Official releases: SOP 03-3.

Space considerations prevent publishing here the appendices to SOP 03-3. Since the appendices often are important to understanding SOPs, readers are advised to obtain complete copies. To obtain a copy of SOP 03-3 (product no. 014938), contact the AICPA order department at 888-777-7077.

SOP 03-3--Accounting for Certain Loans or Debt Securities Acquired in a Transfer

(Issued by the Accounting Standards Executive Committee)

NOTE

Statements of Position on accounting issues present the conclusions of at least two-thirds of the Accounting Standards Executive Committee, which is the senior technical body of the Institute authorized to speak for the Institute in the areas of financial accounting and reporting. Statement on Auditing Standards No. 69. The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, as amended, identifies AICPA Statements of Position that have been cleared by the Financial Accounting Standards Board as sources of established accounting principles in category b of the hierarchy of generally accepted accounting principles that it establishes. AICPA members should consider the accounting principles in this Statement of Position if a different accounting treatment of a transaction or event is not specified by a pronouncement covered by Rule 203 of the AICPA Code of Professional Conduct. In such circumstances, the accounting treatment specified by the Statement of Position should be used, or the member should be prepared to justify a conclusion that another treatment better presents the substance of the transaction in the circumstances.

TABLE OF CONTENTS

Summary

Foreword

Introduction and Background

Scope

Conclusions

Recognition, Measurement, and Display

Changes in Cash Flows Expected to Be Collected

Prepayments

Restructured or Refinanced Loan

Variable Rate Loans

Multiple Loans Accounted for as a Single Asset

Disclosures

Amendments to Existing Literature

Effective Date and Transition

APPENDIX A: Implementation Guidance

APPENDIX B: Basis for Conclusions

APPENDIX C: Amended Paragraphs of Practice Bulletin 6 to Show Changes Made by This Statement of Position

GLOSSARY

SUMMARY

This Statement of Position (SOP) addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part. to credit quality. It includes such loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be secreted (accretable yield) to the excess of the investor's estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor's initial investment in the loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan's yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment.

This SOP prohibits "carrying over" or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination.

This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Early adoption is encouraged. For loans acquired in fiscal years beginning on or before December 15, 2004, and within the scope of Practice Bulletin 6, paragraphs 7 and 8 of this SOP, as they apply to decreases in cash flows expected to be collected, should be applied prospectively for fiscal years beginning after December 15, 2004.

FOREWORD

The accounting guidance contained in this document has been cleared by the Financial Accounting Standards Board (FASB). The procedure for clearing accounting guidance in documents issued by the Accounting Standards Executive Committee (AcSEC) involves the FASB reviewing and discussing in public board meetings (1) a prospectus for a project to develop a document, (2) a proposed exposure draft that has been approved by at least 10 of AcSEC's 15 members, and (3) a proposed final document that has been approved by at least 10 of AcSEC's 15 members. The document is cleared if at least four * of the seven FASB members do not object to AcSEC undertaking the project, issuing the proposed exposure draft, or, after considering the input received by AcSEC as a result of the issuance of the exposure draft, issuing the final document.

The criteria applied by the FASB in its review of proposed projects and proposed documents include the following:

1. The proposal does not conflict with current or proposed accounting requirements, unless it is a limited circumstance, usually in specialized industry accounting, and the proposal adequately justifies the departure.

2. The proposal will result in an improvement in practice.

3. The AICPA demonstrates the need for the proposal.

4. The benefits of the proposal are expected to exceed the costs of applying it.

In many situations, before clearance, the FASB will propose suggestions, many of which are included in the documents.

INTRODUCTION AND BACKGROUND

1. A loan or group of loans (loan (1)) is always transferred at a price less than its contractually required payments receivable. The difference between the price and the contractually required payments receivable is attributable to the time value of money and may also be attributable to (a) changes in interest rates between the loan's origination and transfer dates, (b) changes in credit quality of the borrower between the loan's origination and transfer dates, (c) other flatters, or (d) some combination of all three reasons.

2. Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, and related FASB Emerging Issues Task Force (EITF) consensuses address accounting for differences in prepayments and interest rates that are not attributable to credit quality. Some accounting issues involving differences attributable to credit quality were addressed in Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans. However, as outlined in paragraph B.3 of this Statement of Position (SOP), the accounting for loss contingencies attributable to credit quality has subsequently changed, Accordingly, the Accounting Standards Executive Committee (AcSEC) undertook this project to (a) identify those objectives of Practice Bulletin 6 that continue to be relevant and (b) update and elevate the authority of related guidance. This SOP supersedes Practice Bulletin 6 for transactions entered into after this SOP's initial application. For loans acquired in fiscal years prior to the effective dare of this SOP and within the scope of Practice Bulletin 6, this SOP amends the application of Practice Bulletin 6 with regard to accounting (or decreases in cash flows expected to be collected.

SCOPE

3. This SOP applies to all nongovernmental entities, including not-for-profit organizations, that acquire loans (investors). It applies to a loan (2) with evidence of deterioration of credit quality since origination acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable, (3) except:

a. Loans that are measured at fair value if all changes in fair value are included in earnings or, for a not-for-profit organization, loans that are measured at fair value if all changes in fair value are included in the statement of activities and included in the performance indicator if a performance indicator is presented. Examples include those loans classified as trading securities under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, (4) and FASB Statement No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise (5)

b. Mortgage loans classified as held for sale under paragraph 4 of FASB Statement No. 65, Accounting for Certain Mortgage Banking Activities

c. Leases as defined in FASB Statement No. 13, Accounting for Leases (6)

d. Loans acquired in a business combination accounted for at historical cost (7)

e. Loans held by liquidating banks (8)

f. Revolving credit agreements, such as credit cards and home equity loans, if at the acquisition date the borrower has revolving privileges

g. Loans that are retained interests (9)

This SOP does out apply to loans that are derivative instruments subject to the requirements of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. If a loan would otherwise be in the scope of this paragraph of tiffs SOP and has within it an embedded derivative that is subject to FASB Statement No. 133, the host instrument (as described in FASB Statement No. 133) remains within the scope of this paragraph of this SOP if it satisfies the conditions in this paragraph.

CONCLUSIONS

Recognition, Measurement, and Display

4. Loss accruals or valuation allowance. Valuation allowances should reflect only those losses incurred by the investor after acquisition--that is, the present value of all cash flows expected at acquisition (10) that ultimately are not to be received. For loans that are acquired by completion of a transfer, it is not appropriate, at acquisition, to establish a loss allowance. For loans acquired in a purchase business combination, the initial recognition of those loans should be the present value of amounts to be received.

5. Upon completion of a transfer of a loan, this SOP requires that the investor (transferee) should recognize the excess of all cash flows expected at acquisition over the investor's initial investment in the loan as interest income on a level-yield basis over the life of the loan (accretable yield). (11) The amount of accretable yield should not be displayed in the balance sheet. The loan's contractually required payments receivable in excess of the amount of its cash flows expected at acquisition (nonaccretable difference) should not be displayed in the balance sheet or recognized as an adjustment of yield, a loss accrual, or a valuation allowance for credit risk.

6. Income recognition. Recognition of income under this SOP is dependent on having a reasonable expectation about the timing and amount of cash flows expected to he collected. Subsequent to acquisition, this SOP does not prohibit placing loans on nonaccrual status, including use of the cost recovery method or cash basis method of income recognition, when appropriate. For example, if the timing of either a sale of the loan into the secondary market or a sale of loan collateral in essentially the same condition as received upon foreclosure is indeterminate, the investor likely does not have the information necessary to reasonably estimate cash flows expected to be collected to compute its yield and should cease recognizing income on the loan. However, the ability to place a loan on nonaccrual should not be used to circumvent the loss recognition guidance contained in paragraphs 7(a) and 8(a). Alternatively, if the timing and amount of cash flows expected to be collected from those sales are reasonably estimable, the investor should use those cash flows to apply the interest method under this SUP. Consistent with paragraph 18 of FASB Statement No. 91, interest income should not be recognized to the extent that the net investment in the loan would increase to an amount greater than the payoff amount. If the loan is acquired primarily for the rewards of ownership of the underlying collateral, accrual of income is inappropriate. Such rewards of ownership would include use of the collateral in operations of the entity or improving the collateral for resale.

Changes in Cash flows Expected to Be Collected

7. Loan accounted for as a debt security. An investor should continue to estimate cash flows expected to be collected over the life of the loan. If, upon subsequent evaluation:

a. The fair value of the debt security has declined below its amortized cost basis, an entity should determine whether the decline is other than temporary. An entity should apply the impairment of securities guidance in paragraph 16 of FASB Statement No. 115. For example, if it is probable, based on current information and events, that the investor is unable to collect all cash flows expected at acquisition plus any additional cash flows expected to be collected arising from changes in estimate after acquisition (in accordance with paragraph 7(b) of this SOP), an other than temporary impairment should be considered to have occurred. The investor should consider both the timing and amount of cash flows expected to be collected in making a determination about whether it is probable that the investor is unable to collect all cash flows expected at acquisition plus any additional cash flows arising from changes in estimates after acquisition.

b. Based on current information and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, the investor should recalculate the amount of accretable yield for the loan as the excess of the revised cash flows expected to be collected over the sum of (1) the initial investment less (2) cash collected less (3) other-than-temporary impairments plus (4) amount of yield accreted to date. The investor should adjust the amount of accretable yield by reclassification from nonaccretable difference. The adjustment should be accounted for as a change in estimate in conformity with Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, with the amount of periodic accretion adjusted over the remaining life of the loan.

8. Loan not accounted for as a debt security. (12) An investor should continue to estimate cash flows expected to be collected over the life of the loan. If, upon subsequent evaluation:

a. Based on current information and events, it is probable that the investor is unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimate after acquisition (in accordance with paragraph 8(b)(2) of this SOP), the condition in paragraph 8(a) of FASB Statement No. 5, Accounting for Contingencies, is met. (13) The loan should be considered impaired for purposes of applying the measurement and other provisions of FASB Statement No. 5 or, if applicable, FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan. (14)

b. Based on current information and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual crash flows are significantly greater than cash flows previously expected, the investor should:

(1) Reduce any remaining valuation allowance (or allowance for loan losses) for the loan established after its acquisition for the increase in the present value of cash flows expected to be collected, and

(2) Recalculate the amount of accretable yield for the loan as the excess of the revised cash flows expected to be collected over the sum of (a) the initial investment less (b) cash collected less (c) write-downs plus (d) amount of yield accreted to date. The investor should adjust the amount of accretable yield by reclassification from nonaccretable difference. The adjustment should be accounted for as a change in estimate in conformity with APB Opinion No. 20 with the amount of periodic accretion adjusted over the remaining life of the loan. The resulting yield should be used as the effective interest rate in any subsequent application of paragraph 8(a) of this SOP.

Prepayments

9. Expected prepayments should be treated consistently for cash flows expected to be collected and projections of contractual cash flows such that the nonaccretable difference is not affected. Similarly, the difference between actual prepayments and expected prepayments should not affect the nonaccretable difference.

Restructured or Refinanced Loan

10. If an investor subsequently refinances or restructures the loan, other than through a troubled debt restructuring, (15) the refinanced or restructured loan should not be accounted for as a new loan, and this SOP, including paragraphs 7 and 8, continues to apply.

Variable Rate Loans

11. If a loan's contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate (for example, the prime rate, the London interbank offered rate, or the U.S. Treasury bill weekly average), that loan's contractually required payments receivable should be calculated based on the factor as it changes over the life of the loan. Projections of future changes in the factor should not be made for purposes of determining the effective interest rate or estimating cash flows expected to be collected. At the acquisition date, the amount of cash flows expected to be collected should be based on the index rate in effect at acquisition. Increases in cash flows expected to be collected should be accounted for according to paragraph 7(b) or 8(b). Decreases in cash flows expected to be collected resulting directly from a change in the contractual interest rate should be recognized prospectively as a change in estimate in conformity with APB Opinion No. 20 by reducing, for purposes of applying paragraphs 7(a) and 8(a), all cash flows expected to be collected at acquisition and the accretable yield. The investor should decrease the amount of accretable yield and the cash flows expected to be collected. Thus, for decreases in cash flows expected to be collected resulting directly from a change in the contractual interest rate, the effect will be to reduce prospectively the yield recognized rather than recognize a loss.

Multiple Loans Accounted for as a Single Asset

12. For purposes of applying the recognition, measurement, and disclosure provisions of this SOP for loans that are not accounted for as debt securities, investors may aggregate loans acquired in the same fiscal quarter that have common risk characteristics and thereby use a composite interest rate and expectation of cash flows expected to be collected for the pool. To be eligible for aggregation, each loan first should be determined individually to meet the scope criteria of paragraph 3 of this SOP. After determining that certain acquired loans are within the scope as defined in paragraph 3 of this SOP, the investor may evaluate whether such loans have common risk characteristics, thus permitting the aggregation of such loans into one or more pools. A portion of the total cost of acquired assets should be assigned to each individual asset acquired on the basis of its relative fair value at the date of acquisition. The excess of the contractually required payments receivable over the investor's initial investment (whether accretable yield or nonaccretable difference) for a specific loan or a pool of loans with one set of common risk characteristics should not be considered available to "offset" changes in cash flows expected to be collected from a different loan or an assembled pool of loans with another set of common risk characteristics.

13. Once a pool is assembled, the integrity of the pool should be maintained. A loan should be removed from a pool of loans only if the investor sells, forecloses, or otherwise receives assets in satisfaction of the loan, or the loan is written off, and it should be removed at its carrying amount. The difference between the loan's carrying amount and the fair value of the collateral or other assets received should not affect the percentage yield calculation used to recognize accretable yield on the pool of loans.

Disclosures

14. The notes to financial statements should describe how prepayments are considered in the determination of contractual cash flows and cash flows expected to he collected.

15. Information about loans meeting the scope criteria of paragraph 3 of this SOP should be included in the disclosures required by paragraphs 20(a) and 20(b) of FASB Statement No. 114, if the condition in paragraph 16 of FASB Statement No. 115 or paragraph 8(a) of FASB Statement No. 5 (as discussed in paragraphs 7(a) and 8(a) of this SOP) is met.

16. In addition to disclosures required by other generally accepted accounting principles, for each balance sheet presented, an investor should disclose the following information about loans within the scope of this SOP:

a. Separately for both those loans that are accounted for as debt securities and those loans that are not accounted for as debt securities:

(1) The outstanding balance and related carrying amount at the beginning and end of the period.

(2) The amount of accretable yield at the beginning and end of the period, reconciled for additions, accretion, disposals of loans, and reclassifications to or from nonaccretable difference during the period.

(3) For loans acquired during the period, the contractually required payments receivable, cash flows expected to be collected, and fair value at the acquisition date.

(4) For those loans within the scope of this SOP for which the income recognition model in this SOP is not applied in accordance with paragraph 6, the carrying amount at the acquisition date for loans acquired during the period and the carrying amount of an loans at the end of the period.

b. Further, for those loans that are not accounted for as debt securities, an investor should disclose:

(1) The amount of(a) any expense recognized pursuant to paragraph 8(a) of this SOP and (b) any reductions of the allowance recognized pursuant to paragraph 8(b)(1) of this SOP for each period for which an income statement is presented.

(2) The amount of the allowance for uncollectible accounts at the beginning and end of the period.

AMENDMENTS TO EXISTING LITERATURE

17. Amendments to Practice Bulletin 6 are contained in Appendix C.

EFFECTIVE DATE AND TRANSITION

18. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Previously issued annual financial statements should nut be restated. Early application of this SOP is encouraged, but not required, for transfers of loans subsequent to the issuance of this SOP but prior to the effective date.

19. For loans acquired in fiscal years beginning on or before December 15. 2004, and within the scope of Practice Bulletin 6, paragraphs 7 and 8 of this SOP, as they apply to decreases in cash flows expected to be collected, should be applied prospectively for fiscal years beginning after December 15, 2004.

* At the time the Accounting Standards Executive Committee developed the prospectus and exposure draft for tilts project, at least five of the seven Financial Accounting Standards Board members were required to not object.

(1) Terms defined in the Glossary are set in boldface type the first time they appear.

(2) For an acquisition of a pool of loans, each loan first should be determined individually to meet the scope criteria of paragraph 3 of this Statement of Position (SOP). In other words, the pool may not be evaluated as a pool to determine the applicability of the scope criteria of paragraph 3.

(3) Investors should consider the significance of delays and shortfalls for a loan so the SOP is not applied when such delays and shortfalls are insignificant with regard to the contractually required payments.

(4) Certain loans that do not meet the definition eta debt security may be accounted for as trading securities. Paragraph 14 of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, states:

   Interest--only strips, retained interests in securitizations,
   loans, other receivables, or other financial assets that
   call contractually be prepaid or otherwise settled in
   such a way that the holder would not recover substantially
   all of its recorded investment, except for instruments
   that are within the scope of FASB Statement
   No. 133, Accounting for Derivative Instruments and Hedging
   Activities], shall be subsequently measured like investments
   in debt securities classified as available-for-sale
   or trading under [FASB Statement No. 115,
   Accounting for Certain Investments in Debt and Equity Securities],
   as amended (paragraph 362).

(5) Paragraph b of FASB Statement No. 65, Accounting for Certain Mortgage Banking Activities, requires that a mortgage banking enterprise must classify as trading any retained mortgage-backed securities that it commits to sell before or during the securitization process.

(6) Only contracts that are classified By the purchaser as leases under FASB Statement No. 13, Accounting for Leases, meet this exclusion. The distinction between purchasing a lease and purchasing a stream of cash flows must be drown to determine applicability of this SOP.

(7) In June 2001, the FASB issued FASB Statement No. 141, Business Combinations, which supersedes Accounting Principles Board (APB) Opinion No. 16, Business Combinations, FASB Statement No. 141, which applies to all business combinations except to combinations of two or more not-for-profit organizations, the acquisition of a for-profit business entity by a not-for profit organization, and combinations of two or more mutual enterprises, requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method. The provisions of FASB Statement No. 141 are applicable to business combinations accounted for by the purchase method completed after June 30, 2001.

(8) The Emerging Issues Task Force (EITF) discussed financial reporting by liquidating banks in EITF Issue No. 88-25, Ongoing Accounting and Reporting for a Newly Created Liquidating Bank.

(9) The EITF discussed accounting for loans that are retained interests in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.

(10) See footnote 3.

(11) Footnote 3 of FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan, states:

   A loan may be acquired at a discount because of a
   change in credit quality or rate or Both. When a loan is
   acquired at a discount that relates, at least in part, to
   the loan's credit quality, the effective interest rate is the
   discount rate that equates the present value of the investor's
   estimate of the loan's future cash flows with
   the purchase price of the loan.

(12) On June 19, 2003, AcSEC issued an exposure draft of a proposed SOP, Allowance for Credit Losses, that addresses certain issues related to the allowance for credit losses. Readers should be alert to any final pronouncement.

(13) For purposes of applying paragraph 23 of FASB Statement No. 5. Accounting for Contingencies, to a loan within the scope of this SOP, the phrase "all amounts due according to the contractual terms" should he read "all cash flows originally expected to be collected by the investor plus any additional cash flows expected to be collected arising from changes in estimate after acquisition."

(14) See footnote 11.

(15) FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring, establishes the accounting fur troubled debt restructurings (TDRs). For creditors, TDRs include certain modifications of terms of loans and receipt of assets from debtors in partial or full satisfaction of loans. Outstanding loans whose retails have been modified in TDRs are accounted for under the provisions of FASB Statement No. 114 or FASB Statement No. 115, as applicable

The provisions of this Statement of Position need not be applied to immaterial items.

GLOSSARY

This glossary defines terms and phrases used in this Statement of Position (SOP).

Accretable yield. The excess of a loan's cash flows expected to be collected over the investor's initial investment in the loan.

Amortized cost. The sum of (1) the initial investment less (2) cash collected less (3) writedowns plus (4) yield accreted to date.

Cash flows expected at acquisition. The investor's estimate, at acquisition, of the amount and timing of undiscounted principal, interest, and other cash flows expected to be collected. (1) This would be the investor's best estimate of cash flows, including the effect of prepayments if considered, that is used in determining the acquisition price, and, in a business combination, the investor's estimate of fair value for purposes of acquisition price allocation.

Common risk characteristics. For purposes of applying this SOP, loans with similar credit risk (for example, evidenced by similar Fair Isaac Company [FICO] scores, an automated rating process for credit reports) or risk ratings, and one or more predominant risk characteristics, such as financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location, should be considered to have common risk characteristics.

Completion of a transfer. Completion of a transfer (1) that satisfies the conditions in paragraph 9 of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to be accounted for as a sale; (2) in a purchase business combination; or (3) to a newly created subsidiary if the transferee has written the loan down to its fair value with the intent of transferring the stock of the subsidiary as a dividend to the shareholders of the parent company; or (4) that is a contribution receivable or a transfer that satisfies a prior promise to give.

Contractually required payments receivable. The total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of prepayments, if considered, less any reduction (2) by the investor. For an acquired asset-backed security (ABS) with required contractual payments of principal and interest, the "contractually required payments receivable" is represented by the contractual terms of the security. However, when contractual payments of principal and interest are not specified by the security, die investor should look to the contractual terms of the underlying loans or assets.

Fair value. Refer to paragraphs 68 through 70 of FASB Statement No. 140.

Initial investment. The amount paid to the seller plus any fees paid or less any fees received. (3) In a business combination accounted for as a purchase, the allocation of fair value to loans or groups of loans should be in accordance with FASB Statement No. 141, Business Combinations.

Loan. As defined in paragraph 4 of FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan:

   [A] contractual right to receive money on
   demand or on fixed or determinable dates
   that is recognized as an asset in the creditor's
   statement of financial position. Examples include
   but are not limited to accounts receivable
   (with terms exceeding one year) and
   notes receivable.

This definition encompasses loans accounted fur as debt securities (as defined in paragraph 137 of FASB Statement No. 115, Accounting for Certain Investments in Debt arm Equity Securities).

Nonaccretable difference. A loan's contractually required payments receivable in excess of the amount of its cash flows expected to be collected.

Outstanding balance. For loans that have a net carrying amount, the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loan, owed to the investor at the reporting date, whether or not currently due and whether or not any such amounts have been written or charged off by the investor. Amounts forgiven in a debt restructuring but contingently payable to the investor should be included in the forgiven contract balance, but amounts irrevocably forgiven in a debt restructuring should not be included. Amounts payable to the investor in cash, in kind, and by any other means should be included. Amounts legally discharged should not be included. The outstanding balance does not include amounts that would be accrued under the contract as interest, fees, penalties, and other alter the reporting date.

Probable. As defined in paragraph 10 of FASB Statement No. 114 (emphasis in original):

   The term probable is used in this Statement
   consistent with its use in [FASB Statement
   No. 5, Accounting for Contingencies], which
   defines probable as an area within a range of
   the likelihood that a future event or events
   will occur confirming the fact of the loss.
   That range is from probable to remote, as
   follows:

   Probable. The future event or events are
   likely to occur.

   Reasonably possible. The chance of the future
   event or events occurring is more
   than remote but less than likely.

   Remote. The chance of the future event or
   events occurring is slight.

The term probable is further described in paragraph 84 [of FASB Statement No. 5], which states:

   The conditions for accrual in paragraph 8
   [of FASB Statement No. 5] are not inconsistent
   with the accounting concept of
   conservatism. These conditions are not intended
   to be, so rigid that they require virtual
   certainty before a loss is accrued. [Emphasis
   added.] They require only that it be probable
   that an asset has been impaired or a liability
   has been incurred and that the
   amount of loss be reasonably estimable.
   [Emphasis in original.]

Revolving privileges. A feature in a loan that provides the borrower with the option to make multiple borrowings up to a specified maximum amount, to repay portions of previous borrowings, and to then reborrow under the same loan.

Accounting Standards Executive Committee (1999-2000)

David B. Kaplan, Chair Albert G. Adkins Mary E. Barth Mark M. Bidstein Val R. Bitton Cassandra A. Camp John T. Ciesielski Robert O. Dale Joseph F. Graziano David W. Hinshaw Ray L. Krause David M. Morris Benjamin S. Neuhausen Paula C. Panik Mark V. Sever

Discount Accretion Task Force

Dorsey L. Baskin, Jr., Chair Joan Amble James W. Bean Carol H. Larson William J. Lewis Dayton G. Lierley John Verdonck AICPA Staff

Elizabeth A. Fender Director Accounting Standards

Sydney K. Garmong Senior Manager Professional Standards and Services

The Accounting Standards Executive Committee, the task force, and AICPA staff also gratefully acknowledge the contributions of James F. Green, Brad A. Davidson, and Frederick T. Hondzinski.

(1) One acceptable method of making this estimate is described in paragraphs 42 through 54 of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, which discusses the use of an expected cash flow approach.

(2) This Statement of Position does not address when an investor should record a direct write-down of an impaired loan.

(3) Only certain fees paid are included in the initial investment in a purchased loan. Paragraph 36 of FASB Statement on Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, explains that "designation of a fee or cost as an origination fee or cost for a loan that is purchased is inappropriate because a purchased loan has already been originated by another party." Also, the answer to question 39 in the FASB Special Report, A Guide to Implementation of Statement 91 on Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases: Questions and Answers, explains that:

   fees paid to an independent third party, or incurred internally,
   for portfolio management or investment consultation
   ... are considered "other costs incurred in connection
   with acquiring purchased loans or committing
   to purchase loans" because they constitute investment
   advisory costs, not loan origination costs. Therefore,
   such costs should be charged to expense in accordance
   with paragraph 15 [of FASB Statement No. 91]
   whether the costs are paid to independent third parties
   or incurred internally.

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