BRegulatory Reporting Matters—Interpretation and Reporting Related to U.S. GAAP – Audit and Accounting Guide Depository and Lending Institutions, 2nd Edition

Appendix B
Regulatory Reporting Matters—Interpretation and Reporting Related to U.S. GAAP1

This appendix is nonauthoritative and is included for informational purposes only.

U.S. Generally Accepted Accounting Principles (GAAP) Regulatory Reporting Matters
Description References Description References
I. RECOGNITION AND MEASUREMENT
Interest Income Practices for Loans and Other Assets:
Accrual and Nonaccrual Matters
Interest income on loans that are not impaired should be accrued and credited to interest income as it is earned. However, U.S. GAAP does not provide specific criteria for when a loan should be placed on nonaccrual. FASB Accounting Standards Codification (ASC) 310-10-35

Regulatory guidance provides a general rule to ensure an institution’s net income is not over-stated by defining that loans (and other assets) should be placed on nonaccrual (1) when the loan (or asset) is maintained on a cash basis because of deterioration in the financial condition of the borrower, (2) when payment in full of principal or interest is not expected, or (3) when principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection.

Certain other loans need not be placed on nonaccrual status, such as loans and other assets that have been acquired at a discount and consumer loans. Nevertheless, consistent with the objective to not overstate income, financial institutions should use alternative methods of evaluation to ensure that this objective is met.

Refer to the entry nonaccrual status in the "Glossary" section of the Federal Financial Institutions Examination Council’s (FFIEC’s) Instructions for Preparation of Consolidated Reports of Condition and Income, and Schedule RC-N of the FFIEC Consolidated Reports of Condition and Income (Call Report).
Income Recognition and Restoration Matters
FASB ASC 310-10-35-40 provides two alternative income recognition methods to account for changes in the net carrying amount of an impaired loan subsequent to the initial measure of impairment:

a. Under the first income recognition method, a creditor should accrue interest on the net carrying amount of the impaired loan and report other changes in the net carrying amount of the loan as an adjustment to bad-debt expense.

b. Under the second income recognition method, a creditor should recognize all changes in the net carrying amount of the loan as an adjustment to bad-debt expense. See FASB ASC 310-10-50-19 for a disclosure requirement related to this method.

Those income recognition methods are not required, and a creditor is not precluded from using either of those methods.
FASB ASC 310-10-35 As a general rule, when a loan (or other asset) has been placed on nonaccrual status, interest payments received may be recognized as interest income on a cash basis as long as the remaining recorded investment in the loan (or other asset), after charge-off of any identified losses, is deemed to be fully collectible.

If doubt exists as to the collectibility of the remaining recorded investment in an asset placed on nonaccrual status, any payments received must be applied to reduce the recorded investment in the asset to the extent necessary to eliminate such doubt (for example, cost recovery basis).

Loans (or other assets) may be restored to accrual status (using the effective interest rate) when (1) none of its principal and interest is due and unpaid and the institution expects repayment of the remaining contractual principal and interest2 or (2) when the loan (or other asset) becomes well secured and in the process of collection.

The determination to return a loan (or other asset) to an accrual status may also consider the borrower’s historical payment performance over a reasonable period of time. The regulators consider a reasonable period of payment performance to generally be a minimum of 6 months for an amortizing loan.
Refer to the entry nonaccrual status in the "Glossary" section of the FFIEC’s Instructions for Preparation of Consolidated Reports of Condition and Income.
Measuring Loan Impairment
Impaired Collateral Dependent Loans Matters
U.S. GAAP requires the measurement of impairment on a collateral dependent impaired loan at fair value of the collateral when the creditor determines foreclosure is probable.

The FASB ASC glossary defines probable as the future event or events are likely to occur.

The creditor may choose from alternative measurement methods for a collateral dependent impaired loan unless foreclosure is probable, including the, (1) present value of expected future cash flows at the loan’s effective interest rate, (2) observable market price of the loan or (3) the fair value of the collateral.

FASB ASC 310-10-35 The agencies require the measurement of impairment on a collateral dependent loan to be measured using the fair value of collateral method. Refer to the entry loan impairment in the "Glossary" section of the FFIEC’s Instructions for Preparation of Consolidated Reports of Condition and Income.
Charge-Offs
No specific guidance exists on the timing of charge-offs. No specific guidance exists. In general, any portion of the recorded investment in an impaired collateral-dependent loan (including recorded accrued interest, net deferred loan fees or costs, and unamortized premium or discount) in excess of the fair value of the collateral that can be identified as uncollectible should be promptly charged off against the allowance for loan and lease losses (ALLL). Interagency Policy Statement on the Allowance for Loan and Lease Losses issued December 16, 2006.
Restructured Lease Matters
No specific guidance exists on disclosure of impaired modified finance lease receivables in FASB ASC 840-10-50. No specific guidance exists. Restructured loans and leases are reported in bank Call Report schedules RC-C/RC-N, and in National Credit Union Administration Loan related schedules (which equally applies to finance and leveraged lease restructures that would be akin to a troubled debt restructuring).

In certain situations a modified finance lease with a debtor in financial difficulty will result in removal of the finance lease from these loan and lease related schedules. If the restructured finance lease is reclassified as a new operating lease, the operating lease property is reported as an "Other asset" and depreciated.

Foreclosed Assets
U.S. GAAP allows for the grouping of assets when subsequently measuring a long-lived asset (disposal group) classified as held for sale. Such a measurement should be measured at the lower of its carrying amount or fair value less cost to sell. FASB ASC 360-10-35-43 After foreclosure, each foreclosed real estate asset must be carried at the lower of (a) the fair value of the asset minus the estimated costs to sell the asset or (b) the cost of the asset (as defined in the glossary definition of foreclosed assets). This determination must be made on an asset-by-asset basis. Refer to the entry foreclosed assets in the "Glossary" section of the FFIEC’s Instructions for Preparation of Consolidated Reports of Condition and Income.
Other Matters:
Credit Losses on International Loans
Valuation allowances (for example, an ALLL) are deducted from the assets or group of assets that the allowances relate to. Additions and deductions from a valuation allowance should not be made for impairments or credit losses of unrelated assets. FASB ASC 310-10-45 Allocated transfer risk reserves are intended to recognize and measure impairment and credit losses of international assets, which are recognized and measured separately from loans. However, institutions are allowed to recognize and measure in the ALLL credit losses on loan impairments or credit losses on international assets unrelated to those loans in the ALLL. Title 12 U.S. Code of Federal Regulations Part 28.52(c) (2) and (4), Section 905(a) of the International Lending Supervision Act of 1983; reported in Schedule RI-B, of the Call Report
Acquirer’s Accounting Pushed Down to Acquiree’s Financial Statements
FASB Accounting Standards Update (ASU) No. 2014-17, Pushdown Accounting, provides an acquired entity, either public or nonpublic, the option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity.

Previously, for SEC registrants, under Staff Accounting Bulletins (SAB), Topic 5.J., "New Basis of Accounting Required in Certain Circumstances", pushdown accounting generally was permitted when 80 percent or more of an entity’s ownership was acquired, required when 95 percent or more was acquired, and prohibited when less than 80 percent was acquired.

Prior to the issuance of FASB ASU No. 2014-17, GAAP offered limited guidance on pushdown accounting for non-SEC registrants.

FASB ASC 805-50-25

SEC SAB No. 115

Pushdown accounting is an acquiree’s establishment of a new accounting basis in its separate financial statements when an acquirer obtains control of the acquired entity. Under Call Report instructions, an acquiree that retains its separate corporate existence may apply pushdown accounting upon a change-in-control event.

A change-in-control event occurs when an acquirer obtains a controlling financial interest, as defined under U.S. GAAP, in the acquiree. A controlling financial interest typically requires ownership of more than 50 percent of the voting rights in an acquired entity.

In all cases, the institution’s primary federal regulators reserve the right to require or prohibit the institution’s use of pushdown accounting for Call Report purposes based on the regulator’s evaluation of whether the election best reflects the facts and circumstances of the business combination.
Refer to entry business combinations in the "Glossary" section of the FFIEC’s Instructions for Preparation of Consolidated Reports of Condition and Income.
Income Taxes of Subsidiaries Within a Consolidated Group
In practice, income taxes generally are allocated to members within a consolidated group in accordance with a tax sharing agreement. No specific guidance exists. The agencies treat each financial institution subsidiary as if it were filing a separate return for intercompany tax allocation purposes. This treatment is also applied in determining net deferred tax asset limitations for regulatory capital purposes.

If the holding company forgives payment by the subsidiary of the current portion of the income taxes required on a separate entity basis, the forgiveness is treated as a capital contribution. If the subsidiary pays an amount greater than that required on a separate return basis or if it pays its deferred tax liability in addition to its current tax liability, the institution must report these differences as a cash dividend to the holding company. Failure of the holding company to pay the subsidiary bank an equitable refund of the bank’s net operating loss should also be considered a cash dividend paid by the bank to the parent holding company.

Refer to entry income taxes of a bank subsidiary of a holding company in the "Glossary" section of the FFIEC’s Instructions for Preparation of Consolidated Reports of Condition and Income; and Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure, issued December 23, 19983
Related Party Transactions4
Transfers of nonmonetary assets to a stockholder (such as dividends in-kind) must be recorded at fair value; however, that accounting does not apply to transfers of nonmonetary assets solely between entities or persons under common control. Rather, such transfers are accounted for at historical cost.

Institutions must disclose the aggregate amount of loans to directors, officers, employees, and stockholders, as well as to entities that directors, officers, employees, and stockholders are affiliated with.

FASB ASC 845-10 and FASB ASC 805-50-30

General guidance on related party disclosures is established in FASB ASC 850-10-50

Transfers of assets other than cash (for example, securities of another company or real estate) to a stockholder or related party must be recorded at their fair value, as if the transfer were completed at arm’s length. However, this accounting is governed by the facts and circumstances of the transaction and there are often exceptions to this policy.

Institutions must disclose extensions of credit to executive officers, directors, principal shareholders, and their related interests.

Refer to entry property dividends within the entry dividends in the "Glossary" section of the FFIEC’s Instructions for Preparation of Consolidated Reports of Condition and Income and Schedule RC-M of the Call Report.
II. DISPLAY
Accounting Changes
U.S .GAAP provides guidance on the accounting for and reporting of accounting changes and error corrections. FASB ASC 250-10 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. FASB ASC 250-10 Regulatory reports cover a single discrete period. As a result, the agencies require that the effect (on undivided profits) of required retroactive application of a new pronouncement be excluded from net income and reported as a direct adjustment to equity capital in the related regulatory reports in the period of adoption. Refer to the entry accounting changes in the "Glossary" section of the FFIEC’s Instructions for Preparation of Consolidated Reports of Condition and Income. Cumulative catch-up adjustment due to a change in accounting principle is reported on line 2 of Schedule RI-A and on line 4 of Schedule RI-E of the Call Report.
Gain/Loss on Certain Sales
SEC registrants are required to include in noninterest expense the net cost of foreclosed real estate, including gains, losses, and rental income. In practice, classification by nonregistrants of gains and losses on sales of loans, real estate owned, fixed assets (including branch office assets), and other assets varies. Article 9.04.14(d) of SEC Regulation S-X The agencies require that institutions always include rental income in noninterest income. In addition, there are specific Call Report line items for gains (losses) on sales of loans and leases, real estate owned, and other assets.

Banks should consistently report net gains (losses) on the sale of certain others assets, such as foreign currency, as either other noninterest income or as other noninterest expense.

Line 5(i)–5(l) and 7(d) of Schedule RI of the Call Report and the related FFIEC’s Instructions for Preparation of Consolidated Reports of Condition and Income.

Notes

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