Nearly 4,000 employees and 25 countries around the world. Under existing guidance, collateralization between 98%-102% is considered an acceptable range for assessing the repo party's "ability" under such circumstances. In addition, any payment due to the financing customer should be recorded as a credit in Account 220, Accounts Receivable-Customers . © 2020 Duff & Phelps, LLC. The provision eliminated by the ASU was relied upon by executives and advisors to remove up to $50 billion of inventory (i.e., investments) from Lehman Brothers Holdings Inc.'s ("LBHI") reported quarter-end balance sheets prior to its bankruptcy filing. The entire ASU 2011-3 can be found at the following link: ASU 2011-03. Repos often have collateral maintenance provisions to mitigate credit exposure to the parties. And additional losses on OREO or PPO go against income, they cannot be a charge to the ALLL either. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities ("SFAS 140"), paragraph 364. The ASU removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance guidance related to that criterion. Whether you choose to increase your reserves is a separate issue. Read more. Duff & Phelps was the lead financial advisor to Anton Valukas, Chairman of Jenner & Block, in connection with his role as Examiner in the Lehman bankruptcy, the largest such case in U.S. history. But, in general, all assets must be at fair value and once at fair value, any additional loss should be expensed, not charged to the ALLL. If the fair market value of the foreclosed assets is higher or lower than the amount of loan outstanding at the time of the foreclosure, the foreclosure generates a gain or loss, recorded as a credit or debit, respectively. Sign up to receive periodic news, reports, and invitations from Duff & Phelps. By applying this criterion, LBHI characterized transactions that otherwise were no different than its regular repos as sales rather than secured borrowings. FASB Amends Accounting for Repurchase Agreements, /insights/publications/litigation-and-disputes/fasb-amends-accounting-for-repurchase-agreements, Governance, Risk, Investigations and Disputes. I believe it is FAS 65 that directs banks to maintain assets at "fair value". I love these accounting pronouncements almost as much as I like HMDA/CRA. With seller financing, a bank that sells the foreclosed asset would record a debit to loan receivable as an asset on its balance sheet.
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