What is SOP 033?
AICPA Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, was issued in December 2003. A key principle of SOP 03-3 is a prohibition on the “carrying over” or creation of an allowance for loan losses when initially accounting for the purchase of an impaired loan.
What are purchased credit impaired loans?
PCI loans are loans that have experienced deterioration in credit quality after origination. It is probable that the acquiring institution will be unable to collect all the contractually obligated payments from the borrower for these loans.
What is an ASC 310?
ASC 310 comprises four Subtopics (Overall, Nonrefundable Fees and Other Costs, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and Troubled Debt Restructurings by Creditors).
What is Accretable yield?
The number of expected cash flows that exceed the initial investment in the loan represents the Accretable Yield, which is recognized as interest income on a level yield basis over the life of the loan.
What FAS 114?
114 (FAS 114), “Accounting by Creditors for Impairment of a Loan.” Under FAS 114, a loan is impaired when it is probable that the bank will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement.
What is an impaired loan?
Impaired loans are loans where it is unlikely that the full contractual principal and interest will be repaid/paid.
What is credit deterioration?
Credit Deterioration means a material deterioration in the creditworthiness of a Customer, as determined by Factor in its sole discretion.
What does ASC in accounting stand for?
FASB Accounting Standards Codification
On July 1, the FASB Accounting Standards Codification (ASC) became the single source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC.
Is allowance for doubtful accounts required by GAAP?
The primary ways of estimating the allowance for bad debt are the sales method and the accounts receivable method. According to generally accepted accounting principles (GAAP), the main requirement for an allowance for bad debt is that it accurately reflects the firm’s collections history.
What is FAS 5 now called?
5: Accounting for Contingencies (FAS 5), the original FASB pronouncement, superseded by the substantively same FASB Accounting Standards Codification (ASC) subtopic 450 -20, Contingencies: Loss Contingencies, is a principal source of guidance on accounting for impairment in a loan portfolio under GAAP.
What is a FAS 5?
FAS 5 refers to one of two underlying sources of accounting guidance factoring into the calculation of the allowance for loan and lease losses (ALLL) under GAAP, and it applies to those financial institutions and other entities not yet implementing the current expected credit loss model, or CECL.
How do you know if a loan is impaired?
A loan is considered to be impaired when it is probable that not all of the related principal and interest payments will be collected. Impairment documentation. Any allowance for loan impairments should be fully documented with the appropriate analysis, and updated consistently from period to period.
When was AICPA Statement of Position ( SOP ) 03-3 issued?
AICPA Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer,was issued in December 2003. When it takes effect next year, it will supersede AICPA Practice Bulletin (PB) 6, Amortization of Discounts on Certain Acquired Loans,which was issued in 1989.
How does SOP 03-3 apply to purchased loans?
However, SOP 03-3 does not apply to purchased loans that are held for trading or to purchased mortgage loans that are designated as held for sale. It also does not cover loans that a bank has originated.
When to use ASC 310-30 ( SOP 03-3 )?
If loans have a deterioration in credit quality after origination and it is probable that the acquiring institution will be unable to collect all contractually obligated payments from the borrower, then these loans are to be accounted for under the ASC 310-30 (SOP 03-3) method.
How does the SOP change bank accounting practices?
The SOP will change banks’ current practices in accounting for purchased impaired loans. In purchase business combinations, the acquiring bank normally “carries over” the acquired institution’s allowance for loan losses when it records the acquired loan portfolio at fair value.
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