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 stipulates that
an entity is required to write off a financial asset when it is “deemed
uncollectible.” That requirement is not limited to loan and other receivables and
applies to HTM and AFS debt securities (see Section 7.2.4 for a discussion specific to AFS
debt securities). An entity’s process for determining that a financial asset is
uncollectible should be similar from one asset type to the next (e.g., loan
receivables and HTM securities).
4.5.2 Recoveries
An entity should consider recoveries in its allowance for expected
credit losses. Specifically, ASC 326-20-30-1, 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.