4.8 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. 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.” For more information
about the reclassification of the loans, see Section
4.10.
4.8.1 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:
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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.
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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).
4.8.2 Postacquisition Accounting for Acquired Loans Receivable Classified as Held for Sale
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 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 on mortgage loans are not
amortized as interest income when the loans are classified as held for sale.
Similarly, purchase discounts on nonmortgage 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.