Accounting for Certain Loans or Debt Securities Acquired in a Transfer (ASC 310-30)

Accounting for Certain Loans or Debt Securities Acquired in a Transfer (ASC 310-30)

Accounting for Certain Loans or Debt Securities Acquired in a Transfer (ASC 310-30) set forth the accounting treatment for acquired loans with evidence of deteriorated credit quality. Because an acquired failed bank will likely hold large inventory of loans with deteriorated credit quality, the guidance in ASC 310-30 will be applicable.

Fundamentally, the difference between the basic model of loan accounting in ASC 310-20 and ASC 310-30 accounting is that ASC 310-30 uses the acquirer’s “cash flows expected at acquisition” (a defined term) as the benchmark for calculating the yield (interest income) on the investment in the loan and for purposes of determining whether the loan is impaired and how that impairment should be measured. Cash flows expected at acquisition is in contrast to the traditional use of contractual cash flows to measure yield and impairment.

Under ASC 310-30, the expected cash flows that exceed the initial investment in the loan (i.e., the fair value of the loan) represent the “accretable yield,” which is recognized as interest income on a level-yield basis over the life of the loan. The difference between the cash flows expected at acquisition and the total contractual cash flows is considered the “nonaccretable difference.”

Adams Capital develops sophisticated loan pricing algorithms to price each loan in a portfolio.  When appropriate, we perform statistical testing to evaluate accuracy.