 7

Real Estate Sector Supplement 119

Real Estate Accounting Update 119

Appendix A

Abbreviations 12

Appendix B

Glossary o Topics, Standards, and Regulations 12

Appendix C

Deloitte Specialists and Acknowledgments 133

Appendix D

Other Resources 136


4/1401

December 2010

Those o us in the fnancial services industry have continued to experience challenges and opportunities asa result o fnancial conditions both in the United States and abroad. To help you address such challenges,we are pleased to present Deloittes annual Accounting, Financial Reporting, and Regulatory Update. Wehope youll fnd it useul as you enter your year-end reporting cycle.

This years edition outlines accounting, fnancial reporting, and regulatory updates that have occurred in2010 and aect the fnancial services industry.

The frst ew chapters cover developments that are relevant to companies throughout the fnancial servicesindustry. Included are SEC, FASB, IASB, and fnancial reorm updates as well as detailed commentary aboutsignifcant accounting developments.

The remaining chapters highlight insights targeted to the asset management, banking and securities,

insurance, and real estate sectors.

This years edition covers developments that took place through the beginning o the ourth quarter.We hope you fnd it to be a useul resource, and we welcome your eedback. Please also visit us at

www.deloitte.com or more inormation, and watch or our Heads Upnewsletter, to be issued inmid-December, covering highlights rom the 2010 AICPA National Conerence on Current SEC and PCAOBDevelopments.

As always, we encourage you to contact your Deloitte team or additional inormation and assistance.

Jim Reichbach Susan L. FreshourVice Chairman, Financial Services Financial Services Industry Proessional Practice Director

Deloitte LLP Deloitte & Touche LLP

Foreword
http://www.deloitte.com/http://www.deloitte.com/


5/140Section 1: Signiicant Accounting Developments 2

Section 1Signifcant Accounting Developments

Consolidations/Transers o Financial Assets

Introduction

Over the past ew years, the fnancial services industry has seen substantial changes in the accountingor transers o fnancial assets and consolidation o VIEs. In June 2009, the FASB issued Statement 166,subsequently codifed as ASU 2009-16, which amended Statement 140. The FASB concurrently issuedStatement 167, subsequently codifed as ASU 2009-17, which amended Interpretation 46(R). Both ASUshave signifcantly aected entities fnancial statements and business arrangements.

To recap, ASU 2009-16 removed the concept o a QSPE and required additional clarifcation about therisks that a transeror continues to be exposed to because o its continuing involvement in transerred

fnancial assets. Furthermore, ASU 2009-17 replaced Interpretation 46(R)s risks-and-rewards-basedquantitative approach to consolidation with a more qualitative approach that requires an entity to havethe obligation to absorb losses o . . . or the right to receive benefts rom the VIE that could potentiallybe signifcant to the VIE along with the power to direct the activities o a VIE that most signifcantlyimpact the VIEs economic perormance.

When ASU 2009-17 was frst issued, many reporting entities hoped that under the ASUs morequalitative approach, they would need to perorm less analysis to determine whether an entity shouldbe consolidated. Reporting entities initially concentrated on understanding the eect that ASU 2009-17would have on their ormer QSPEs, which would no longer be outside the scope o ASU 2009-17.

However, reporting entities have ound that the initial adoption o ASU 2009-17 is more time-consuming,since entities previously not deemed to be VIEs under Interpretation 46(R) are now considered VIEs underthe new guidance. For example, certain entities, such as limited partnerships that contained simplemajority kick-out rights to remove the general partner without cause, were not considered VIEs beore theadoption o ASU 2009-17. However, under the new guidance, the limited partnership could potentially be

a VIE i the kick-out rights are not unilaterally held by one party.

To lessen the burden or certain entities, on January 27, 2010, the FASB voted to fnalize ASU 2010-10,which deerred the eective date o ASU 2009-17 or a reporting entitys interest in certain entities andor certain money market mutual unds.1 ASU 2010-10 addressed concerns that (1) the joint consolidation

model under development by the FASB and the IASB may result in dierent consolidation conclusionsor asset managers and (2) an asset manager consolidating certain unds would not provide useulinormation to investors.

Although the eects o ASU 2009-17 on ASC 810-10 and the fnancial services industry have receivedthe most media attention, the implications o ASU 2009-17 were elt in nearly every industry, includingenergy and resources, hospitality and tourism, manuacturing, and retail. Specifcally, the banking andsecurities industries experienced a more than twelve-old increase in the percentage o consolidated

VIE assets to total assets ater the frst quarter o 2010 (when adoption o the standard was required). 2This extraordinary increase in consolidated VIEs contributed to an assortment o implementation and

operational issues.

This section addresses key implementation issues, as well as some operational and fnancial statementconcerns, related to the adoption o ASU 2009-16 and ASU 2009-17. Some o the upcoming FASB andIASB projects associated with these standards are also highlighted.

1 See Deloittes January 27, 2010, Heads Up, FASB Votes to Finalize Deerral o Statement 167 or Certain Investment Funds.

2 See Deloittes May 2010 report, Back On-Balance Sheet: Observations F rom the Adoption o FAS 167.
http://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statements-Internal-Control-Audit/Accounting-Standards-Communications/1a5e147aa8176210VgnVCM100000ba42f00aRCRD.htmhttp://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statements-Internal-Control-Audit/Accounting-Standards-Communications/1a5e147aa8176210VgnVCM100000ba42f00aRCRD.htmhttp://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statements-Internal-Control-Audit/Accounting-Standards-Communications/1a5e147aa8176210VgnVCM100000ba42f00aRCRD.htmhttp://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Accounting-Reporting/f3a70ca28d9f8210VgnVCM200000bb42f00aRCRD.htmhttp://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Accounting-Reporting/f3a70ca28d9f8210VgnVCM200000bb42f00aRCRD.htmhttp://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statements-Internal-Control-Audit/Accounting-Standards-Communications/1a5e147aa8176210VgnVCM100000ba42f00aRCRD.htm



General Implementation Issues Related to ASU 2009-16

Some implementation issues have arisen as a result o ASU 2009-16s introduction o the concept oa participating interest. Many fnancial institutions transer (participate) a portion o individual loans toother fnancial institutions to limit credit risk or provide liquidity. Loan participations requently containterms that entities must careully evaluate to determine whether the transerred portions o a loan areparticipating interests. ASU 2009-16 defned participating interests and clarifed that sale accountingis precluded or transers o portions o fnancial assets that do not meet this defnition. Entities must

evaluate transers o portions o fnancial assets that meet the defnition o a participating interest underASC 860-10-40-6A to determine whether derecognition under ASC 860-10-40-5 is appropriate.

Financial institutions oten issue participations in loans they have originated, and entities look to theguidance on transers o fnancial assets to account or those transactions appropriately. To satisy thedefnition o a participating interest, transers o fnancial assets must meet certain requirements, includingthe ollowing:

Prorataownershipinterestisintheentireassettransferred.

Proportionatedivisionofallcashowsreceivedfromtheunderlyingnancialassetisinanamount equal to the ownership share.

Therightsofeachparticipatinginterestholderhavethesamepriority;nooneinterestholdersinterest is subordinate to others.

Nopartyhastherighttopledgeorexchangetheunderlyingnancialassetsunlessallparticipating interest holders agree.

For example, consider the impact o the concept o participating interests on the accounting or transers

involving asset-backed CP conduits. Generally, the transeror transers fnancial assets to a bankruptcy-remote entity that will then transer assets, or interests in assets, to the CP conduit. I an entity transersa portion o trade receivables to a CP conduit, it must perorm an analysis to determine whether theinterests transerred represent participating interests. In pro rata participation, the conduit and transeror

areeachentitledtotheirspeciedportionofallcashowscollected.

Assume that trade receivables pool 1 and trade receivables pool 2 are transerred to a CP conduit. Eachpool has a par value o $50, and the $100 total value o assets purchased by the CP conduit is undedwith $80 o CP issued by the conduit. In an 80 percent pro rata participation, i $45 is collected on pool 1and $5 is collected on pool 2, the CP conduit is entitled to $40 (80 percent o the total o $50 collected)and the transeror receives $10 or its pro rata participation in the assets.

I all the criteria o a participating interest are met, the entity would derecognize the participating interest

only ater perorming the traditional sale accounting analysis.

General ASU 2009-17 Implementation Issues

One o the most arduous tasks entities aced in applying ASU 2009-17 was determining whether toconsolidate their VIEs.3 Beore making this determination, entities needed to consider a series o otherissues.

3 See ootnote 2.



This section highlights some o the key implementation issues associated with ASU 2009-17 that havearisen over this past year and includes discussion o the ollowing questions:

DoestheentityqualifyfortheFASBsrecentlyissueddeferral?

Howdoestheentitynowevaluatetheserviceproviderfeesindeterminingtheprimary

beneciary?

WhatarethemostsignicantactivitiesoftheVIE?

IstheentitytheprimarybeneciaryoftheVIEunderthenewrequirements?

Whatistheeffectofkick-outrightsinthenewVIEconsolidationanalysis?

Does the Entity Qualiy or the FASBs Recently Issued Deerral?

ASU 2010-10 deers the application o ASU 2009-17 or a reporting entitys interest in an entity i all theollowing conditions are met:

Theentityeither(1)hasalloftheattributesspeciedinASC946-10-15-2(a)(d)4 or (2) is an entitywhose industry practice is to apply guidance that is consistent with the measurement principles inASC 946 or fnancial reporting purposes.

Thereportingentitydoesnothaveanobligationtofundlossesoftheentitythatcouldpotentiallybe signifcant to the entity. In evaluating this condition, entities should consider implicit or explicitguarantees provided by the reporting entity and its related parties, i any.

Theentityisnotasecuritizationentity,anasset-backednancingentity,oranentitythatwasormerly considered a QSPE.

Examples o entities that may satisy the conditions o the deerral include, but are not limited to, mutualunds, hedge unds, private equity unds, mortgage real estate investment unds, and venture capitalunds. The FASB noted that the examples in the implementation guidance in ASU 2009-17 would not bemodifed as a result o the ASUs amendments and that an entity whose characteristics are consistent with

the characteristics o a VIE outlined in ASU 2009-17s implementation guidance should not be subject tothe deerral.5

How Does the Entity Now Evaluate the Service Provider Fees in Determining the PrimaryBenefciary?

One topic that received much attention involved service providers (e.g., und managers, master servicers)

and how to evaluate whether the ee they received that was identifed as a variable interest underASC 810-10-55-37 would be potentially signifcant under ASC 810-10-25-38A(b). The consensus wasthat it would depend on which o the six criteria in ASC 810-10-55-37 caused the ee to be a variableinterest, the quantitative criteria in (c), (e), or () or the more qualitative criteria in (a), (b), or (d). I the

quantitative conditions result in the ees being considered a variable interest (i.e., the anticipated ee

4 The attributes are as ollows:

a. Investment activity. The investment company's primary business activity involves investing its assets, usually in the securities o other entities

not under common management, or current income, appreciation, or both.

b. Unit ownership. Ownership in the investment company is represented by units o investments, such as shares o stock or partnership interests,

to which proportionate shares o net assets can be attributed.

c. Pooling o unds. The unds o the investment company's owners are pooled to avail owners o proessional investment management.

d. Reporting entity. The investment company is the primary reporting entity.

5 See ootnote 1.



absorbs more than an insignifcant amount o the expected residual returns o the VIE), the ee generallywould be presumed to be potentially signifcant under ASC 810-10-25-38A(b). However, i the more

qualitative conditions result in the ees being considered a variable interest (e.g., a loan servicer receivesa subordinate ee o 5 basis points, which is deemed to be a market-based ee at the time o the analysis,

and the servicer does not hold any other benefcial interests), that ee may not necessarily result in avariable interest that is potentially signifcant to the VIE. A reporting entity generally must use judgmentin making such determinations, and the outcome o the analysis varies on the basis o the acts andcircumstances.

What Are the Most Signifcant Activities o the VIE? Is the Entity the Primary Benefciaryo the VIE Under the New Requirements?

Many entities initially struggled with this new qualitative model and desired to apply thresholds or brightlines to determine whether to consolidate a VIE. This desire to apply a more quantitative analysis was

ueled by the term signifcant, as used in ASC 810-10-25-38A(b) with respect to the determination o aprimary benefciary. Questions arose about what amount or percentage would be considered signifcantand about whether dierent thresholds were associated with signifcance and insignifcance (the terminsignifcant is introduced in the determination o whether a servicing ee is a variable interest underASC 810-10-55-37). As practice and guidance developed, entities began ocusing more on the qualitativeaspects o their economic involvements rather than relying strictly on quantitative measures to determinesignifcance. The SEC suggested a need or both a qualitative and a quantitative analysis to support aconclusion regarding signifcance. Arie S. Wilgenburg made the ollowing remarks at the 2009 AICPAConerence:6

[S]imilar to how we have talked in the recent past about materiality assessments being based on thetotal mix o inormation, we believe that assessing signifcance should also be based on both quan-titative and qualitative actors. While not all-inclusive, some o the qualitative actors that you mightconsider when determining whether a reporting enterprise has a controlling fnancial interest include:

1. The purpose and design o the entity. What risks was the entity designed to create and passontoitsvariableinterestholders?

2. A second actor may be the terms and characteristics o your fnancial interest. While theprobability o certain events occurring would generally not actor into an analysis o whether afnancial interest could potentially be signifcant, the terms and characteristics o the fnancialinterest (including the level o seniority o the interest), would be a actor to consider.

3. A third actor might be the enterprises business purpose or holding the fnancial interest. Forexample, a trading-desk employee might purchase a fnancial interest in a structure solely orshort-term trading purposes well ater the date on which the enterprise frst became involvedwith the structure. In this instance, the decision making associated with managing thestructure is independent o the short-term investment decision. This seems dierent rom anexample in which a sponsor transers fnancial assets into a structure, sells o various tranches,

but retains a residual interest in the structure.

As previously mentioned this list o qualitative actors is neither all-inclusive nor determinative and theanalysis or a particular set o acts and circumstances still requires reasonable judgment.

The next challenge was to determine the most signifcant activities o a VIE and who had the power over

those activities. This determination largely depended on the nature and design o the entity. For certainentities, such as certain securitization structures involving benefcial interests in one type o collateral, theanalysis was airly straightorward. For others, such as operating partnerships or joint ventures, the analysiswas contingent on the specifc design and operations o the entity.

6 Speech by SEC Sta: Remarks beore the 2009 AICPA National Conerence on Current SEC and PCAOB Developments by Arie S. Wilgenburg,

December 7, 2009.



In addition, this analysis has been particularly challenging or arrangements in which one party is exposedto the signifcant risks and rewards o a VIE yet does not appear to have the power to direct the most

signifcant activities o the VIE. The FASB added language to ASU 2009-17 that requires the exerciseo additional skepticism when the relative economic interests o the parties to an arrangement are

inconsistent with the stated power o each o these parties. Further, the SEC sta has publicly commentedon multiple occasions that it will scrutinize the accounting or arrangements that lack economic substanceor appear to be motivated by a desire to deconsolidate.

What Is the Eect o Kick-Out Rights in the New VIE Consolidation Analysis?

Also requently debated was a question regarding a provision in ASU 2009-17 under which a single partymust be able to exercise kick-out rights, or participating rights, or these rights to be considered in theconsolidation analysis. In particular, one question that came up was whether the ability o the board odirectors to remove a manager or other party with power over the signifcant decision making would

be considered to be power held by a single party. A practice has emerged in which a board o directorsis an extension o the equity investors and thereore does not constitute a single party or ASU 2009-17purposes unless a single equity investor (or related-party group o equity investors) controls representationon the board o directors (i.e., has more than 50 percent representation on a board that requires a simplemajority vote, thereby indirectly controlling the boards vote).

Operational Issues

Once entities identifed which VIEs required consolidation, they soon ocused on the operational aspectso consolidation or the frst time. The ollowing are just a ew o the operational challenges entities haveaced:

Needforadditionaldedicatedresources.

Accesstonecessarynancialinformationonatimelybasis.

Needfordevelopmentofadditionalinternalcontrols.

Depending on the type o entity applying ASU 2009-17 and its involvements and variable interests held,the implementation may have taken just a ew days or it may have equated to many grueling hours witha large number o dedicated resources (e.g., employees, consultants, auditors). For some companies,

the consolidation o new VIEs may have been simple enough to perorm by using a spreadsheet tool.For others, it may have involved signifcant systems modifcations or upgrades to acilitate an expandedconsolidation process.

Another operational challenge that entities have been dealing with is access to the necessary fnancial

inormation on a timely basis. Many entities have used a reporting lag in consolidating their VIEs (i.e.,they have used February VIE inormation or a March quarter-end consolidation) while monitoring or anymaterial events occurring during the lag period. ASC 810-10-45-12 states that it ordinarily is easible orthe subsidiary to prepare, or consolidation purposes, fnancial statements or a period that correspondswith or closely approaches the fscal period o the parent. ASC 810-10-45-12 urther states that as long

as the fscal-year-end dates o the parent and subsidiary are not more than three months apart, it wouldbe acceptable to use the subsidiarys fnancial statements or its fscal period. Similarly, the SEC states thatthe dierence cannot be more than 93 days (see SEC Regulation S-X, Rule 3A-02) and that the entity mustdisclose both the closing date or the subsidiary and the actors supporting the parents use o dierentfscal-year-end dates.



Although the guidance does not speciy when dierent fscal-year-end dates would be appropriate, aparent should always be able to support its conclusion. For example, a calendar-year parent may have its

subsidiary use a November 30 year-end simply to ensure that the subsidiarys fnancial inormation is ullycompiled, reliable, and available to include in the parents annual fnancial statements.

The parent should also evaluate material events occurring during any reporting time lag (i.e., the period

between the subsidiarys year-end reporting date and the parents balance sheet date) to determinewhether the eects o such events should be disclosed or recorded in the parents fnancial statements.Under ASC 810-10-45-12 and Regulation S-X, Rule 3A-02, recognition should be given by disclosureor otherwise to the eect o intervening events that materially aect the [parents] fnancial position orresults o operations.7

Furthermore,securitizationvehicleshavehistoricallybeenstrictlycashowvehiclesandwereneverrequired to prepare separate fnancial reports under U.S. GAAP. The creation o initial U.S. GAAP fnancialstatements or these entities, and the supporting ootnote disclosures, presented another challenge and

required signifcant time and resources.

Public companies that are required to consolidate an entity may also ace challenges rom a Sarbanes-Oxley control perspective to the extent that the fnancial inormation processing was outside their control(i.e., the structure o CDOs or CLOs depended on trustee reports). Entities may have relied on SAS 70reports or developed other control processes to gain sufcient comort with the fnancial inormation.The CAQ also recently issued an alert that provides the SEC stas views on ICFR requirements or entitiesnewly consolidated under ASU 2009-17. Such considerations include the requirement or companies toconsider ICFR or the consolidated entity. The SEC sta believes that registrants will most likely have theright or authority to assess internal controls o the consolidated entity, and since consolidation will occur

as o the frst day o the fscal year, registrants will have sufcient time to perorm such an assessment.

An entity can consider the ollowing when assessing ICFR or newly consolidated entities:

Propersegregationofdutiesfornancialreportingpurposes.

Appropriateproceduresforreviewofnancialreportingpackages.

Consistentapplicationofaccountingpoliciesacrossreportingentities.

Financial Statement Presentation Issues

The measurement o assets and liabilities now presented on the balance sheet as a result o theapplication o ASU 2009-17 has been another source o contemplation or preparers. Under the ASU,an entity can choose, upon initial adoption, to measure the assets and liabilities being consolidated (1)

at their carrying amounts, (2) at the UPB or lending-related activities, (3) at their initial air value (withsubsequent measurements based on the application o the relevant GAAP or those assets or liabilities),or (4) by election o the FVO. O a 40-entity sample, 43 percent selected the carrying amount, 23 percentelected the FVO, 7 percent selected the UPB, and 27 percent elected a combination o methods. 8 Thissection will highlight a presentation issue that asset managers experienced this past year.

Many asset managers who consolidate CFEs will elect the FVO to mitigate the potential income statement

volatility that could occur under the carrying amount transition methods in ASC 810-10-65-2. Under thosemethods, subsequent impairments on the assets held by a CFE would not be oset by recognition odeclines in air value o the benefcial interests issued by the CFE.

7 For additional inormation, see 810-10-45 (Q&A 06), Parent and Subsid iary With Dierent Fiscal-Year-End Dates (available on Technical Library:

The Deloitte Accounting Research Tool).

8 See ootnote 2.
http://www.deloitte.com/us/techlibraryhttp://www.deloitte.com/us/techlibraryhttp://www.deloitte.com/us/techlibraryhttp://www.deloitte.com/us/techlibrary



Asset managers that have elected the FVO have generally concluded that upon initial adoption o ASU2009-17, the aggregate air value o the assets in the CFE exceeds the aggregate air value o the CFEs

benefcial interest (liabilities). Even though the liabilities are nonrecourse obligations, this situation mayoccur as a result o the valuation premise and market participant guidance in ASC 820. In particular, the

market participant exit prices or the CFEs benefcial interests oten contain liquidity discounts that are notinherent in the market participant exit prices or the CFEs assets. In addition, there may not be a perectcorrelation between the duration o the assets and liabilities o the CFE.

Accounting or the excess o the air value o the assets over the air value o the liabilities o a CFEpresents a challenge and could result in the ollowing eects on the fnancial statements o theconsolidated entity that includes the asset manager:

1. Upon initial adoption o ASU 2009-17, equity o the parent is increased by the excess o theair value o the CFEs assets over its liabilities in accordance with the transition guidance in ASC810-10-65-2(c).9

2. In subsequent fnancial reporting periods, the net change in air value o the fnancial instruments

oftheCFEwouldbereectedasincomeorlossoftheconsolidatedentitythatincludestheassetmanager. Although the net change could be income or loss in any fnancial reporting period, thenet change over the remaining lie o the CFE would result in a loss.

This way o accounting caused great concern or entities consolidating these structures, since thenancialreportingdidnotreecttheeconomicsofthetransactionandresultedinapresentationdifcult or investors to understand. Essentially, the above accounting would result in a consolidatedentity that includes all income and loss (and associated volatility) in its income statement or which itis not economically exposed. That is, i the asset managers involvement with the CFE is limited to a

management ee, a portion (or all) o the CFEs periodic net income or loss will have economic eects that

are either benefcial or detrimental to the third-party benefcial interest holders, but it would neverthelessbereectedasnetincomeorlossoftheconsolidatedentitythatincludestheassetmanager.Inaddition,the reversal o the initial amount recorded to retained earnings (i.e., over time as the values o the assetsand benefcial interests converge) would result in the asset managers recognizing less income than itsactual management ees.

The question was raised with the sta o the SECs Ofce o the Chie Accountant. The stacommunicated that it would not object to an appropriation o retained earnings related to the transitionadjustment rom adoption. In addition, the sta stated that it would object to exclusion, in uture periods,

o any o the changes associated with these variable interest entities rom the consolidated net incomeor loss o the consolidated entity. However, the sta would not object to an appropriate attribution othe periodic net income or loss between the asset manager (parent interests) and the benefcial interestholders (noncontrolling interests) as an allocation to noncontrolling interest holders, with a corresponding

adjustment to the amount o the appropriated retained earnings.

For additional details on implementation and operational issues, see Deloittes May 2010 report, BackOn-Balance Sheet: Observations From the Adoption o FAS 167.

Looking Ahead Convergence Project

The FASB and IASB have been jointly developing a comprehensive consolidation model or all entities(both voting interest entities and VIEs). The basis or the consolidation ocuses on control, which is defned

9 ASC 810-10-65-2(c) states, Any dierence between the net amount added to the balance sheet o the consolidating entity and the amount o any

previously recognized interest in the newly consolidated VIE shall be recognized as a cumulative eect adjustment to retained earnings.



as having the ollowing elements: (1) power over the entity, (2) exposure/rights to variable returns rom itsinvolvement with the entity, and (3) the ability to use its power over the entity to aect the amount o the

reporting entitys returns.

The IASB has completed its deliberations separately rom the FASB and plans to issue a fnal standard bythe end o 2010. The FASB will consider U.S. stakeholder input on the IASBs published sta drat and,

on the basis o this input, determine whether it will issue an ED that is consistent with the IASBs fnalstandard.

Looking Ahead Repurchase Transactions

The FASB is currently working on a project to improve the accounting or repurchase transactions byamending the eective control criteria or transactions involving repurchase agreements or other

agreements that both entitle and obligate the transeror to repurchase or redeem fnancial assets beoretheir maturity. ASC 860 states that i a transeror maintains eective control over fnancial assets, it isprecludedfromaccountingforthetransferofnancialassetsasasale;rather,itmustaccountforthetranser as a secured borrowing.

In particular, a transeror maintains eective control over transerred fnancial assets i there is arepurchase agreement that both entitles and obligates the transeror to repurchase fnancial assets beoretheir maturity. ASC 860 also provides a criterion that indicates that a transeror maintains eective controlover a fnancial asset when the transeror is able to purchase or redeem the fnancial asset on substantially

agreed terms, even in the event o deault by the transeree. To comply with this criterion, the transerormust maintain cash or sufcient collateral to und substantially all the cost o purchasing replacementfnancial assets rom others.

The FASB tentatively decided to remove this cash collateral criterion a transeror uses to determine

whether a transer o fnancial assets within a repurchase agreement is to be accounted or as a sale or asa secured borrowing. The Board has concluded its deliberations on this project and expects to issue an EDin the ourth quarter o 2010.

Loan Accounting

Introduction New Guidance

The FASB issued two ASUs in 2010 that aect registrants with loan receivable portolios. On April 29, itreleased ASU 2010-18, which provides guidance on whether an entity should remove a modifed loan thatconstitutes a TDR under ASC 310-40 rom a pool o loans accounted or as a single asset underASC 310-30.

On July 21, the Board issued ASU 2010-20, which amends ASC 310 by requiring more robust anddisaggregated disclosures about the credit quality o an entitys fnancing receivables and its allowance or

credit losses. The disclosure amendments apply to all entities with fnancing receivables, whether publicor nonpublic. A fnancing receivable is defned as a contractual right to receive money on demand, or onfxed or determinable dates, that is recognized as an asset in the entitys statement o fnancial position.Examples o fnancing receivables include (1) loans, (2) trade accounts receivable, (3) notes receivable, (4)credit cards, and (5) lease receivables (other than operating leases). The amended disclosure guidancedoes not apply to short-term trade accounts receivable or receivables measured at (1) air value, withchanges in air value recorded in earnings, or (2) lower o cost or air value. It also excludes rom its scopedebt securities, unconditional promises to give, and benefcial interests in securitized fnancial assets.



Implementation Considerations

ASU 2010-18

ASU 2010-18 establishes that entities should not evaluate whether a modifcation o loans (that are parto a pool accounted or under ASC 310-30) meets the criteria or a TDR in ASC 310-40. In addition,modifed loans should not be removed rom the pool unless any o the criteria in ASC 310-30-40-1 aremet. Entities are allowed a one-time election to change the unit o accounting rom a pool basis to anindividual loan basis. Such an election would be applied on a pool-by-pool basis. This would allow entities

that have elected to apply the guidance in ASC 310-40 on troubled debt restructurings to uture loanmodifcations. The ASU is eective prospectively or any modifcations o a loan or loans accounted orwithin a pool in the frst interim or annual reporting period ending ater July 15, 2010.

Registrants should be aware that the FASBs proposed ASU on accounting or fnancial instruments (seeSection 3) contains a requirement to remove modifed loans that constitute TDRs under ASC 310-40 roma pool o loans, contrary to ASU 2010-18. Accordingly, entities may be required to change their practice inthe uture i the proposed ASU is fnalized as exposed.

ASU 2010-20

Under ASU 2010-20, at the portolio segment level, an entity is only required to provide disclosuresabout the allowance or credit losses related to fnancing receivables and qualitative inormation relatedto modifcations o fnancing receivables. The ASU defnes a portolio segment as the level at which anentity develops and documents a systematic methodology to determine its allowance or credit losses.For example, a portolio segment may be defned by the dierent types o fnancing receivables (e.g.,mortgage loans, auto loans), the industry to which the fnancing receivable relates, or the diering riskratings. All other disclosures required by the ASU are to be provided by class o fnancing receivable, which

is generally a disaggregation o a portolio segment and is determined on the basis o the nature andextent o an entitys exposure to credit risk arising rom fnancing receivables. At a minimum, classes o

fnancing receivables must be frst (1) segregated on the basis o the measurement attribute (amortizedcost and present value o amounts to be received) and then (2) disaggregated to the level that an entityuses when assessing and monitoring the risk and perormance o the portolio (including the entitysassessment o the risk characteristics o the fnancing receivables). For example, a loan portolio may frstbe disaggregated into classes on the basis o whether the loans were initially measured at amortized costor purchased credit impaired. The loan portolio may then be urther disaggregated into commercial,consumer,andresidentialbecausesuchclassesbestreectdifferentriskcharacteristicsandareconsistentwith the method the entity uses to monitor and assess loan portolio credit risk.

The ASUs new and amended disclosure requirements ocus on the ollowing fve topics: (1) nonaccrualand past due fnancing receivables, (2) allowance or credit losses related to fnancing receivables,(3) loans individually evaluated or impairment, (4) credit quality inormation, and (5) modifcations. For adetailed list o new and amended disclosure requirements see Deloittes July 22, 2010, Heads Upon ASU2010-20. In preparation or their frst flings under the new and amended disclosure requirements, entitiesshould consider any data collection issues that may arise as they gather inormation or reporting boththe period-end balances as well as the activity that occurs during a reporting period. Note, however, thaton December 9, 2010, the FASB issued a proposed ASU to deer the eective date in ASU 2010-20 ordisclosures about TDRs by creditors until the FASB fnalizes its project on determining what constitutes a

TDR or a creditor (see the Accounting or Impairments and TDRs section below or more inormation onthis project). I redeliberations o both the proposed ASU and the Boards TDR clarifcations project go asthe Board expects, the deerral o ASU 2010-20 disclosures will only last a single quarter or public entities
http://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statement-Internal-Control-Audit/Accounting-Standards-Communications/7b4aaa552ebf9210VgnVCM200000bb42f00aRCRD.htmhttp://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statement-Internal-Control-Audit/Accounting-Standards-Communications/7b4aaa552ebf9210VgnVCM200000bb42f00aRCRD.htm


14/140



The discussion below reviews some basics o TDR accounting under existing U.S. GAAP and addressesaccounting developments in TDR and impairment that took place in 2010.

TDR Decision Tree

Is the debtorexperiencing

fnancialdifculty?

Did thecompany grant a

concession?

What type oTDR does the

modifcation allunder?

Is themodifcation more

than minor accordingtoASC310-20-35-11?

Continuation o old loan.Carry orward previous basis

adjustments.

The modifcation is not a TDRand should be accounted orunder ASC 310-20, ASC 310-20-35-11 and ASC 470-50.

Measure orimpairment as

per ASC 310-10.

Recognize again or loss onrestructuring.

ASC470-60-55-79

ASC470-60-55-1114ASC 310-20-35-11

ASC 310-20-35-10

ASC 310-20-35-9

Yes

YesYes

No

No

No

Receipt o assets in ullsatisaction o the loan.

ASC 310-40-40-2-4

Modifcation o theloan terms.

ASC 310-40-35-5

Extinguishment o old loanand recognition o new loan.Recognize into income anyprevious basis adjustmentsand deer any new ees or

costs.

The ollowing diagram (presented rom the perspective o a creditor) is intended to help entities determinewhen loan modifcations are considered TDRs and what related accounting guidance they should apply.

Under current accounting guidance, when a loan modifcation is deemed a TDR, the fnancial institutionmust recognize an impairment charge in earnings, calculated on the basis o the dierence between

thepresentvalueofthemodiedcashows,byusingtheEIRoftheoriginalloanandthenancialinstitutions recorded investment in the loan. Under this approach, the impairment charge would notnecessarilyreectthefullfairvaluedeteriorationoftheloanbecausetheimpairmentdoesnottake



into account the air value o the loan or the air value o the underlying mortgage property. Thus, amodifcation o the terms o a loan may sometimes have ar less o an eect on the fnancial statements

than the true air value deterioration o the loan. In addition, a creditor may avail itsel o a practicalexpedient. As indicated in ASC 310-10-35-22, as a practical expedient, a creditor may measure

impairment based on a loans observable market price, or the air value o the collateral i the loan is acollateral dependent loan.

Financial institutions may modiy loans or numerous reasons and in numerous ways. In accordancewith ASC 470-60, no single characteristic or actor can be used alone in the determination o whethera modifcation is a TDR. In addition, because there is inadequate implementation guidance on loanimpairments, the identifcation o TDRs can involve subjectivity. Furthermore, ASC 310-40-15-9 notesthat TDRs can take a variety o orms and accordingly the industry practice o applying U.S. GAAP variesamong fnancial institutions and lacks consistency. As a result, there are signifcant accounting and auditrisks in the application o TDRs and impairments, and in 2010 the industry continues to ace the challenge

o assessing whether a modifcation represents a TDR.

Three areas in which fnancial institutions commonly experience difculty in the implementation o TDRaccounting under U.S. GAAP are (1) identifcation o TDRs by lenders, (2) impairment methods, and (3)income recognition on impaired loans.

Identication o TDRs by Lenders

On July 14, 2010, the FASB added a project to its agenda to provide additional implementation guidanceto assist lenders in determining whether a loan modifcation constitutes a TDR. The addition o this projectto the FASBs agenda was in response to concerns raised by certain constituents, including the SEC andbanking regulators, that such guidance was warranted given the signifcant increases in loan modifcationsbeing made by lenders in the current economic environment.

On October 12, 2010, the FASB issued a proposed ASU, Clarifcations to Accounting or Troubled DebtRestructurings by Creditors, to help lenders achieve more consistent identifcation o TDRs. The proposedASU would be eective or interim and annual periods ending ater June 15, 2011. Retrospectiveapplication would be required or certain disclosures (see urther discussion below on the eect o the

proposed ASU on disclosures). Comments on the proposed ASU are due by December 13, 2010.

The proposed ASU clarifes the current accounting ramework or TDRs. The discussion below ocuses onhow the FASBs proposed changes to TDR accounting address the implementation challenges related to(1) when a modifcation constitutes a concession, (2) the concept o fnancial difculty, (3) the concepto insignifcant delay in payment or shortall o amount, and (4) updated disclosure requirements. 13

When a Modication Constitutes a ConcessionIdentiying TDRs is complicated by the act that under U.S. GAAP, dierent approaches are used orcreditors and debtors to identiy whether a concession has been granted. Debtors are directed to use aneective rate test under which the original EIR is compared with the postmodifcation EIR.

In contrast, under U.S. GAAP there are examples o TDRs or creditors, but a concession test is notrequired. In act, in the FASBs proposed ASU, the Board stated that the eective rate test is only meant tobe used by the debtor. Creditors would need to consider whether a reduction in the EIR o the debt wasmadetoreectadecreaseinmarketratesortograntaconcession.Forexample,thelendermayreducetheinterestrateonaloanprimarilytoreectadecreaseinmarketinterestratestomaintainarelationship

13 For more inormation, see Deloittes October 15, 2010, Heads Up.
http://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statement-Internal-Control-Audit/Accounting-Standards-Communications/75a39ab3d80bb210VgnVCM3000001c56f00aRCRD.htmhttp://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statement-Internal-Control-Audit/Accounting-Standards-Communications/75a39ab3d80bb210VgnVCM3000001c56f00aRCRD.htmhttp://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statement-Internal-Control-Audit/Accounting-Standards-Communications/75a39ab3d80bb210VgnVCM3000001c56f00aRCRD.htm



with a borrower that can readily obtain a loan rom another lender under similar loan terms. This wouldnot be considered a TDR. Financial institutions ace the challenge o creating an eective policy to

identiy when a concession is considered granted. It can be particularly difcult to determine whether themodifed terms are at or above market terms (not a concession) or below market terms (a concession)

when there are no active markets to reer to. In response to these and other similar challenges, the FASBsproposed ASU provides the ollowing clarifcations:

Creditorsshouldbeexplicitlyprecludedfromusingtheborrowerseffectiveratetestintheirevaluation o whether a loan is a TDR.

Asituationinwhichamarketinterestrateisnotreadilyavailableisastrongindicatorthatthemodifcation was executed at a rate that is below market and that a concession may have beengranted.

Amodicationthatresultsinatemporaryorpermanentincreasetothecontractualinterestrate

cannot be presumed to be at a rate that is at or above market.

The Concept o Financial Diculty

Numerous actors indicate that a debtor is experiencing fnancial difculty. ASC 470-60-55-8 notes thatthese actors can include:

Default.

Bankruptcy.

Doubtaboutwhetherthedebtorwillcontinueasagoingconcern.

Delistingofsecurities.

Insufcientcashowstoservicedebt.

Inabilitytoobtainfundsfromothersourcesatamarketrateforsimilardebttoanontroubledborrower.

Lenders must exercise proessional judgment in assessing fnancial difculty, which can lead to diversity inpractice. For example, credit score and valuation o underlying collateral are both acceptable approachesto identiying fnancial difculty within the existing accounting ramework established by the FASB.

The FASBs proposed ASU clarifes the concept o fnancial d ifculty. Recent interagency regulatoryinterpretive guidance makes a useul distinction between borrowers that are experiencing fnancial

deteriorationand those that are experiencing fnancial difculty. According to an August 25, 2010, Boardmeeting handout, the ocus o the regulatory guidance is that a borrowers inability to service debt is aprimary indicator o fnancial difculty. Accordingly, a borrower that is not currently in deault may still beexperiencing fnancial difculty (i.e., deault may be probable even i all contractual payments are beingmade as scheduled. For example, a borrower with an adjustable rate mortgage (ARM) loan may make allo its scheduled payments when a loan is still at its teaser rate. Nonetheless, it is not uncommon or acreditor to modiy the terms o an ARM to reduce the orthcoming rate increase. Although in this exampleit appeared that the borrower was not in fnancial difculty because it made timely payments, the lendermay decide that deault is probable in the oreseeable uture (i.e., fnancial difculty exists) on the basis oeach debtors individual circumstances.
http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176157225374http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176157225374http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176157225374http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176157225374



The Concept o Insignicant Delay in Payment or Shortall o Amount

When lenders determine whether a concession has been made, they consider whether the modifcationresults in an insignifcant delay in payments or a shortall o amount. In accordance with ASC 310-10-35-17, orms o loan workouts that result in an insignifcant delay in the amount o payments contractuallydue to the organization are not typically considered TDRs and thus are not subject to an individualimpairment evaluation.

For instance, certain loans may be in short-term orbearance arrangements 14 in which the duration o the

orbearance period and the shortall in amount o payments would not signifcantly aect the eectiveyield expected to be collected on the original loan. Although the eective yield may decrease by a smallamount, the entity may conclude that this change is insignifcant. Conversely, any orm o loan workoutthat results in a more-than-insignifcant delay or shortall in amount with regard to the contractually duepayments by the borrower is subject to impairment recognition, measurement, and disclosure criteria.

The FASBs proposed ASU indicates that a creditor should not conclude that a modifcation is not a TDRsimply because it results in a delay in payment or shortall o payment amount. Under the proposed ASU,entities must exercise judgment in determining whether a delay in payment or shortall in the amount opayments is more than insignifcant. Institutions should consider the acts and circumstances o the orm

o workout arrangement in reaching this conclusion.

Updated Disclosure Requirements

Because signifcant judgment is so pervasive in the accounting or troubled assets, institutions shouldconsider whether their MD&A and other disclosures related to troubled assets are sufciently clear inexplaining how the institution accounts or those assets. Some questions that should be asked in this

process include the ollowing:

HaveIdisclosedmypolicyforidentifyingloanstoberestructured?

DomydisclosuresmakecleartoreaderstheprocessIusetodeterminewhetheraloanmodicationrepresentsaTDRorsomeotherformofmodication?

HaveIdiscussedandquantiedthetypesofconcessionsgrantedonTDRsandtherelatedredefaultratebytypeofconcession?

HaveIdisclosedinformationsuchastheredefaultrateonrenegotiatedloans,thepercentageofaccrual and nonaccrual TDRs, and other inormation that provides investors and regulators withthesuccesslevelofmyrenegotiationefforts?

Domydisclosuresexplainhowspecictrends(e.g.,anincreaseinthenumberofdelinquent

loans)haveaffectedmyallowanceforloanlosses?

DomydisclosuresexplainhowIconsiderpropertyappraisals,includinganyadjustmentstodatedappraisals,inthedeterminationofmyallowanceforloanlosses?

Domydisclosuresmakeclearthecompositionandassetqualityofmyloanportfolios(e.g.,geographicconcentrations,xedvs.oating,jumbovs.conforming)?

14 An arrangement providing a temporary reduction or suspension o payment on a borrowers mortgage loan, ollowed by an arrangement to cure

the delinquency. The borrower may or may not be making payments during the orbearance plan. Servicers typically enter into a verbal orbearance

agreement with the borrower with the expectation that the borrower is incurring temporary difculty in making payments but will be able to catch

up over a shorter period.



DoIsufcientlyunderstandhowIdeterminewhenaloanisplacedonnonaccrualstatusorwhat my companys policy is or returning a loan to accrual status (e.g., how many payments a

borrowermustmakebeforereturningtoaccrualstatus)?

HaveIclearlydisclosedanychangestomybusinesspoliciesandproceduresthatweremadeto

minimizedefaults(e.g.,numberorsizeofloansoriginated)?

HaveImadetheappropriatedisclosuresforloancommitmentsthatareaccountedforoffbalancesheet?

Recently, a number o companies received SEC comment letters regarding TDRs, nonperorming loans,and nonaccrual status. These comments are consistent with the FASBs recently issued ASU 2010-20in that the comments call or enhanced disclosures that acilitate fnancial statement users evaluationo credit risks and allowance or credit losses or an entitys portolio o fnancing receivables. Areasaected by the ASU include (1) the credit quality o receivables, (2) the allowance or loan losses, (3)

impairment and accrual or nonaccrual status o loans, and (4) loan modifcations. The ASU also requiressome new disclosures, including (1) qualitative inormation about the type o modifcations undertaken

and the fnancial impacts thereo, (2) Inormation on how an organization determines to place a loan onnonaccrual status, and (3) inormation on how an organization recognizes interest income on impairedloans.

For public entities, the new and amended disclosures required by ASU 2010-20 that relate to inormationas o the end o a reporting period will be eective or the frst interim or annual reporting periodsending on or ater December 15, 2010. That is, or calendar-year-end public entities, most o the newand amended disclosures in the ASU would be eective or this year-end reporting season. However,the disclosures that include inormation or activity that occurs during a reporting period will be eective

or the frst interim or annual periods beginning ater December 15, 2010. Those disclosures include (1)

the activity in the allowance or credit losses or each period and (2) disclosures about modifcations ofnancing receivables. For calendar-year-end public entities, those disclosures would be eective or thefrst quarter o 2011.

Impairment Methods

In accordance with ASC 310-10-35-22, when a restructured loan qualifes as a TDR, or a loan is considered

individually impaired, impairment should be measured on the basis o one o the ollowing three methods

ThepresentvalueofexpectedcashowsdiscountedattheloansoriginalEIR.

Theloansobservablemarketprice.15

Thefairvalueoftheunderlyingcollateral,asapracticalexpedient,iftheloanisconsideredcollateral dependent.16

FormostTDRs,thepresentvalueofexpectedfuturecashowsisthemethodtousebecausetheloansare not collateral dependent upon modifcation, and obtaining a market price or the loan is usually notpracticable.Ifentitiesmeasureimpairmentbyusinganestimateoftheexpectedfuturecashows,the

interestrateusedtodiscountthecashowsistheEIRbasedontheoriginalcontractualrateandnottherate specifed in the restructuring agreement. Because U.S. GAAP does not speciy an order o impairment

15 Note that the use o a air value measure in determining loan impairment may cause signifcantly dierent impairment results than does a present

valueapproachthatusesexpectedcashows.

16 I either the observable market price or collateral dependent methods are used in measuring impairment, air value disclosures under ASC 820-10

may be required and thus an entity will review or these potential disclosures.



methods or entities to use, they ollow the method that is most consistent with reasonable expectationsor the recovery o their recorded investment in the loan.

ASC 310-10-35-26 states, in part:

I a creditor bases its measure o loan impairment on a present value calculation, the estimates oexpectedfuturecashowsshallbethecreditorsbestestimatebasedonreasonableandsupportableassumptions and projections. All available evidence, including estimated costs to sell i those costs areexpectedtoreducethecashowsavailabletorepayorotherwisesatisfytheloan,shallbeconsideredindevelopingtheestimateofexpectedfuturecashows.

Notethattheestimateofexpectedcashowsisbasedonthecreditorsjudgmentandmaydifferfromwhat is received in the uture. In addition, estimates could change dramatically with changes in themarket or credit worthiness o a borrower. Thereore, present value estimates should be revisited regularly

However, ASC 310-10-35-32 notes that regardless o the original measurement method, when it becomes

probable that the organization will oreclose on a loan, impairment should be measured by comparingthe entitys recorded investment in the loan to the air value less cost to sell o the underlying collateral.Once a company looks to the collateral value to determine impairment on a restructured loan, it shouldcontinue to look to the collateral value to quantiy impairment when oreclosure is considered probable.Determining that oreclosure will most likely occur is difcult or many creditors. Thereore, it is importantor organizations to continuously assess loans that are, or may become, probable o oreclosure.

In the current economic environment, many loans are susceptible to oreclosure, and changes in theexpectedcashowsareverycommon.InaccordancewithASC310-10-35-37,aftertheinitialimpairment

measurement, management should reassess the impairment on the loan by applying a net present valuemethodbasedontheexpectedcashows.Further,theentitymaydecidetochangetheimpairmentmethod, such as when a loan becomes probable o oreclosure. Thus, changes in the valuation allowancecanresultfromchanges(i.e.,intimingoramount)ofexpectedfuturecashowsoftheimpairedloan,actualcashowsthatdifferfrompreviousprojections,orchangesincircumstancesthatwouldsuggestaninstitutionwillnotrecoverallexpectedfuturecashowsassociatedwiththeimpairedloanonthebasisofthe restructured terms (i.e., oreclosure is probable or i the underlying collateral is signifcantly damaged).

Income Recognition on Impaired Loans

Even ater a fnancial institution determines a loan is a TDR and records the associated impairment, it isaced with the challenge o determining when to change a loans status rom nonaccrual to accrual.

Typically, once a loans principal or interest is no longer reasonably assured o collection, the loan is placedon nonaccrual status, and any subsequent interest accruals are not recognized. Thereore, loans subject toa modifcation or restructuring o terms in a TDR represent troubled loans that most likely were placed on

nonaccrual status beore the modifcation.

Under U.S. GAAP, there is no specifc guidance on whether a loan that has been modifed in a TDR should

be classifed as nonaccrual or returned to accrual status. General revenue recognition guidance under U.S.GAAP, however, states that an entity should not recognize income unless it is both earned and realizable.The Ofce o Thrit Supervision17 recommends that loans should remain on nonaccrual status until theborrower has demonstrated a willingness and ability to make the restructured loan payments. 18 Exampleso loans that may demonstrate willingness and ability to make restructured payments include those with

17 The Ofce o Thrit Supervision is the primary regulator o all ederal and many state-chartered thrit institutions, which include savings banks and

savings and loan associations.

18 Ofce o Thrit Supervision, Thrit Bulletin 85, Regulatory and Accounting Issues Related to Modifcations and Troubled Debt Restructurings o 1-4

Residential Mortgage Loans.



evidence o sustained perormance such as a borrowers timely payments o principal and interest or a setnumber o months.

Note that it is not always appropriate to assume that a loan can return to accrual status immediatelyater its restructuring. For example, recent evidence has been seen rom results o the Home AordableModifcation Program (HAMP), whereby a signifcant number o loans restructured under the program

have deaulted again ater modifcation, thus indicating that modifcation alone does not always suggestthat principal and interest will be reasonably assured o collection. Although the HAMP program providesa trial period to evaluate the borrowers willingness and ability to make payments, all uture paymentsmay not be reasonably assured. Thereore, companies must be cautious when creating a policy or thereturn o modifed loans to accrual status.

TDRs were also a hot topic on the agenda at the AICPAs 2010 Banking Conerence. One o the takeawaysrom the conerence was that a majority o loan modifcations are TDRs in nature and that fnancialinstitutions need to be careul in determining whether a modifcation is in act a TDR because a TDR

designation cannot subsequently change, as emphasized by the adage once a TDR, always a TDR.

Fair Value Measurements

The issuance o Statement 157 (codifed in ASC 820) our years ago led to a signifcant amount odiscussion about its implementation in a turbulent market (and to the issuance o additional guidance),which has begun to settle during the past year. In addition, eorts to converge the air value standardso the FASB with those o the IASB continue. For more details on the FASB and IASB joint project onair value measurements, see Section 3. This section discusses both the FASBs guidance on air valuedisclosure requirements and other air value measurement guidance.

Fair Value Disclosure Update

ASU Improves Disclosures About Fair Value Measurements

Last years Financial Services Industry update discussed the FASBs proposed ASU to enhance thedisclosures related to air value measurements. Ater considering comment letters and engaging in urtherdeliberation, in January 2010 the FASB issued ASU 2010-06, which added to ASC 820 requirements ordisclosures about transers into and out o Levels 1 and 2 and or separate disclosures about purchases,

sales, issuances, and settlements related to Level 3 measurements. ASU 2010-06 also clarifes existingair value disclosure requirements related to the level o disaggregation and to the inputs and valuationtechniques used to measure air value. The key changes this ASU makes to air value disclosure guidanceare summarized below.

Unlike the proposed ASU, the fnal ASU does not require entities to provide sensitivity disclosures.19

TheFASB decided to exclude this requirement rom the fnal ASU in view o comments it received during theexposure period about the operationality and cost o such disclosures and its October 2009 decision toconverge its guidance with the IASBs on air value measurement and disclosure. The FASB is consideringwhether to require sensitivity disclosures jointly with the IASB as part o their convergence project. In

June 2010, the FASB issued a proposed ASU, Amendments or Common Fair Value Measurement andDisclosure Requirements in U.S. GAAP and IFRSs, which reintroduced the sensitivity analysis requirement.See Section 3 or urther discussion o this ASU.

19 Under the proposed ASU, or Level 3 air value measurements, i changing one or more o the signifcant unobservable inputs to reasonably possible

alternative inputs would have changed the air value signifcantly, entities would have been required to state that act and disclose the total eect

o those changes. In addition, entities would have been required to describe how the eect o a change to a reasonably possible alternative input

was calculated. The proposed ASU also suggested that an entity disclose, or each class o Level 3 measurements, quantitative inormation about the

signifcant inputs used and reasonably possible alternative inputs.
http://www.deloitte.com/view/en_US/us/Industries/Banking-Securities-Financial-Services/50d114416bb25210VgnVCM100000ba42f00aRCRD.htmhttp://www.deloitte.com/view/en_US/us/Industries/Banking-Securities-Financial-Services/50d114416bb25210VgnVCM100000ba42f00aRCRD.htm



Level o Disaggregation

Beore the amendments made by ASU 2010-06, the guidance in ASC 820 required entities to provide airvalue measurement disclosures by major category o assets and liabilities. The term major categoryhas oten been interpreted to reer to a line item in the statement o fnancial position. The ASU amendsASC 820 to require entities to provide air value measurement disclosures or each class o assets andliabilities. Disclosure by class may be more useul since a class is oten a subset o assets or liabilitieswithin a line item in the statement o fnancial position. When providing disclosures or equity anddebt securities, entities should determine class on the basis o the nature and risks o the securities, ina manner consistent with ASC 320-10-50-1B and, i applicable, ASC 942-320-50-2. Under ASC 320-10-50-1B, in determining the nature and risks o the securities, entities should consider activity or business

sector, vintage, geographic concentration, credit quality, and economic characteristics. ASC 942-320-50-2requires fnancial institutions to disclose all o the ollowing major security types (additional types may benecessary):

Equitysecurities,segregatedbyanyoneofthefollowing:

o Industry type.

o Entity size.

o Investment objective.

Debtsecuritiesissuedby:

o U.S. Treasury and other U.S. government corporations and agencies.

o States o the United States and political subdivisions o the states.

o Foreign governments.

o Corporations.

Mortgage-backedsecurities,including:

o Residential.

o Commercial.

Debtobligations,including:

o Collateralized.

o Noncollateralized.

For all other assets and liabilities, entities should use judgment to determine the appropriate classes oassets and liabilities or which they should provide disclosures about air value measurements.

Under ASU 2010-06, when determining the appropriate classes o its assets and liabilities, an entitymust consider the nature and risks o the assets and liabilities as well as their placement in the air valuehierarchy (i.e., Level 1, 2, or 3). For example, a greater number o classes may be necessary or air valuemeasurements with signifcant unobservable inputs (i.e., Level 3 measurements) because o the increaseduncertainty and subjectivity involved in these measurements.



In determining the appropriate level o disaggregation, an entity should also consider what is required orspecifc assets and liabilities under other GAAP (e.g., the disclosure level required or derivative instruments

under ASC 815).

Questions have arisen about whether, when this guidance is applied to derivative contracts, the levelo disaggregation or disclosures under ASC 820 (as amended by ASU 2010-06) is the same as that or

disclosures under ASC 815. Consequently, questions have arisen about how the term class, as discussedin ASC 820, compares with the term type o contract used or the ASC 815 tabular disclosures. Insupporting its judgments about the determination o class or its derivative contracts, a reporting entityshould consider the type o derivative contracts it holds (i.e., the level o disaggregation required orthe ASC 815 tabular disclosures). However, as described in ASC 820-10-50-2A, class is based on thenature and risks o the derivatives and their classifcation in the hierarchy and is oten determined at agreater level o disaggregation than the reporting entitys line items in the statement o fnancial position.Thereore, in determining the nature and risks o its derivative contracts, a reporting entity should consider

the ollowing actors (in addition to type o contracts): the valuation techniques and inputs used todetermine air value, the classifcation in the air value hierarchy, and the level o disaggregation in thestatement o fnancial position. A reporting entity may also consider the level o disaggregation it uses orother ASC 815 disclosures (e.g., qualitative and volume), which may vary rom the level o disaggregationit uses or the ASC 815 tabular disclosures.

For equity and debt securities, ASC 320-10-50-1B provides guidance on class determination andprovides useul general considerations or assessing nature and risks. On the basis o these requirements,concentrations are likely to be key considerations in the class determination or all assets and liabilitieswithin the scope o the ASU. For example, a reporting entity that engages in material commodity

transacting may consider concentrations in areas such as commodity type, or a reporting entity with amaterial oreign exchange portolio may consider concentrations by discrete currencies.

In summary, the classes o derivative contracts under the ASC 820 disclosures may dier rom the type ocontracts used or the ASC 815 tabular disclosures. Depending on the acts and circumstances, class maybe more disaggregated than type o contract, but it generally should not be more aggregated.

Transers Into and Out o Levels 1, 2, and 3

Beore the eective date o ASU 2010-06, ASC 820 only required disclosures about transers into andout o Level 3 or recurring air value measurements as part o the Level 3 reconciliation o beginning andending balances. The ASU 2010-06 amendments expand these disclosure requirements to include all three

levels o the air value hierarchy. More specifcally, or assets and liabilities that are measured at air valueon a recurring basis in periods ater initial recognition, the ASU requires an entity to disclose the amountso signifcant20 transers between Levels 1 and 2, and transers into and out o Level 3, o the air valuehierarchy and the reasons or those transers. An entity must disclose and discuss signifcant transers intoeach level separately rom transers out o each level. For this purpose, signifcance is judged with respectto earnings and total assets or total liabilities or, when changes in air value are recognized in othercomprehensive income, with respect to total equity. In addition, an entity should disclose and consistentlyollow its policy or determining when transers between levels are recognized (e.g., as o the (1) actual

date o the event or change in circumstances that caused the transer, (2) beginning o the reportingperiod, or (3) end o the reporting period). The entitys policy or transers into Levels 1, 2, and 3 shouldbe the same as that or transers out o Levels 1, 2, and 3.

20 The FASBs proposed ASU Amendments or Common Fair Value Measurements and Disclosures Requirements in U.S. GAAP and IFRSs, issued in June

2010, amends the disclosure requirement to include any transers between Level 1 and Level 2 o the air value hierarchy. See Section 3 or urther

discussion o this ASU.



Reconciliation on a Gross Basis

The ASU amends the reconciliation o the beginning and ending balances o Level 3 recurring air valuemeasurements. In periods ater initial recognition, an entity presents inormation about purchases, sales,issuances, and settlements or signifcant unobservable inputs (Level 3) on a gross basis (i.e., each typeseparately) rather than as a net number as previously required. Financial statement users have indicatedthat gross presentation is more useul.

Disclosures About Inputs and Valuation Techniques

ASU 2010-06 clarifes that a description o the valuation techniques (e.g., market approach, incomeapproach, cost approach) and inputs used to measure air value is required or both recurring and

nonrecurring air value measurements. In addition, such disclosures are required or air valuemeasurements classifed as either Level 2 or Level 3. I the valuation technique has changed, entitiesshould disclose that change and the reason or the change.

Upon implementation, various constituents have asked whether ASC 820 now requires entities to disclosequantitative inormation about inputs. On the basis o the guidance in ASC 820-10-50-2(e), a reportingentity is not required to disclose quantitative inormation about inputs. However, in many instances, areporting entity may conclude that such inormation is appropriate. This determination is based on thereporting entitys evaluation o what types o input disclosures enable fnancial statement users to assessthe entitys valuation techniques and inputs. A reporting entity should prepare its disclosures about inputs

in accordance with ASC 820-10-50-2(e). In other words, the discussion o inputs is expected to vary byclass o assets or liabilities, level in the air value hierarchy, and valuation technique(s) used. Likewise, webelieve that there should be some degree o consistency between the items discussed in the narrativeabout inputs and valuation techniques and the class determination. For example, disclosure about inputsspecifc to a certain commodity type (e.g., average tenor and geographic concentration or natural gas

positions) may suggest that the commodity type should represent a class o its own.

Eective Date and Transition

The guidance in the ASU is eective or the frst reporting period (including interim periods) beginningater December 15, 2009, except or the requirement to provide the Level 3 activity o purchases,

sales, issuances, and settlements on a gross basis, which will be eective or fscal years beginning aterDecember 15, 2010, and or interim periods within those fscal years. In the period o initial adoption,entities will not be required to provide amended disclosures or any previous periods presented orcomparative purposes. However, those disclosures are required or periods ending ater initial adoption.Early adoption is permitted.

VRG UpdateThe Valuation Resource Group (VRG), the FASBs advisory body on valuation-related issues, met in Aprilo this year to discuss practice issues associated with air value measurement.21 At the April meeting, the

VRG discussed Issue 2010-01: the FASB/IASB joint project on air value measurement and disclosure andwhether the tentative decisions reached as part o this project would represent a signifcant change inpractice or would result in unintended consequences. The VRG voiced concerns regarding some o thetentative decisions in particular, those on blockage actors. The ollowing table summarizes (1) theboards tentative decisions to date that the FASB sta believes will change the existing guidance in ASC820 (though these decisions may not necessarily result in a change in practice) and (2) the VRG membersdiscussion. For urther discussion o related proposed guidance, see Section 3.

21 This document ocuses only on topics discussed by the VRG that are signifcant to the fnancial services industry. For summaries o all issues discussed

at the April 12, 2010, VRG meeting, see Deloittes Heads Upon the meeting.
http://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statement-Internal-Control-Audit/Accounting-Standards-Communications/article/a9e96ce397718210VgnVCM200000bb42f00aRCRD.htmhttp://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/Financial-Statement-Internal-Control-Audit/Accounting-Standards-Communications/article/a9e96ce397718210VgnVCM200000bb42f00aRCRD.htm



SubjectTentative Board Decisions That WouldChange Existing Guidance in ASC 820 VRG Members Discussion

The principal(or mostadvantageous)market

Thereferencemarketforafairvaluemeasurement is the principal (or mostadvantageous) market, provided that an entityhas access to that market.

Theprincipalmarketisthemarketwiththegreatest volume and level o activity or theasset or liability.

Theprincipalmarketispresumedtobethemarket in which the entity normally transacts.An entity does not need to perorm anexhaustive search or markets that might havemore activity than the market in which theentity normally transacts.

Thedeterminationofthemostadvantageousmarket takes into account both transactioncosts and transportation costs.

Some VRG members expressed concern aboutadding the access notion to the principal or mostadvantageous market principle. They pointed outthat this could result in unintended consequences,particularly when there is no or a limited market.They also highlighted that a price in a market thatan entity does not have access to may neverthelessbe a relevant observable input that the entity couldconsider in estimating air value.

Marketparticipants

Inthedescriptionofmarketparticipants,independence means that marketparticipants are independent o each other(i.e., they are not related parties).

Apriceinarelated-partytransactionmaybeused as an input to a air value measurementi the transaction was entered into at marketterms.

Theunobservableinputsderivedfroman

entitys own data, adjusted or any reasonablyavailable inormation that market participantswould take into account, are consideredmarket-participant assumptions and meet theobjective o a air value measurement.

VRG members expressed concern that the guidanceon related parties was circular. They pointedout that to use the price rom the related-partytransaction, an entity would have to prove it was atmarket terms (in which case the entity would notneed the price rom the related-party transaction).

Some VRG members indicated their belie thatthe guidance on related parties should take intoaccount existing related-party literature, such asASC 850-10-50-5, which states, Transactions

involving related parties cannot be presumed to becarried out on an arms-length basis, as the requisiteconditions o competitive, ree-market dealingsmay not exist. Representations about transactionswith related parties, i made, shall not imply thatthe related party transactions were consummatedon terms equivalent to those that prevail in arms-length transactions unless such representations canbe substantiated.

Highest andbest use

Thehighest-and-best-useconceptrelatesonly to nonfnancial assets, not to liabilities orfnancial assets.

Thetermsphysicallypossible,legally

permissible, and fnancially easible will bedefned.

Some VRG members noted that, in certaincircumstances, nonfnancial assets can be bundledas a group with fnancial instruments to oset therisk o another asset or liability that is not measuredat air value (e.g., an inventory purchase contract).

Some VRG members were concerned abouteliminating the in-use concept or fnancialassets because it might lead to a conclusion thatinvestment companies cannot include controlpremiums when valuing controlling interests inportolio companies.

The VRG also noted that more guidance on what isconsidered a nonfnancial asset and liability wouldbe helpul.



SubjectTentative Board Decisions That WouldChange Existing Guidance in ASC 820 VRG Members Discussion

Valuationpremise

Theconceptofavaluationpremiserelatesonly to nonfnancial assets, not to liabilities orfnancial assets.

Theobjectiveofmeasuringanindividualassetat air value is to determine the price or asale o that asset alone, not or a sale o thatasset as part o (1) a group o assets or (2)a business. However, when the highest andbest use o an asset is as part o a group oassets, the air value measurement o thatasset presumes that the sale is to a marketparticipant that has, or can obtain, thecomplementary assets and complementary

liabilities. Complementary liabilities includeworking capital but do not include fnancingliabilities.

Theobjectiveofthevaluationpremisewillbedescribed without using the terms in-useand in-exchange because those terms areoten misunderstood.

Many VRG members expressed concern that therevisions to the guidance on groups o assets couldhave signifcant implications or current practice,cause unnecessary conusion, or both.

Premiums anddiscounts ina air valuemeasurement

Blockagefactorswillbeclariedandadescription o how they dier rom othertypes o adjustments, such as a lack omarketability discount, or an individualinstrument will be included.

Theapplicationofablockagefactorwill

be prohibited at any level o the air valuehierarchy.

Therewouldbeguidancespecifyingthataair value measurement in Levels 2 and 3 othe air value hierarchy takes into accountother premiums and discounts that marketparticipants would consider in pricing an assetor liability at the unit o account specifed inthe relevant standard (except or a blockageactor).

VRG members thought that this was a signifcantchange in practice. Concerns were raised regardingthe use o the term lack o marketability discount,since they did not believe this term was understoodin practice. This term has historically applied tominority interests in privately held stocks. SomeVRG members voiced concern about the proposalto preclude the consideration o blockage in Levels2 and 3 o the air value hierarchy. Some VRGmembers noted that blockage discounts typicallyapply to market transactions or assets that do notrelate to Level 1 air value measurements (e.g.,aeetofcars).Theybelievedthatitwouldbechallenging to distinguish a blockage discount roma liquidity and marketability discount.

Accounting or Financial Instruments Eects o the FASBsProposed ASU

Summary o the ED

For years, the FASB and IASB (the boards) have attempted to solve the mystery o accounting orfnancial instruments. Their attempts have typically been made in response to pressure on their accountingmodels exerted by new fnancial instrument products and more creative accounting schemes. Driven bylimitations in their models and the stress on fnancial markets due to the global fnancial crisis, the boardsjoined eorts to develop a comprehensive reorm o their models or fnancial instrument accounting.

On May 26, 2010, the FASB issued a proposed ASU on accounting or fnancial instruments, derivative

instruments, and hedging activities. Although creation o this ASU was one o the boards major


27/140


28/140



Loan Commitments and Standby Letters o Credit

An entity that provides a loan commitment or fnancial standby letter o credit (commitment) mustclassiy such a commitment in the same way it classifes the loan that would be extended under theoutstanding oer. Thus, the commitment would be classifed as FV-OCI i the resulting loan would beclassifed as FV-OCI and as FV-NI i the loan would be classifed as FV-NI. Loan commitments and fnancialstandby letters o credit held by a potential borrower are outside the scope o the proposed ASU.

Special Guidance or Broker-Dealers and Investment Companies

Under the proposed ASU, broker-dealers and investment companies must classiy allo their fnancialassets as FV-NI. Broker-dealers are permitted to use the FV-OCI or amortized cost categories or their

fnancial liabilities i those liabilities meet the qualiying criteria. However, investment companies mustclassiy all o their fnancial liabilities at air value and recognize all changes in air value as increases (ordecreases) in net assets or the period.

Measurement o Financial Instruments

The reporting basis o fnancial instruments that do not meet the amortized cost requirements will beclassifed as air value.

Initial Measurement

A fnancial instrument classifed as FV-NI would be initially measured at air value with any dierence

between the actual transaction price and the estimated air value immediately recognized as a gain or lossin net income. Other fnancial instruments within the scope o the proposed ASU are initially measured attheir transaction price.

In addition, or fnancial instruments classifed as FV-OCI, any dierence between the transaction priceand air value upon the frst remeasurement is recognized in OCI. However, i on the basis o reliableevidence an entity determines that there is a signifcant dierence between the transaction price andair value at initial recognition or such an instrument, the entity would initially measure the fnancialinstrument at air value.24

Transaction Costs and Fees

For a fnancial instrument classifed as FV-NI, any initial transaction costs and ees (e.g., loan originationees and costs) are recognized in net income immediately as incurred. However, or those fnancialinstruments classifed as FV-OCI, such charges are deerred and recognized in earnings as a yieldadjustment via the interest method over the lie o the instrument (in a manner generally consistent with

current U.S. GAAP).

Further, preparers must consider additional income statement presentation issues that may arise. Notably,investment companies that currently report transaction costs in net income as realized and unrealizedgains or losses on fnancial instruments will have geographical shits in these costs because they wouldbecome more akin to investment income and expenses.

24 The proposed ASU requires that i reliable evidence suggests a signifcant dierence between the transaction price and air value at initial

recognition, the entity must consider whether the transaction includes other elements (e.g., unstated rights and privileges) that would require

accounting under other U.S. GAAP.


30/140


31/140


32/140



Ater determining that credit impairment exists, an entity must:

[R]ecognize . . . at the end o each fnancial reporting period the amount o credit impairment relatedto all contractual amounts due or originated fnancial asset(s) that the entity does not expect to collectand all amounts originally expected to be collected or purchased fnancial asset(s) that the entity doesnot expect to collect.

Unlike existing U.S. GAAP, the proposed ASU requires entities to use an allowance account to record creditlosses or investments in debt securities classifed as FV-OCI, not just or loan assets. In addition, unlikeexisting U.S. GAAP, the proposed ASU permits entities to evaluate not only loans but also investments indebt securities or credit impairment on a collective, pool, or portolio basis.

For example, a loan asset is originated with a principal amount o $100. At the end o the frst reportingperiod, credit impairment has occurred and the entity no longer expects to collect $12 o uture principal

cashows,whichhasapresentvalueof$10.Asaresult,theentityrecordsthefollowingjourna

finan service industry

Documents