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.
ASU 2016-13 does not provide guidance on how an entity should apply the
CECL model when a loan that is HFS is transferred into an HFI classification (or vice
versa) or when a debt security is transferred from AFS to HTM (or vice versa).17 As a result, in ASU 2019-04, the FASB provided guidance on transfers between
classification categories. The table below summarizes this guidance.
HFS Loan to HFI Loan
|
HFI Loan to HFS Loan
|
---|---|
|
|
HTM Debt Security to AFS Debt Security
|
AFS Debt Security to HTM Debt Security
|
---|---|
|
|
ASC 320-10-35-10 through 35-16 provide guidance on transfers between the
classifications of investments in debt and equity securities (i.e., trading, AFS, and
HTM). Transfers involving the trading classification are expected to be rare. Transfers
out of the HTM classification may call into question the entity’s ability to use that
classification for a period. Transfers from AFS to HTM are not restricted, provided that
the entity has the positive intent and ability to hold the transferred security to its
maturity.
Example 4-3
Transfer From HTM to
AFS
Company X has an investment in a bond that is
classified as HTM. The bond was acquired for $1,000 with a par
value of $1,000. Upon initial recognition of the bond, X
recognized an allowance of $70 for credit losses. During the
following year, X transfers the bond from HTM to AFS. As of the
transfer date, the bond’s amortized cost and fair value are
$1,000 and $900, respectively. In addition, as of the transfer
date, because the bond is now classified as AFS, X determines,
in accordance with ASC 326-30, that $90 of the unrealized loss
is related to credit and $10 is related to interest rate
changes.
As of the transfer date, X would record the following journal
entries:
Example 4-4
Transfer From AFS to
HTM
Company Z purchases a security and classifies it
as AFS. The security is acquired at its par value of $4,000.
Immediately before the transfer date, the security’s fair value
is $3,500 and its allowance for credit losses is $300
(accordingly, Z recognizes in OCI an unrealized loss of $200
that is due to non-credit-related factors). Once Z transfers the
security from AFS to HTM, it estimates the allowance for credit
losses on the security to be $350 in accordance with ASC 326-20.
As of the transfer date, Z would record the
following journal entries:
Keep in mind that the unrealized loss of $200 as of the transfer
date will continue to be recorded in AOCI; however, it should be
amortized prospectively over the remaining life of the security
from AOCI. The amortization should be performed in a manner
consistent with the recognition of a premium or discount (e.g.,
the effective interest method). In addition, the transfer will
create a discount of $200 on the carrying amount of the security
that should be amortized prospectively over the remaining life
of the security. Typically, this amortization will have no net
impact on the reported yield of the security because the
amortization of the amount in AOCI and the amortization of the
discount will offset each other. Effectively, the amortization
of the unrealized loss in AOCI will reduce the debt discount,
thereby increasing the carrying amount of the investment.
Footnotes
17
This issue was initially addressed by the TRG at
its June 2018 meeting and led to the FASB’s
issuance of ASU 2019-04.