Chapter 4 — Measurement of Expected Credit Losses

4.5 Write-Offs and Recoveries

ASC 326-20

35-8 Writeoffs of financial assets, which may be full or partial writeoffs, shall be deducted from the allowance. The writeoffs shall be recorded in the period in which the financial asset(s) are deemed uncollectible.

35-8A An entity may make an accounting policy election, at the class of financing receivable or the major security-type level, to write off accrued interest receivables by reversing interest income or recognizing credit loss expense or a combination of both. This accounting policy election should be considered separately from the accounting policy election in paragraph 326-20-30-5A. An entity may not analogize this guidance to components of amortized cost basis other than accrued interest.

4.5.1 Write-Offs

The write-off guidance in ASC 326-20-35-8 and 35-8A is similar to the existing guidance in U.S. GAAP. That is, an entity is required to write off a financial asset when it is “deemed uncollectible.” However, unlike existing GAAP, the write-off guidance now applies to HTM and AFS debt securities (see Section 7.2.4 for a discussion specific to AFS debt securities). As a result, an entity will need to develop a process to determine whether an HTM debt security is uncollectible. This process would be similar to the process the entity uses to determine that other financial assets measured at amortized cost are deemed uncollectible.

4.5.2 Recoveries

Under ASU 2016-13, as originally issued, an entity was required to record recoveries (1) when they are received and (2) as a direct adjustment to earnings or as a reduction to the allowance for credit losses. While ASC 326-20-35-8 provided guidance on when and how to recognize recoveries, the guidance was unclear on whether an entity is required to consider expected recoveries in determining its allowance for expected credit losses. Further, although ASC 326-20-30-1 originally required entities to present the net amount expected to be collected on a financial asset, ASC 326-20-35-8 appeared to conflict with this guidance because it required an entity to reflect recoveries in the carrying amount of the financial asset only when the entity receives the recovered amounts.

As a result, in ASU 2019-04, the FASB clarifies that an entity should consider recoveries in its allowance for expected credit losses. Specifically, ASC 326-20-30-1, as amended by ASU 2019-04, notes that “[e]xpected recoveries of amounts previously written off and expected to be written off shall be included in the valuation account and shall not exceed the aggregate of amounts previously written off and expected to be written off by an entity.” As a result:

Entities should include expected recoveries within the allowance for expected credit losses and should not directly write up the related assets.
Because an entity recognizes expected recoveries as an adjustment to the allowance for expected credit losses, the allowance may have a negative balance in situations in which a full or partial write-off has occurred.
Expected recoveries should not exceed the aggregate of amounts previously written off and amounts that are expected to be written off by the entity.

Example 9 in ASC 326-20 illustrates an entity’s accounting for a recovery of an amount previously written off.

ASC 326-20

Example 9: Recognizing Writeoffs and Recoveries

55-51 This Example illustrates how an entity may implement the guidance in paragraphs 326-20-35-8 through 35-9 relating to writeoffs and recoveries of expected credit losses on financial assets.

55-52 Bank K currently evaluates its loan to Entity L on an individual basis because Entity L is 90 days past due on its loan payments and the loan no longer exhibits similar risk characteristics with other loans in the portfolio. At the end of December 31, 20X3, the amortized cost basis for Entity L’s loan is $500,000 with an allowance for credit losses of $375,000. During the first quarter of 20X4, Entity L issues a press release stating that it is filing for bankruptcy. Bank K determines that the $500,000 loan made to Entity L is uncollectible. Bank K considers all available information that is relevant and reasonably available, without undue cost or effort, and determines that the information does not support an expectation of a future recovery in accordance with paragraph 326-20-30-7. Bank K measures a full credit loss on the loan to Entity L and writes off its entire loan balance in accordance with paragraph 326-20-35-8, as follows:

During March 20X6, Bank K receives a partial payment of $50,000 from Entity L for the loan previously written off. Upon receipt of the payment, Bank K recognizes the recovery in accordance with paragraph 326-20-35-8, as follows:

55-53 For its March 31, 20X6 financial statements, Bank K estimates expected credit losses on its financial assets and determines that the current estimate is consistent with the estimate at the end of the previous reporting period. During the period, Bank K does not record any change to its allowance for credit losses account other than the recovery of the loan to Entity L. To adjust its allowance for credit losses to reflect the current estimate, Bank K reports the following on March 31, 20X6:

Alternatively, Bank K could record the recovery of $50,000 directly as a reduction to credit loss expense, rather than initially recording the cash received against the allowance.

4.5.2.1 Expected Recoveries and Contractual Interest

When estimating expected credit losses in accordance with ASC 326-20-30-1 by using a method other than a DCF method, an entity is not allowed to consider expected recoveries of contractual interest before that interest has been accrued. Contractual interest that the entity has not accrued would not meet the condition described in ASC 326-20-30-1, which indicates that an entity’s estimated recoveries are limited to “amounts previously written off and expected to be written off.”

4.5.2.2 Considering Recoveries When Foreclosure Is Probable

If foreclosure on a collateral-dependent financial asset is probable, an entity is not allowed to adjust its estimate of expected credit losses (determined on the basis of the fair value of the collateral) for any expected recoveries if the entity has a history of collecting payment after foreclosure or repossession. ASC 326-20-35-4 indicates that when foreclosure on a collateral-dependent financial asset is probable, an entity measures the estimate of expected credit losses as the difference between the financial asset’s amortized cost and the collateral’s fair value (adjusted for selling costs, when applicable). Once the entity is using fair value to measure the estimate of expected credit losses in accordance with ASC 326-20-35-4, it must not adjust the fair value by any amounts (other than selling costs), including expected recoveries.

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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.