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Federal R eserve Bank
OF DALLAS
ROBERT
D. M c T E E R , J R .
PRESIDENT
AND CHIEF EX ECUTIVE O F F IC E R
April 4, 1991
DALLAS, TEXAS 7 5 2 2 2
Notice 91-26
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Request for Comment on Proposal to Return
Partially Charged-off Loans to Accrual Status
DETAILS
The Federal Financial Institutions Examination Council (FFIEC) has
requested comment on a proposal that pertains to returning nonaccrual loans
with partial charge-offs of principal to accrual status. Public comments are
being solicited to assist the four federal regulators of banks and savings
associations in developing criteria under which portions of such loans may be
returned to accrual status. Under the proposal, a loan’s status could change
without the depository institution first recovering the partial charge-off or
without the loan becoming fully current in accordance with the contractual
loan terms.
The FFIEC must receive comments by May 2, 1991. Comments should be
addressed to Robert J. Lawrence, Executive Secretary, Federal Financial
Institutions Examination Council, 1776 G Street, N.W., Suite 850B, Washington,
D.C. 20006. Comments will be available for public inspection and photocopying
at the same location.
ATTACHMENT
A copy of the FFIEC’s proposal as it appears on pages 11441-46, Vol.
56, No. 52, of the Federal Register dated March 18, 1991, is attached.
MORE INFORMATION
For more information, contact at the Office of the Comptroller of
the Currency, Zane D. Blackburn, Chief Accountant, or William J. Lewis,
Accounting Fellow, at (202) 447-0471; at the Federal Deposit Insurance
Corporation, Robert F. Storch, Chief, or Doris L. Marsh, Examination Special
ist, Accounting Section, Division of Supervision, at (202) 898-8914; at the
Board of Governors of the Federal Reserve System, Rhoger H. Pugh, Manager,
(202) 728-5883, or Gerald A. Edwards, Project Manager, (202) 452-2741, Policy
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
-
2
-
Development Section, Division of Banking Supervision and Regulation; and at
the Office of Thrift Supervision, David H. Martens, Chief Accountant, (202)
906-5646, or Robert J. Fishman, Program Manager, (202) 906-5672.
For additional copies of this notice, please contact the Public
Affairs Department at (214) 651-6289.
Sincerely yours,
Federal Register / Vol. 56, No. 52 / Monday, March 18, 1991 / Notices
11441
FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL
Reporting Standard Concerning the
Return of a Loan With a Partial
Charge-Off to Accrual Status
AGENCY: Federal Financial Institutions
Examination Council.
ACTION: Notice of request for comment.
s u m m a r y : Under the auspices of the
Task Forces on Supervision and Reports
of the Federal Financial Institutions
Examination Council (FFIEC), the Office
of the Comptroller of the Currency
(OCC), the Federal Deposit Insurance
Corporation (FDIC), the Board of
Governors of the Federal Reserve
System (FRB), and the Office of Thrift
Supervision (OTS) (referred to as the
“agencies”), propose to establish criteria
under which a federally supervised bank
or savings association ("depository
institution”), for purposes of the Reports
of Condition and Income (Call Reports)
or Thrift Financial Reports (TFR), may
return nonaccrual loans with partial
charge -offs of principal to accrual status
without first recovering the partial
charge-off or becoming fully current in
accordance with the contractual loan
terms. These proposed Call Report and
TFR instructions and reporting
requirements would implement one
11442
Federal Register / Vol. 58, No. 52 / Monday, March 18, 1991 / Notices
aspect of the agencies’ joint program to
clarify certain regulatory policies.
DATES: Comments requested must be
received by May 2,1991.
A DDRESSES: Comments should be
directed to: Robert J. Lawrence,
Executive Secretary, Federal Financial
Institutions Examination Council, 1776 G
Street, NW., suite 850B, Washington, DC
20006. Comments will be available for
public inspection and photocopying at
the same location.
FOR FURTHER INFORMATION CONTACT:
At the OCC: Zane D. Blackburn, Chief
Accountant, or William J. Lewis,
Accounting Fellow (202) 447-0471. At
the FDIC: Robert F. Storch, Chief, or
Doris L. Marsh, Examination Specialist,
Accounting Section, Division of
Supervision (202) 898-8914. At the FRB:
Rhoger H. Pugh, Manger (202) 728-5883,
or Gerald A. Edwards, Project Manager
(202) 452-2741, Policy Development
Section, Division of Banking Supervision
and Regulation. At the OTS: David H.
Martens, Chief Accountant (202) 9065646 or Robert J. Fishman, Program
Manager (202) 906-5672.
SUPPLEMENTARY INFORMATION:
I. Introduction
National banks and federally insured
state-chartered member banks and
nonmember banks are required to file
quarterly Call Reports with the OCC,
FRB, and FDIC, respectively. Savings
associations are required to file Thrift
Financial Reports with the OTS.
The agencies have been reviewing
requests for clarification of the
regulatory guidelines regarding
nonaccrual status of loans. Currently,
the bank Call Report instructions
provide certain requirements for a
nonaccrual loan to be returned to
accrual status. These instructions state
that a nonaccrual asset may be returned
to an accrual when: (1) None of its
principal and interest is due and unpaid
or (2) when it otherwise becomes well
secured and in the process of collection
(emphasis added). These instructions
also require that repayment of principal
and interest must be expected before an
asset can be restored to accrual status.
For savings associations, the TFR
instructions state that, in order for
interest to be accrued on a loan, its
collection must be probable.
In applying these requirements,
amounts due and expected have been
based on the loan’s contractual
amounts. Some have questioned
whether the remaining book balance
(after any partial loan charge-offs)
should be the basis for applying these
requirements in certain circumstances. If
a suitable charge-off is taken and the
expectation of full collection of the
remaining book value of the loan at a
market rate of interest is supportable, it
may be appropriate to return the loan to
an accrual status under certain
circumstances.
II. Proposed Call Report Glossary Entry
and TFR Instructions for Partially
Charged-Off Loans Accruing Interest at
a Market Rate
General Instruction
The reporting treatment discussed
herein is contemplated principally for
collateral dependent loans that have
been placed on nonaccrual status.
However, other loans for which the
primary source of repayment is a
dedicated and readily determinable
stream of cash flows may qualify for this
reporting treatment. Application of this
reporting treatment to any such loans
would be subject to supervisory review
during the examination process.
Qualifying Criteria
Qualifying nonaccrual loans that have
demonstrated substantial, but less than
required, contractual repayment
performance may be returned to accrual
status when all of the following criteria
are met. These loans are hereafter
referred to as “Partially charged-off
loans accruing interest at a market
rate.”
(1) The borrower continues to retain
control of any associated collateral and
the loan is not an insubstance
foreclosure.
(2) The loan has been reduced through
a charge-off to a balance that will have
the characteristics of a good loan paying
interest at a market rate (i.e., that rate
which the depository institution would
require for a new loan of the same type
with comparable terms and credit risk).
Indicators of a good loan would include
prudent loan-to-value ratios and
adequate cash flow support similar to
that which would be required by the
depository institution for a new loan
under its normal underwriting
standards. Consequently, the book value
of the loan following the charge-off will
be less than the present value of the
total expected cash flows, in order to
provide cash flow support consistent
with prudent underwriting standards.
For purposes of the determination of
adequate cash flow support, cash
receipts must not include any interest
reserves or other amounts funded
indirectly or directly by the depository
institution. Furthermore, designation of
the loan as “other assets especially
mentioned” by banking or thrift
regulators for technical reasons not
reflecting the assessment of the
adequacy of the cash flow support
would not preclude this reporting
treatment, provided the loan otherwise
meets all four of these criteria.
(3) The amount and timing of
collections must be reasonably
estimable. Further, the amount and
timing of anticipated cash flow must be
sufficient to cover the expected lower
level of debt service (i.e., the reduced
principal and interest payments) on the
remaining recorded loan balance. The
estimated cash flow must be probable
and demonstrate that the borrower will
be able to fully repay the reduced loan
balance plus interest over a reasonable
period of time. Probability should be
based on long term lease contracts, third
party commitments or similar
arrangements. If commitments from
third parties are relied upon, the ability
of those parties to perform must be
thoroughly assessed and documented,
(4) The borrower must have
performed for a sustained period at the
level necessary to service the reduced
principal and interest payments on the
remaining loan balance. A sustained
period is that which, under the specific
circumstances, is sufficient to
reasonably demonstrate the ability of
the borrower to continue required
performance. In making this
determination, existing sustained
performance which began prior to the
date of the adoption of this reporting
treatment should be considered.
Only once during the life of a loan
relationship may a nonaccrual loan be
reduced through a charge-off to a
balance that may be returned to accrual
status. If there is a further charge-off due
to renewed doubt as to collectibility on
a nonaccrual loan that has been
returned to accrual status by means of
this reporting treatment, the accrual of
interest should be discontinued, unless
and until the loan subsequently meets
the existing reporting requirements for
return to accrual status based on its
contractual terms.
Income Accrual
For a loan which has been returned to
accrual status through this reporting
treatment, interest income must be
accrued at the market interest rate used
in the second criterion, above. Cash
receipts in excess of that required to
amortize the recorded loan balance at
this market rate may occur. Interest
income in excess of that accrued at the
market rate on the reduced loan balance
cannot be recognized until all prior
charge-offs have been recovered.
Recoveries of partial charge-offs can
only be recorded when realized as cash
i3 received.
11443
Federal Register / Vol. 56, No. 52 / Monday, March 18, 1991 / Notices
iTimwirmniiinnniiiiirTiriiii i m
ib iiii an
Continuing Performance
Once a loan has been returned to
accrual status under this reporting
treatment, the required evaluation of
cash flows and payment performance
should be updated at each report date to
determine whether the loan continues to
meet the criteria for remaining on
accrual status.
If a loan fails to perform in
accordance with the criteria for
adoption of this reporting treatment, but
no further charge-off is necessary, the
loan must again be placed on
nonaccrual status. Also, when a loan
meets the existing Call Report or TFR
nonaccrual criteria applied to the
remaining book balance and related
debt service, the loan must be placed on
nonaccrual status. In either event, the
return of a partially charged-off loan to
nonaccrual status may be indicative of
an insubstance foreclosure.
A loan that has been placed on
accrual status through this reporting
treatment but that later has been placed
on nonaccrual status (other than
following a further charge-off due to
renewed doubt as to collectibility) may
be restored to accrual status only when
the loan meets the existing reporting
requirements for restoration to accrual
status based on the lower required debt
service. Additionally, the loan must
again meet the four criteria previously
set forth. In this case the loan would be
returned to the category of “Partially
Charged-Off Loans Accruing Interest at
a Market Rate.” Of course, any loan that
meets the existing reporting
requirements for restoration to accrual
status, based on its contractual terms
may be returned to accrual status. In
this case the loan would not be included
in the category of “Partially Charged-Off
Loans Accruing Interest at a Market
Rate."
Other Matters
This reporting treatment will require
depository institutions to charge a loan
down to a point where the remaining
principal balance will be repaid at a
market rate of interest and the reduced
loan balance will have collateral and
cash flow support equivalent to that
expected under prudent underwriting
standards. Thus, the adoption of this
reporting treatment may require greater
charges against the allowance for loan
and lease losses (ALLL) than were
contemplated for the loans in question
when the ALLL was last evaluated.
Depository institutions must ensure that
the adoption of this reporting treatment
does not diminish the adequacy of the
ALLL.
■—
■■iim iiiib i
iiiiiim ■ ■ ■ i i i m
ih i
i i i i i i B i « - m r i T i T r T r r - m r n ' r "- r i —
Appraisals of collateral values should
be performed in accordance with
existing regulatory standards.
Information on loans to which this
reporting treatment has been applied is
to be reported in the Call Report or TFR.
III. Proposed Information To Be
Collected in the Call Report and TFR
The following information is to be
collected in regulatory report forms
regarding partially charged-off loans
accruing interest at a market rate:
[Dollar amounts in thousands]
1. Partially charged-off loan3 accruing
interest at a market rate:
a. Book value at the end of the
prior
quarter
of partially
charged-off loans accruing inter
est at a market rate.
b.
$
Book value of partially
charged-off loans returned to
accrual status at a market rate
since the end of the prior quar
ter.
b.l.
Charge-offs taken in
order to return the partially
charged-off loans reported
in item l.b. to accrual $
status at a market rate.
__
c. LESS: payments applied during
the quarter to reduce the re
corded balance of partially
charged-off loans accruing inter
est at a market rate.
__
d. LESS: all other changes and
adjustments since the end of
the prior quarter, net, to partial
ly charged-off loans accruing in
__
terest at a market rate.
e. Book value 'at the end of the
current quarter of partially
charged-off loans accruing inter
est at a market rate.
$
e.l. Book value of loans in
I.e. that are not collateral
dependent.
_$
2. Interest income accrued on
loans that have been partially
charged-off and are accruing in
terest at a market rate.
_$
3. Recoveries on charged-off por
tions of loans that have been
returned to accrual status at a
market rate.
$
■ » —
i«m
iim iw
" t u t
IV. Instructions for Preparation of
Disclosure for “Partially Charged-Off
Loans Accruing Interest at a Market
Rate”
General Instructions
Information on loans meeting the
criteria set forth in the bank Call Report
glossary entry and TFR instructions for
"Partially Charged-off Loans Accruing
Interest at a Market Rate” must be
reported in the bank Call Report and
TFR. The remaining book balance of any
such loan should be included in item 1
until:
(a) It is redesignated as a nonaccrual
loan under existing reporting
requirements (that determination being
based, however, on the recorded and
not the contractual balance due),
(b) It becomes classified substandard
or worse by examiners or the
institution’s internal credit review
process,
(c) The level of cash flows falls below
that level required when the loan was
determined as qualifying for this
reporting treatment,
(d) The loan to value ratio falls below
a prudent level,
(e) Additional charge-offs are taken,
(f) It becomes current based on its
contractual terms, or,
(g) It is repaid or otherwise satisfied
(including through formal restructuring,
foreclosure or insubstance foreclosure).
Item Instructions
Item No., Caption and Instructions
1
Partially charged-off loans
accruing interest at a market rate.
Report in subitems l.a through l.e,
below, a reconciliation of the changes
since the prior quarter in the book
balance of loans restored to accrual
status after being partially charged-off
in accordance with the Call Report
glossary entry or TFR instruction
"Partially Charged-off Loans Accruing
Interest at a Market Rate.” For loans
returned to accrual status in the current
quarter, also report in subitem l.b .l the
amount of charge-offs taken in order to
qualify the remaining balance of the
loan for return to accrual status in
accordance with this reporting
treatment. (See Call Report glossary
entry or TFR instruction entitled
“Partially Charged-off Loans Accruing
Interest at a Market Rate.”)
1(a) Book value at the end o f the
prior quarter o f partially charged-off
loans accruing interest at a market rate.
Report the book balance of all loans (net
of unearned income and prior chargeoffs) at the end of the prior quarter
which were accruing interest in
11444
Federal Register / Vol. 56, No. 52 / Monday, March 18, 1991 / Notices
accordance with the Call Report
glossary entry or TFR instruction
‘‘Partially Charged-off Loans Accruing
Interest at a Market Rate."
1(b) Book value o f partially chargedoff loans returned to accrual status at a
market rate since the end of the prior
quarter. Report the book balance of
loans returned to accrual status since
the end of the prior quarter in
accordance with the Call Report
glossary entry or TFR instruction
“Partially Charged-off Loans Accruing
Interest at a Market Rate.” The book
balance reported in this item shall be as
of the date the loan was returned to
accrual status after deduction of any
charge-off necessary to qualify the loan
for this reporting treatment. Payments of
principal applied subsequent to that
date, but prior to the quarter end, should
be reported in item I.e.
l(b.l) Charge-offs taken in order to
return the partially charged-off loans
reported in item l.b to accrual status at
a market rate. Report the amount of
charge-offs taken in order to return the
loans reported in subitem l.b to accrual
status in accordance with the Call
Report glossary entry or TFR instruction
“Partially Charged-off Loans Accruing
Interest at a Market Rate." Include any
charge-offs taken to return the loans in
item l.b to accrual status under this
reporting treatment, regardless of
whether such charge-offs were taken in
this quarter or prior quarters.
1(c) LESS: paym ents applied during
the quarter to reduce the recorded
balance of partially charged-off loans
accruing interest at a market rate.
Report in this item the amount of
payments received during the quarter
that were applied to reduce the book
balance of loans which were reported in
this category at the prior quarter end
and which were continuously included
in such category through this quarter
end. For loans which were returned to
accrual status in accordance with this
reporting treatment during the quarter,
report payments applied during the
quarter after the date of return to this
category or initial adoption of this
reporting treatment, respectively. For
loans which were removed from this
accrual category during the quarter,
report only payments applied to the
book balance while the loan was in this
category during the quarter. This would
also hold true for any loans which were
both removed from and returned to this
category during the quarter. Payments,
as that term is used, are not limited to
expected periodic payments, but would
also include payment in full of the
obligation (other than through Formal
restructuring, foreclosure or insubstance
foreclosure).
1 (d) LESS: all other changes and
adjustments since the end of the prior
quarter, net, to partially charged-off
loans accruing interest at a market rate.
Report the net effect of all other changes
and adjustments, including additional
advances, if any; loans removed from
this category because they were placed
back in nonaccrual status or because
they became current in accordance with
their contractual terms or due to formal
restructuring, foreclosure, including
insubstance foreclosure; or loans
returned to this category from
nonaccrual status after payment
deficiencies had been cured (see Call
Report glossary or TFR instruction
entitled ‘‘Partially Charged-off Loans
Accruing Interest at a Market Rate” for
details). In rare circumstances, the
amount reported in the aggregate of
loans subject to this reporting treatment.
In such instances the amount reported in
this item could represent a net increase
in this item should be enclosed with
parentheses to indicate that it must be
added to, rather than subtracted from,
the total of items l.a, l.b and l.c in order
to arrive at the current quarter end
balance for all loans for which interest
income is being accrued after partial
charge-off in accordance with the Call
Report glossary entry or TFR instruction
“Partially Charged-off Loans Accruing
Interest at a Market Rate”, as reported
in item l.e below.
1(e) Book value at the end of the
current quarter of partially charged-off
loans accruing interest at a market rate.
Report in this item the book balance as
of the report date of all partially chargeoff loans which were accruing interest in
accordance with the Call Report
glossary entry or TFR instruction
“Partially Charged-off Loans Accruing
Interest at a Market Rate.” The item
must equal the sum of items l.a through
l.d.
l(e.l) Book value of loans in I.e. that
are not collateral dependent. Report the
book value as of the report date of loans
included in item l.e which do not rely on
cash flow support from collateral for
repayment but rather are supported by
other dedicated and readily
determinable cash flow streams, in
accordance with Call Report glossary
entry or TFR instruction “Partially
Charged-off Loans Accruing Interest at a
Market Rate.”
2 Interest income accrued on loans
that have been partially charged-off and
are accruing interest at a market rate.
Report the amount of interest income
accrued in the current period on all
loans for which interest income was
being accrued after a partial charge-off
in accordance with Call Report glossary
entry or TFR instruction “Partially
Charged-off Loans Accruing Interest at a
Market Rate.”
3
Recoveries on charged-off portions
of loans that have been returned to
accural status at a market rate. Report
in this item all recoveries during the
current quarter on the charged-off
portion of any loan during that portion
of the current quarter that interest was
accrued on the loan in accordance with
the Call Report glossary entry or TFR
instruction “Partially Charged-off Loans
Accuring Interest at a Market Rate."
V. Issues for Comment
Background
Introduction
The agencies have assessed the
requirements for this reporting treatment
in light of existing supervisory policy
and regulatory reporting requirements.
The agencies believe that it may be an
acceptable practice under those policies
and requirements.
This belief is based on the assumption
that the proposed reporting treatment
can lead to more conservative
regulatory reporting. The loss
recognized for those loans to which the
proposed method is applied may be
greater than would otherwise result
under current acceptable methods. This
situation arises because under current
regulatory and accounting standards,
depository institutions are required to
charge off all elements of known loss.
This typically results in all or a portion
of the remaining balance of the loan
subject to partial charge-off being
adversely classified. On the other hand,
the proposed treatment would require
depository institutions to charge a loan
down to an amount that is characteristic
of a good loan, i.e., no portion of the
remaining loan balance would warrant
adverse classification.
The reporting treatment may also
provide financial institutions with more
flexibility in dealing with problem loans.
Finally, the adoption of this proposed
method may enhance the quality of
information provided to existing and
potential depositors, borrowers and
shareholders of depository institutions.
However, before the agencies are able
to issue a final instruction, there are
several areas where public comment is
sought.
The agencies strive, whenever
possible, to maintain conformity
between generally accepted accounting
principles (GAAP) and regulatory
reporting requirements. While the
agencies believe that the proposed
Federal Register / Vol. 56, No. 52 / Monday, March 18, 1991 / Notices
reporting standard may be a step in the
direction of improved regulatory
reporting, there is not definitive
evidence that it is in accordance with
GAAP.
Additionally, it is uncertain whether
the new method is “preferable” (as that
term is used under GAAP) for all
institutions.
Concurrent Studies
There has been considerable debate
within the rulemaking bodies of the
accounting profession on issues which
the proposed reporting standard
addresses. The Accounting Standards
Executive Committee of the American
Institute of Certified Public Accountants
(AICPA) has been considering various
issues related to the accrual of income.
The Financial Accounting Standards
Board (FASB) is also studying the
recognition and measurement of
financial instruments. The FASB also
has separate projects assessment the
questions of the impairment of loans '
and long-lived assets.
Accounting Changes
The agencies believe that the
adoption of this reporting treatment may
be a change in accounting principle.
Accounting Principles Board Opinion
No. 20, "Accounting Changes” (APB 20)
states that a change in the method used
in applying an accounting principle is a
change in an accounting principle. There
may be differing opinions as to whether
implementation of the proposed
reporting treatment is an accounting
principle change.
In order for an entity to adopt a
change in accounting principle, GAAP
requires that the principle being
implemented be preferable to the one
currently being followed. The agencies
recognize the obligation under APB 20,
in making an accounting change, to
justify this accounting method as a
preferable method under GAAP and
provide guidance as to its
implementation. However, as a
precondition to concluding that
implementation of this proposal would
be a change to a preferable accounting
principle, it may be necessary to:
(1) Expand the scope of this proposed
reporting treatment to certain other
loans or all loans, and/or,
(2) Make the adoption of this
treatment mandatory for all depository
institutions or for all qualifying loans
within an institution.
This request for comment seeks to
determine whether the proposed
reporting treatment can be deemed
preferable or if a definitive conclusion
can be reached
Insubstance Foreclosures
The first criterion for application of
this reporting treatment requires that the
loan not be an insubstance foreclosure.
The agencies believe that the
determination of whether a loan is an
insubstance foreclosure should be made
prior to any charge-offs planned to
return the loan to accrual status under
this reporting treatment. More
specifically, charge-offs which represent
the recognition of uncollectible amounts
under the guidance of Statement of
Financial Accounting Standards No. 5,
“Accounting for Contingencies” (FAS 5)
are relevant in making a determination
of the existence of an insubstance
foreclosure. However, the portion of a
partial charge-off taken when applying
this reporting treatment to a loan that is
in excess of that required under FAS 5
(i.e., to recognize the time value of
money and to provide a degree of excess
cash flow support), should not impact
the determination of whether a loan is
an insubstance foreclosure. Responses
regarding thi3 issue will be important in
assessing whether the accounting
treatment can be practicably and
consistently applied.
Applicability
Finally, the agencies seek to
determine whether this reporting
treatment should be required for all
depository institutions, or whether it
should or could be adopted at an
institution’s option. The agencies
request comment on this issue as well as
on whether the reporting treatment
should be prescribed for all qualifying
loans. Or, rather, should adoption be
required for all troubled loans, for all
nonaccrual loans or for all of some other
category of loans held by a depository
institution.
Responses regarding whether the
application of this proposal should be at
the option of individual depository
institutions should provide sufficient
reference to precedent or cits other
bases in accounting practice or the
accounting literature.
Considerations regarding selective
application include:
(1) For the assets affected, a more
conservative accounting practice in
comparison to the existing method may
result.
(2) For loans which do not have a
dedicated and readily determinable
stream of cash flows, the determination
of value may be more difficult and
inherently subjective.
Questions
Accordingly, to facilitate an
understanding of this proposed reporting
11445
treatment (which, in its proposed form,
would not be required to be adopted by
a depository institution and could be
selectively applied to qualifying loans)
relative to GAAP, the agencies request
comment specifically on the following
questions:
(1) Is the method permitted under this
proposed reporting treatment an
acceptable interpretation under existing
GAAP? Specifically, commentators
should consider addressing whether the
proposed reporting treatment is
consistent with the analogous literature:
(a) Under FAS 5 and the AICPA
Industry Audit Guides, “Audits of
Banks” and “Audits of Savings and
Loan Associations”, is it acceptable for
an institution to utilize both discounted
and undiscounted techniques to measure
probable losses on loans? Is the use of
both methods acceptable, particularly if
the less conservative method is used for
lower-quality loans that do not qualify
for application of the proposed method?
(b) Is the use of a market discount rate
an acceptable interpretation of the
AICPA Savings and Loan Audit Guide
which requires the reduction of proceeds
at a rate equivalent to the cost of capital
in determination of net realizable value?
Can an institution use two discount
rates for similar loans?
(c) Is the proposed method consistent
with Statement of Financial Accounting
Standards No. 15, "Accounting by
Debtors and Creditors for Troubled Debt
Restructurings” (FAS 15), in which the
gain or loss on restructuring is measured
on an undiscountad basis?
(d) Is the proposed method consistent
with AICPA Practice Bulletin 5, which
prohibits accrual of income on certain
loans unless, among other things, the
loan becomes current as to principal and
interest payments?
(2) Should the proposed reporting
treatment be limited only to collateral
dependent loans? If not, are the
proposed limitations set forth in this
document (i.e., loans where the primary
source of repayment is a dedicated and
readily determinable stream of cash
flows) sufficiently clear and appropriate,
or are other criteria for applicability
necessary ? For example, should the
proposed reporting treatment be
required for a broader subset of loans or
for other assets such as leases?
(3) Is it reasonable to believe that
loans meeting the requirements for the
proposed reporting treatment will not
also meet the criteria requiring
insubstance foreclosure accounting?
(4) Can existing GAAP be interpreted
to permit selective or discretionary
application of the proposed reporting
treatment by a depository institution to
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Federal Register / Vol. 56, No. 52 / Monday, March 18. 1991 / Notices
only certain of the loans within the
defined scope? Further, would existing
GAAP permit an institution to elect to
adopt or forego this proposed reporting
treatment entirely? Do the proposed
bank Call Report and TFR items
alleviate the concerns inherent in
selective application, or is the collection
of additional information in regulatory
reports necessary to alleviate these
concerns? If so, what additional
information would be needed?
(5) Would the adoption of this
proposed reporting treatment represent
a change to a preferable accounting
principle under APB 20? Does the
discretionary application aspect
preclude, or make more difficult or
otherwise impact the determination of
whether the change is preferable?
(6) If a loan to which this reporting
treatment were applied subsequently
became contractually current, should it
be excluded from being reported in the
bank Call Report and TFR items for
partially charged-off loans returned to
accrual status? If so, should it happen
immediately, or after one year-end
reporting, similar to the requirements for
FAS 15 disclosure?
Dated: March 14,1991.
Robert J. Lawrence,
Executive Secretary, Federal Financial
Institutions Examination Council.
[FR Doc. 91-6489 Filed 3-15-91; 8:45 am]
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