Chapter 4 — Measurement of Expected Credit Losses

4.7 Considerations Related to Postacquisition Accounting for Acquired Loans

An entity may acquire loans in a business combination or in an asset acquisition. Loans acquired in a business combination are initially recognized at fair value in accordance with ASC 805-20-25-1. Loans acquired in an asset acquisition are initially recognized at the amount paid to the seller plus any fees paid or less any fees received in accordance with ASC 310-20-30-5. Alternatively, an entity may acquire loans when it becomes the primary beneficiary of a VIE that does not meet the definition of a business. In such instances, there is a scope exception to the initial recognition guidance for asset acquisitions under ASC 805-50-25-4, which states that the primary beneficiary of a VIE that does not meet the definition of a business should initially recognize the acquired loans at fair value in accordance with ASC 805-20-25-1. That is, the primary beneficiary of a VIE that does not meet the definition of a business initially recognizes the acquired loans in the same way as they would be recognized in a business combination. See Section C.1.2.1 of Deloitte’s Roadmap Business Combinations for more information. Other sections of the Codification may address the initial recognition of loans acquired in exchange for noncash consideration or loans acquired in an asset acquisition that includes other assets acquired or liabilities assumed. ASC 310 requires an investor to initially classify acquired loans as “held for investment” or “held for sale” unless the loans are accounted for at fair value in accordance with ASC 825. For more information about the reclassification of the loans, see Section 4.9.

4.7.1 Postacquisition Accounting for Acquired Loans Receivable Classified as Held for Investment

If the fair value option in ASC 825 is elected as of the acquisition date, the acquired loans are subsequently measured at fair value through earnings. Section 12.4.1 of Deloitte’s Roadmap Fair Value Measurements and Disclosures (Including the Fair Value Option) addresses the separate presentation of interest income when the fair value option has been elected.

If the fair value option in ASC 825 is not elected as of the acquisition date, the investor should recognize the acquired loans at amortized cost and would need to evaluate whether to apply the PCD model to the acquired loans. The PCD model applies to acquired financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination. See Chapter 6 for more information about the PCD model, including guidance on the recognition of income and expected credit losses on PCD assets.

If the investor determines that the PCD model does not apply to the acquired loans, the investor should subsequently account for them by applying the following guidance in ASC 310-20 and ASC 326-20 on income recognition and expected credit losses, respectively:

ASC 310-20 addresses specific matters related to the application of the interest method to loans within its scope. Under ASC 310-20, the interest method is used to recognize, as a level-yield adjustment, the difference between the initial recorded investment in the loan and the principal amount of the loan.
ASC 326-20 addresses the measurement of expected credit losses for financial assets measured at amortized cost. Upon acquiring the loan(s), the investor would be required to record an allowance for expected credit losses on acquired assets within the scope of ASC 326 (even if the acquired loans were initially recognized at fair value in a business combination or at the amount paid to the seller if acquired in an asset acquisition).

4.7.2 Postacquisition Accounting for Acquired Loans Receivable Classified as Held for Sale

If the fair value option in ASC 825 is not elected as of the acquisition date, the investor should subsequently measure loans classified as held for sale at the lower of cost or fair value, as required by ASC 310-10-35-48 for nonmortgage loans held for sale and ASC 948-310-35-1 for mortgage loans held for sale. Purchase discounts or premiums on nonmortgage and mortgage loans are not amortized as interest income when the loans are classified as held for sale. Rather, recognition of interest income on HFS loans is generally based on the stated coupon rate on the loan receivable.

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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.