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Chapter 4 — Measurement of Expected Credit Losses

4.10 Transfers Between Classification Categories

4.10 Transfers Between Classification Categories

Financial assets reported at amortized cost are within the scope of ASC 326-20. By contrast, HFS loans and AFS debt securities are not within the scope of the guidance on expected credit losses in ASC 326-20 since (1) HFS loans are reported at the lower of amortized cost basis or fair value as of the balance sheet date and (2) AFS debt securities are reported at fair value as of the balance sheet date. However, upon either (1) the transfer of an HFS loan to an HFI loan or (2) the transfer of an AFS debt security to an HTM debt security, the transferred loan (i.e., HFI loan or HTM debt security) then becomes subject to ASC 326-20.
HFS Loan to HFI Loan
HFI Loan to HFS Loan
  1. On the transfer date, reverse any previous valuation allowance that was recorded in the income statement for the HFS loan.
  2. Transfer the loan to HFI at its amortized cost reduced by any previous write-offs (but excluding any valuation allowance).
  3. Evaluate the HFI loan for expected credit losses in accordance with ASC 326-20.
  4. The income statement effect of the reversal of the previous allowance and the establishment of a new allowance should be recognized in the income statement on a gross basis.
  1. On the transfer date, reverse any previous valuation allowance that was recorded in the income statement for the HFI loan.
  2. Transfer the loan to HFS at its amortized cost reduced by any previous write-offs (but excluding any valuation allowance).
  3. Evaluate the HFS loan for any valuation allowance in accordance with ASC 310-10.
  4. The income statement effect of the reversal of the previous allowance and the establishment of a new allowance should be recognized in the income statement on a gross basis.

Footnotes

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This issue was initially addressed by the TRG at its June 2018 meeting and led to the FASB’s issuance of ASU 2019-04.