Make Big Things Happen. You are in the Right Place! Make yourself at home! Looking for MainStreet Technologies? Looking for Sageworks? Looking for Farin? Read Time: 0 min. Streamline the reserve calculation process and impress examiners Learn More.
Most, if not all, of these loans should be evaluated under FAS Loans that are considered to be in nonaccrual status.
The financial institution may have a dollar threshold that must be met, but bankers should still ensure that the appropriate loans in this category are being evaluated under FAS , in case some of these are not picked up by the risk rating criteria. Loans that are at a certain level of delinquency i. About the Author. Sageworks Raleigh, N. A variable interest holder does not subsequently become the primary beneficiary simply because the actual losses of the VIE exceed the expected losses.
The assets, liabilities, and noncontrolling interests shall be accounted for in consolidated financial statements as if the VIE were consolidated based on voting interests. Any specialized accounting requirements applicable to the VIE's business, assets, and liabilities shall be applied.
Intercompany balances and transactions should be eliminated. If the Bank holds a significant variable interest, but is not the primary beneficiary, it should disclose the following:. Information about VIEs may be reported in the aggregate for similar VIEs if separate reporting would not add additional information.
Any specialized disclosure requirements applicable to the VIE's business, assets, and liabilities shall be applied. Involvement in the day-to-day management of investees, their affiliates, or other investment assets. Financing guarantees or assets to serve as collateral provided by investees for borrowing arrangements of the entity or its affiliates. Provision of loans by noninvestment company affiliates of the entity to investees or their affiliates.
Exceptions: such loans are not inconsistent with the definition of an investment company if all of the following exist:. Compensation of management or employees of investees or their affiliates is dependent on the financial results of the entity or the entity's affiliates.
Directing the integration of operations of investees or their affiliates or the establishment of business relationships between investees or their affiliates. In considering the above criteria and their effect on the conclusion about whether an entity is an investment company, some factors may be more or less significant than others, depending on the facts and circumstances, and therefore, more or less heavily weighted in determining whether an entity is an investment company.
Criteria 1 through 6 may individually prevent an entity from being classified as an investment company, Criteria 7 through 16 other factors are to be evaluated both individually and on a combined basis. Any single criterion of 7 through 16 is not necessarily determinative of whether the entity is an investment company. All of the criteria, however, must be assessed qualitatively, and professional judgment will need to be exercised. The Reserve Banks, largely as a result of liquidity initiatives, have acquired financial assets and liabilities that are not part of SOMA.
These financial assets and liabilities should be accounted for in accordance with GAAP applicable to commercial entities. In some cases, the assets are reported by a Reserve Bank through the consolidation of legal entities under the terms of its organization typically applies GAAP to these assets and liabilities. Financial assets may include commercial paper, mortgage-backed securities, collateralized debt obligations, commercial and residential mortgages, derivative financial instruments, other asset-backed securities, preferred securities, and similar securities.
Financial liabilities may include obligations arising under derivative financial instruments and obligations due third-party SPE financial interest holders. There are three primary GAAP requirements under which these assets and liabilities should be valued:.
In most cases, the non-SOMA financial assets of Reserve Banks will be regarded as either held-to-maturity or trading securities. Available-for-sale securities are usually those that are held for investment purposes, which is not a typical strategy for Bank holdings of such assets.
Held-to-maturity classification is appropriate in those cases in which the Bank has both the intent and likelihood to hold the securities to maturity. For example, in the case of commercial paper which typically has a relatively short maturity, it may be most appropriate to account for the asset as held-to-maturity.. The trading-securities classification is appropriate in cases in which the stated intent with respect to the asset portfolio is an orderly liquidation of assets, since there is no intent to hold the assets to maturity.
Other real estate assets may be acquired as a result of defaults on the related collateralized asset. Such assets should be recorded at fair value at the date possession is taken of the asset and subsequently should be measured in accordance with paragraph The facts and circumstances of each case may need to be evaluated in order to determine when possession occurs.
The election is made on an instrument-by-instrument basis. If the fair value option is elected for an instrument, all subsequent changes in fair value for that instrument must be reported in earnings. Electing the fair value option might be appropriate to prevent valuing related assets and liabilities differently. This might reduce volatility in reporting earnings and better reflect the overall economics of the transactions.
Another example might be one in which a specific financial liability will be settled from the proceeds of a portfolio of assets; in this case it would be desirable to measure the related assets and liabilities on a similar basis. In the absence of a quoted market price, the Bank should estimate fair value using methods applied consistently and determined in good faith. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs.
Market participant assumptions should include assumptions about the effect of a restriction on the sale or use of an asset if market participants would consider the effect of the restriction in pricing the asset.
For held-to-maturity securities, each individual security should be evaluated for impairment, and as such, the practice of providing a general allowance for unidentified impairment in a portfolio is not appropriate. If the decline is other than temporary, the cost basis of the individual security should be written down to fair value as a new cost basis, and the amount of the write-down should be included in earnings as a realized loss.
The new cost basis should not be changed for subsequent recoveries in fair value. A recovery in fair value should not be recorded in earnings until the security is sold.
Generally, an investment is considered impaired if the fair value of the investment is less than its cost. The Bank should determine whether an investment is impaired at the individual security level in each reporting period except as noted below for certain cost-method investments. A guarantee or other credit enhancement should be considered when determining whether an investment is impaired if it a provides for payment in a manner that would allow the guarantee to qualify for a scope exception under FASB ASC Topic ; formerly SFAS No.
If the fair value of an investment is less than its cost at the balance sheet date, the Bank should determine whether the impairment is other than temporary. While there are no bright-line tests to determine whether an impairment is other than temporary, the Bank should use judgment and consider all available facts in determining whether an impairment is other than temporary. The Bank should follow a systematic approach to consider the nature of the impairment of each security with detailed documentation supporting its decision.
Positive Evidence --If an investment's fair value declines below cost, the investor must determine whether there is adequate evidence to overcome the presumption that the decline is other than temporary. Such evidence may include the following:. Negative Evidence --The positive factors must be weighed against any negative evidence that is gathered about the security. The SEC has noted in its staff accounting bulletins and various enforcement releases a number of factors and circumstances that, individually or in combination, may indicate that the Bank needs to write down a security's carrying amount by way of a charge to income.
Some of those factors and circumstances are as follows:. When the Bank has decided to sell an impaired held-to-maturity security and the investor does not expect the fair value of the security to recover fully prior to the expected time of sale, the security should be deemed other than temporarily impaired in the period in which the decision to sell is made. In situations where the Bank sells a security at a loss subsequent to the balance sheet date but before issuance of the financial statements, the Bank should assess whether an other-than-temporary impairment existed at the balance sheet date.
Selling securities at a loss subsequent to the balance sheet date, but before issuance of the financial statements, is a strong indicator that an other-than-temporary impairment existed at the balance sheet date. The closer to the end of a previous reporting period that a security is sold at a loss, or the larger the number of sales of such securities, the greater the weight of evidence needed to support a conclusion that an other-than-temporary impairment did not exist at the balance sheet date.
If an impairment of a security is considered other than temporary, an impairment loss equal to the difference between the cost and the fair value of the investment, calculated as of the balance sheet date, should be recognized in earnings.
The fair value becomes the investment's new cost basis. Subsequent recoveries or reductions in fair value after the balance sheet date should not affect the measurement of the impairment loss at the balance sheet date.
That is, a discount or reduced premium would be recorded based on the new cost basis, and future changes in the fair value of an available-for-sale security would be recognized in other comprehensive income until disposal of the security or until another impairment in the security is considered other than temporary.
FASB ASC Topic ; formerly FSP SFAS and SFAS further notes that the discount or reduced premium recorded for the debt security based on the new cost basis would be amortized over the remaining life of the debt security in a prospective manner based on the amount and timing of future estimated cash flows.
Any discount or reduced premium should generally be amortized over the remaining life of the debt security using an effective yield method, except when the timing and amount of cash flows expected to be received is not reasonably estimable. In that case, Banks should follow their existing accounting policy for reporting income on securities that are placed on non-accrual status e. Transactions with the following characteristics are considered to be guarantees and should be evaluated to determine if an obligation requires recognizing a liability at the time the guarantee is issued:.
Contracts that contingently require the guarantor to make payments either in cash, financial instruments, other assets, or provision of services to the guaranteed party based on changes in an underlying 20 that is related to an asset, liability, or equity security of the guaranteed party e.
Following are some examples to which this provision applies:. Item 1 above includes most financial standby letters of credit, written put options or market value guarantees on securities including the common stock of the guaranteed party , and many other financial guarantees. Item 1, however, would not include traditional commercial non-standby letters of credit and other loan commitments because they typically do not guarantee payment of an obligation and do not provide for payment in the event of default.
Financial standby letters of credit are guarantees because they do not have material adverse change MAC clauses or similar provisions that enable the issuing institution the guarantor to avoid making a payment. In contrast, many loan commitments contain MAC clauses or other similar provisions that enable the issuing institution to avoid making a loan if the borrower encounters financial difficulties after the commitment is issued. As an example, if a Reserve Bank provided a guarantee to an entity whereby it would provide loans to that entity if certain asset fair values fell below a predetermined level, the arrangement would probably qualify as a guarantee under FASB ASC Topic ; formerly FIN No.
Because the arrangement may meet the characteristics described in Item 1 above, recognition of a liability at the issuance of the guarantee would be required. Fudenberg, D. Greene, W. Johnson, S. Liu, C. Ryan and J. Kanagaretnam, K. Lobo and R. Moyer, S. O'Brien, P. Ohlson, J. Santomero, A. Trueman, B. Titman and P. Wahlen, J. Wilson, G. Download references. You can also search for this author in PubMed Google Scholar. Correspondence to Yihong He.
Reprints and Permissions. Zhao, R.
0コメント