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Home > Bank Resources > Bank Resources Publications > SRC Insights > 2010 > Fourth Quarter

SRC Insights: Fourth Quarter 2010

The Ws of Accounting Standards Update 2010-20 Receivables (Topic 310): Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses

by Becky Goodwin, Examiner

The global financial crisis has prompted several regulatory and accounting changes designed to increase clarity, qualify credit quality, and provide for timely recognition of losses. In July 2010, the Financial Accounting Boards Standard (FASB) issued Accounting Standards Update 2010-20 (ASU 2010-20). The update is specifically related to Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This article will outline the purpose and requirements of ASU 2010-20.

According to FASB, the purpose of ASU 2010-20 is to provide financial statement users with greater transparency about an entity's allowance for credit losses and the credit quality of its financing receivables. As such, ASU 2010-20 requires affected entities to disclose certain credit quality indicators, such as past due information and modifications to their financing receivables.

Who Is Affected?

ASU 2010-20 applies to both public and nonpublic entities with financing receivables, excluding short-term trade accounts receivable or receivables measured at fair value or at the lower of cost or fair value. The extent of the impact depends on the relative significance of financing receivables to an entity's operations and financial position. It is anticipated that traditional banking-type organizations that currently measure a large number of financing receivables at amortized cost will be affected more than brokers and dealers at securities and investment companies that currently measure most financing receivables at fair value. Additionally, the effect will be less significant for many commercial and industrial entities whose financing receivables are primarily short-term trade accounts receivable.¹

The definition of financing receivables is as follows: A contractual right to receive money, on demand or on fixed or determinable dates, that is recognized as an asset in the entity's statement of financial position. Thus, examples of financing receivables include 1) loans, 2) trade accounts receivable, 3) notes receivable, 4) credit cards, and 5) lease receivables (other than operating leases) related to a lessor's rights to payment from non-operating leases that must be recognized as assets under the guidance in ASC 840, Leases.²

Financing receivables are not 1) debt securities, 2) unconditional promises to give, or 3) acquired beneficial interests or the transferor's beneficial interests in securitized financial assets.³

What Are a Financial Institution's Responsibilities?

Disclosures must now be provided to help users of financial statements analyze and evaluate the following:

• The nature of credit risk inherent in the entity's portfolio of financing receivables
• How that risk is analyzed and assessed in determining the allowance for credit losses
• The rationale for changes in determining the adequacy of the allowance for credit losses

Disclosures should be provided on a disaggregated basis or divided into constituent parts for the portfolio segment and class of financing receivable. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. Classes of financing receivables generally are disaggregated or separated from the aggregate portfolio, and the information provided should enable the reader to better understand the characteristic and degree of exposure to credit risk associated with financing receivables.

Specifically, the amendments of ASU 2010-20 require the following additional disclosures about financing receivables:

• Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables
• The aging of past due financing receivables at the end of the reporting period by class of financing receivables
• The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses
• The nature and extent of financing receivables modified as troubled debt restructurings within the previous 12 months that defaulted during the reporting period by class of financing receivables and their effect on the allowance for credit losses
• Significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segment

Current disclosure requirements have also been amended to require an institution to provide the following on a disaggregated basis:

• A roll-forward schedule of the allowance for credit losses from the beginning of the reporting period to the end of the reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of the impairment method
• For each disaggregated ending balance in the item above, the related recorded investment in financing receivables
• The nonaccrual status of financing receivables by class of financing receivables
• Impaired financing receivables by class of financing receivables

When Are These Requirements Effective?

The provisions within ASU 2010-20 will become effective for public entities for the interim and annual reporting periods after December 15, 2010. For nonpublic entities, disclosures are effective on or after annual reporting periods ending on or after December 15, 2011. Comparative disclosures for earlier periods are encouraged but not required for earlier periods that ended before adoption.

ASU 2010-20 is available in full at www.fasb.org. For information on accounting issues, please contact Manager Eddy Hsiao (eddy.hsiao@phil.frb.org) at (215)574-3772.

• ¹   FASB Accounting Standards Update No. 2010-20, Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses, available online.
• ²   “On The Horizon,” Grant Thornton, July 27, 2010, available online.
• ³   Sarno, John; Zelic, Ana; and McKinney, Stephen, “FASB Goes “ALLL”-In, Requires Entities to Show Their Cards: Board Enhances Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” Deloitte Heads Up, Vol. 17, Issue 24, July 22, 2010, available online.