Chapter 3 — Recognition and Unit of Account

3.2 Unit of Account

ASC 326-20

30-2 An entity shall measure expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist (as described in paragraph 326-20-55-5). If an entity determines that a financial asset does not share risk characteristics with its other financial assets, the entity shall evaluate the financial asset for expected credit losses on an individual basis. If a financial asset is evaluated on an individual basis, an entity also should not include it in a collective evaluation. That is, financial assets should not be included in both collective assessments and individual assessments.

35-2 An entity shall evaluate whether a financial asset in a pool continues to exhibit similar risk characteristics with other financial assets in the pool. For example, there may be changes in credit risk, borrower circumstances, recognition of writeoffs, or cash collections that have been fully applied to principal on the basis of nonaccrual practices that may require a reevaluation to determine if the asset has migrated to have similar risk characteristics with assets in another pool, or if the credit loss measurement of the asset should be performed individually because the asset no longer has similar risk characteristics.

55-5 In evaluating financial assets on a collective (pool) basis, an entity should aggregate financial assets on the basis of similar risk characteristics, which may include any one or a combination of the following (the following list is not intended to be all inclusive):

Internal or external (third-party) credit score or credit ratings
Risk ratings or classification
Financial asset type
Collateral type
Size
Effective interest rate
Term
Geographical location
Industry of the borrower
Vintage
Historical or expected credit loss patterns
Reasonable and supportable forecast periods.

An entity must evaluate financial assets within the scope of the model on a collective (i.e., pool) basis if they share similar risk characteristics. If a financial asset’s risk characteristics are not similar to those of any of the entity’s other financial assets, the entity would evaluate that financial asset individually.

Connecting the Dots

Unit of Account

While ASC 326-20-55-5 identifies risk characteristics that an entity could consider when segmenting its portfolio of financial assets, ASC 326 does not discuss how the entity should choose such characteristics. We believe that an entity should consider risk characteristics that reflect how the entity manages credit risk. If the risk characteristics are chosen in this manner, the risk of loss among the assets in the pool is likely to be similar. Accordingly, in such cases, the historical loss information that management uses to estimate expected credit losses is likely to be more relevant, resulting in a better estimate of such losses in the current reporting period.

In paragraph BC49 of ASU 2016-13, the FASB addresses its rationale for requiring collective evaluation of assets with similar risk characteristics and observes that “financial institutions manage many financial assets on a collective basis, wherein new financial assets are originated, existing financial assets are paid down, and some financial assets may be purchased and some financial assets may be sold. In addition, many users analyze financial asset portfolios of financial institutions on a collective basis.” Furthermore, paragraph BC69 of ASU 2016-13 states, in part:

The Board concluded that financial assets generally are priced assuming an estimated likelihood of credit losses on similar assets, although an entity initially expects to collect all of the contractual cash flows on each individual asset. Similarly, while an entity might not currently expect a loss on an individual asset, it ordinarily would expect some level of losses in a group of assets with similar risk characteristics. Therefore, an estimate of expected credit losses should reflect a collective assessment if similar risk characteristics exist for assets measured at amortized cost.

3.2.1 Removing a Financial Asset From a Pool of Financial Assets

An entity generally must remove specific financial assets from larger pools when there is evidence of credit deterioration related to those assets. If a deteriorated financial asset meets the definition of a collateral-dependent asset (see Section 4.4.9.1), the financial asset should be removed from the pool because the calculation of losses for this asset will differ from the calculation used for the other assets. Similarly, a financial asset should be removed from a pool of financial assets if it has deteriorated and therefore no longer shares risk characteristics with the rest of the assets in the pool. Even when the estimated credit losses for the pool incorporate a certain level of defaults and the level of individual financial assets within that pool defaults as expected, the financial asset with deteriorated credit quality must be removed from the pool because its risk characteristics are no longer similar to those of the remaining pool assets. If the asset’s risk characteristics become similar to those of other financial assets, the asset should be placed into a pool with those assets.

Changing Lanes

Unit of Account for HTM Debt Securities

ASC 326 requires an entity to collectively measure expected credit losses on financial assets that share similar risk characteristics, including HTM debt securities. This requirement represents a significant change from previous U.S. GAAP, under which an entity would have evaluated the credit impairment of debt securities individually. See Section 7.2.7 for a comparison between the credit loss model for HTM debt securities and that for AFS debt securities.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.