The document discusses accounting for purchased financial assets with credit deterioration under the new credit impairment standard (ASU 2016-13, Topic 326). It provides guidance on measuring and recording the allowance for credit losses for purchased assets with credit deterioration, allocating any non-credit discount or premium, and accounting for interest income. It also discusses required disclosures including reconciliation of changes to the allowance for credit losses.

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2. 2
CECL – Accounting for Acquired Loans
Non-PCI/PCD & PCI/PCD
Neekis Hammond, CPA
Advisory Services

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The easiest way to listen is
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Submit your questions
Have questions for the presenter?
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For Upcoming and Archived sessions,
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ALLL & CECL Forum for Bankers
Commercial Credit Risk Professionals
@sageworks
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More Resources
Connect With Us

4. 4
This presentation may include statements that constitute “forward-looking statements” relative to publicly
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Disclaimer

5. CPE Credit
5
1) Write down the 6-digit code
2) Look for an email from Sageworks this afternoon
3) Enter email address and 6-digit code
4) Complete course survey provided in email

6. CPE Code - Part 1
6

7. 2018 CECL Transition Workshops
Locations:
» Atlanta, GA – March 14
» New York, NY – April 12
» Nashville, TN – June 14
» Los Angeles, CA – July 12
Agenda includes recommendations for a Practical CECL
Transition as well as hands-on case studies:
» Review CECL principles
» Data, segmentation, methodology, average life, forecasting
» Executing the practical CECL transition methodology
Practical CECL Case Studies and Learning
» Chicago, IL – August 9
» Washington, DC – October 11
» Austin, TX – November 8
Sageworks.com/cecl-workshops

8. Poll Question

9. I: Applicable Guidance & Updates
II: Transition Resource Group (TRG)
III: Illustrations
IV: Summary
9

10. Current GAAP
10
This Subtopic provides recognition, measurement, and
disclosure guidance regarding loans acquired with
evidence of deterioration of credit quality since
origination acquired by completion of a transfer for which
it is probable, at acquisition, that the investor will be
unable to collect all contractually required payments
receivable.
• Guidance
• TRG
• Illustration
• Summary

11. Current GAAP
11
Deterioration may be evidenced by such sources as Fair
Isaac Company (FICO) scores (an automated process
for all credit reports), downgrading, decline in collateral
value, or past due status.
• Guidance
• TRG
• Illustration
• Summary

12. ASU 2016-13 (Topic 326)
12
Acquired individual 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, as determined by an acquirer’s assessment.
See paragraph 326-20-55-5 for more information on the
meaning of similar risk characteristics for assets
measured on an amortized cost basis.
• Guidance
• TRG
• Illustration
• Summary

13. ASU 2016-13 (Topic 326)
13
An entity shall record the allowance for credit losses for
purchased financial assets with credit deterioration in
accordance with paragraphs 326-20-30-2 through 30-10
and 326-20-30-12. An entity shall add the allowance for
credit losses at the date of acquisition to the purchase
price to determine the initial amortized cost basis for
purchased financial assets with credit deterioration…
• Guidance
• TRG
• Illustration
• Summary

14. ASU 2016-13 (Topic 326)
14
An entity shall record the allowance for credit losses for
purchased financial assets with credit deterioration in
accordance with paragraphs 326-20-30-2 through 30-10
and 326-20-30-12. An entity shall add the allowance for
credit losses at the date of acquisition to the purchase
price to determine the initial amortized cost basis for
purchased financial assets with credit deterioration…
• Guidance
• TRG
• Illustration
• Summary

15. ASU 2016-13 (Topic 326)
15
… Any noncredit discount or premium resulting from
acquiring a pool of purchased financial assets with credit
deterioration shall be allocated to each individual asset.
At the acquisition date, the initial allowance for credit
losses determined on a collective basis shall be
allocated to individual assets to appropriately allocate
any noncredit discount or premium.
• Guidance
• TRG
• Illustration
• Summary

16. ASU 2016-13 (Topic 326)
16
… Any noncredit discount or premium resulting from
acquiring a pool of purchased financial assets with credit
deterioration shall be allocated to each individual asset.
At the acquisition date, the initial allowance for credit
losses determined on a collective basis shall be
allocated to individual assets to appropriately allocate
any noncredit discount or premium.
• Guidance
• TRG
• Illustration
• Summary

17. ASU 2016-13 (Topic 326)
17
If an entity estimates expected credit losses using a
discounted cash flow method, the entity shall discount
expected credit losses at the rate that equates the
present value of the purchaser’s estimate of the asset’s
future cash flows with the purchase price of the asset…
• Guidance
• TRG
• Illustration
• Summary

18. ASU 2016-13 (Topic 326)
18
… If an entity estimates expected credit losses using a
method other than a discounted cash flow method, the
entity shall estimate expected credit losses on the basis
of the unpaid principal balance (face value) of the
financial asset(s).
• Guidance
• TRG
• Illustration
• Summary

19. ASU 2016-13 (Topic 326)
19
An entity shall account for purchased financial assets
that do not have a more-than-insignificant deterioration in
credit quality since origination in a manner consistent
with originated financial assets in accordance with
paragraphs 326-20-30-1 through 30-10 and 326-20-30-
12. An entity shall not apply the guidance in paragraphs
326-20-30-13 through 30-14 for purchased financial
assets that do not have a more-than-insignificant
deterioration in credit quality since origination.
• Guidance
• TRG
• Illustration
• Summary

20. ASU 2016-13 (Topic 326)
20
An entity shall account for purchased financial assets
that do not have a more-than-insignificant deterioration in
credit quality since origination in a manner consistent
with originated financial assets in accordance with
paragraphs 326-20-30-1 through 30-10 and 326-20-30-
12. An entity shall not apply the guidance in paragraphs
326-20-30-13 through 30-14 for purchased financial
assets that do not have a more-than-insignificant
deterioration in credit quality since origination.
• Guidance
• TRG
• Illustration
• Summary

21. ASU 2016-13 (Topic 326)
21
… For example, if an entity uses a loss-rate method, the
numerator would include the expected credit losses of
the amortized cost basis (that is, amounts that are not
expected to be collected in cash or other consideration,
or recognized in income). In addition, when an entity
expects to accrete a discount into interest income, the
discount should not offset the entity’s expectation of
credit losses…
• Guidance
• TRG
• Illustration
• Summary

22. ASU 2016-13 (Topic 326)
22
This Subtopic does not address how a creditor shall
recognize interest income. See paragraphs 310-10-35-
53A through 35-53C for guidance on recognition of
interest income on purchased financial assets with credit
deterioration.
• Guidance
• TRG
• Illustration
• Summary

23. ASU 2016-13 (Topic 326)
23
When recognizing interest income on purchased
financial assets with credit deterioration within the scope
of Topic 326, an entity shall not recognize as interest
income the discount embedded in the purchase price
that is attributable to the acquirer’s assessment of
expected credit losses at the date of acquisition.
• Guidance
• TRG
• Illustration
• Summary

24. ASU 2016-13 (Topic 326)
24
… The entity shall accrete or amortize as interest income
the non-credit-related discount or premium of a
purchased financial asset with credit deterioration in
accordance with existing applicable guidance in Section
310-20-35 or 325-40-35.
• Guidance
• TRG
• Illustration
• Summary

25. ASU 2016-13 (Topic 326)
25
For instruments within the scope of this Subtopic, this
Section provides the following disclosure guidance on
credit risk and the measurement of expected credit
losses:
a. Credit quality information
b. Allowance for credit losses
c. Past-due status
d. Nonaccrual status
e. Purchased financial assets with credit deterioration
f. Collateral-dependent financial assets
g. Off-balance-sheet credit exposures
• Guidance
• TRG
• Illustration
• Summary

26. ASU 2016-13 (Topic 326)
26
When disclosing credit quality indicators of financing
receivables and net investment in leases (except for
reinsurance receivables and funded or unfunded
amounts of line-of-credit arrangements, such as credit
cards), an entity shall present the amortized cost basis
within each credit quality indicator by year of origination
(that is, vintage year)…
• Guidance
• TRG
• Illustration
• Summary

27. ASU 2016-13 (Topic 326)
27
… For purchased financing receivables and net
investment in leases an entity shall use the initial date of
issuance to determine the year of origination, not the
date of acquisition. For origination years before the fifth
annual period, an entity may present the amortized cost
basis of financing receivables and net investments in
leases in the aggregate. For interim period disclosures,
the current year-to-date originations in the current
reporting
• Guidance
• TRG
• Illustration
• Summary

28. ASU 2016-13 (Topic 326)
28
Furthermore, to enable a financial statement user to
understand the activity in the allowance for credit losses
for each period, an entity shall separately provide by
portfolio segment and major security type the
quantitative disclosures of the activity in the allowance
for credit losses for financial assets within the scope of
this Subtopic, including all of the following:…
• Guidance
• TRG
• Illustration
• Summary

29. ASU 2016-13 (Topic 326)
29
…
a. The beginning balance in the allowance for credit losses
b. Current-period provision for expected credit losses
c. The initial allowance for credit losses recognized on financial assets accounted for
as purchased financial assets with credit deterioration (including beneficial
interests that meet the criteria in paragraph 325-40-30-1A), if applicable
d. Writeoffs charged against the allowance
e. Recoveries of amounts previously written off, if applicable
• Guidance
• TRG
• Illustration
• Summary

30. ASU 2016-13 (Topic 326)
30
To the extent an entity acquired purchased financial
assets with credit deterioration during the current
reporting period, an entity shall provide a reconciliation of
the difference between the purchase price of the financial
assets and the par value of the assets, including:
a. The purchase price
b. The allowance for credit losses at the acquisition date based on the acquirer’s
assessment
c. The discount (or premium) attributable to other factors
d. The par value.
• Guidance
• TRG
• Illustration
• Summary

31. CPE Code - Part 2
31

32. I: Applicable Guidance & Updates
II: Transition Resource Group (TRG)
III: Illustrations
IV: Summary
32

33. Transition Resource Group
33
TRG Memos are “prepared for discussion at a public meeting of the Transition
Resource Group for Credit Losses. It does not purport to represent the views of any
individual members of the Board or staff. Comments on the application of generally
accepted accounting principles (GAAP) do not purport to set out acceptable or
unacceptable application of GAAP. Stakeholders are strongly encouraged to listen to
feedback about this staff paper from TRG members and Board members during the
TRG meeting and to read the meeting summary, which will be prepared by the staff
after the meeting.”
• Guidance
• TRG
• Illustration
• Summary

34. Transition Resource Group
34
Stakeholder Feedback (summarized):
• Stakeholder questions focus on whether the election to maintain pools accounted
for under Subtopic 310-30 at adoption provides an exemption from the requirement
to collectively evaluate assets with similar risk characteristics in paragraph 326-20-
30-2 at adoption only or both at adoption and on an ongoing basis.
• If the election to maintain pools applies both at adoption and on an ongoing basis,
stakeholders have also asked for clarity on whether the pool unit of account would
continue to apply as it does under Subtopic 310-30, which means a pool unit of
account may apply for purposes of writeoff determination or TDR identification in
addition to credit loss measurement.
• Guidance
• TRG
• Illustration
• Summary

35. Transition Resource Group
35
Staff Views (summarized):
• Maintain the Subtopic 310-30 pool at the time of adoption only. Under this view,
after adoption entities may only continue to maintain the pools for credit loss
measurement purposes to the extent the risk characteristics of the underlying
assets are similar in accordance with paragraph 326-20-30-2
• Maintain the Subtopic 310-30 pool both at the time of adoption and on an ongoing
basis. Under this view, an entity would maintain the integrity of the pool consistent
with the guidance in Subtopic 310-30 for all applicable areas of accounting which
may include credit loss measurement, interest income recognition, writeoff
determination, and TDR identification. Regarding interest income recognition, the
prospective transition approach for PCD assets would be applied at a pool level
which would freeze the effective interest rate of the pool.
• Guidance
• TRG
• Illustration
• Summary

36. Transition Resource Group
36
Staff Recommendation (summarized):
• The staff does not have a recommendation for this issue. The staff notes that
based on the guidance as written, View A appears to be more consistent with the
Board’s original intent. However, depending on feedback from the TRG members
about the level of incremental cost relief and whether the drawbacks would be
manageable, the staff notes that it may be appropriate for the Board to consider
clarifying the guidance to allow View B
• The staff adds that based on the varying degrees of sophistication among entities
that apply Subtopic 310-30 accounting, where systems may range from
spreadsheets to more complex models, the balance of cost relief and other
implications may vary significantly by entity. Therefore, a discussion among the
TRG members on the question in this memo will be helpful for the Board to
determine what, if any, action may be needed to address the issue
• Guidance
• TRG
• Illustration
• Summary

37. I: Applicable Guidance & Updates
II: Transition Resource Group (TRG)
III: Illustrations
IV: Summary
37

38. 38
• Guidance
• TRG
• Illustration
• Summary
Valuation Item Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
Non-PCI/PCD
Day 1/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
ALLL (Notional) (900)
Valuation Adj. (Rem.) (1,000)
ALLL (Recorded) 0
Day 2/Pre-Transition Date

39. 39
• Guidance
• TRG
• Illustration
• Summary
Valuation Item Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
Day 1/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
ALLL (Notional) (900)
Valuation Adj. (Rem.) (1,000)
ALLL (Recorded) 0
Day 2/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Coupon 5%
EIR (Prepayment) 5.69%
PD/LGD 2.5%/15%
NPV 98,343
ALLL (Recorded) (657)/.66%
Day 2/Post-Transition Date
Non-PCI/PCD
Month Balance Cash Flow
0 100,000 (99,000) << Basis
1 96,869 3,341
2 93,768 3,303
… … …

40. 40
• Guidance
• TRG
• Illustration
• Summary
Valuation Item Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
Day 1/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
ALLL (Notional) (900)
Valuation Adj. (Rem.) (1,000)
ALLL (Recorded) 0
Day 2/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Coupon 5%
EIR (Prepayment) 5.69%
PD/LGD 2.5%/15%
NPV 98,343
ALLL (Recorded) (657)/.66%
Day 2/Post-Transition Date
Non-PCI/PCD
Month Balance Cash Flow
0 100,000 (99,000) << Basis
1 96,869 3,341
2 93,768 3,303
… … …

41. 41
• Guidance
• TRG
• Illustration
• Summary
Valuation Item Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
Day 1/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
ALLL (Notional) (900)
Valuation Adj. (Rem.) (1,000)
ALLL (Recorded) 0
Day 2/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Coupon 5%
EIR (Prepayment) 5.69%
PD/LGD 2.5%/15%
NPV 98,343
ALLL (Recorded) (657)/.66%
Day 2/Post-Transition Date
Non-PCI/PCD
Month Balance Cash Flow
0 100,000 (99,000) << Basis
1 96,869 3,341
2 93,768 3,303
… … …

42. 42
• Guidance
• TRG
• Illustration
• Summary
Valuation Item Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
PCI/PCD
Day 1/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Impairment 0
Valuation Adj. (Rem.) (1,000)
Accretable Yield 7,952
Effective Yield 5.22%
Day 2/Pre-Transition Date

43. 43
• Guidance
• TRG
• Illustration
• Summary
Valuation Item Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
PCI/PCD
Day 1/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Impairment 0
Valuation Adj. (Rem.) (1,000)
Accretable Yield 7,952
Effective Yield 5.22%
Day 2/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
Day 1/Post-Transition Date

44. 44
• Guidance
• TRG
• Illustration
• Summary
Valuation Item Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
PCI/PCD
Day 1/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Impairment 0
Valuation Adj. (Rem.) (1,000)
Accretable Yield 7,952
Effective Yield 5.22%
Day 2/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
Day 1/Post-Transition Date
Year Balance Credit Loss Cash Flow
0 100,000 567 (PV) (99,000) << Basis
1 96,869 31 3,341
2 93,768 30 3,303
… … … …
Positions Amount
UPB (Face) 100,000
EIR (Prepayment) 5.69%
Non-Credit Discount (433)/.43%
Credit Discount/ALLL (567)/.57%
Day 2/Post-Transition Date

45. 45
• Guidance
• TRG
• Illustration
• Summary
Valuation Item Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
PCI/PCD
Day 1/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Impairment 0
Valuation Adj. (Rem.) (1,000)
Accretable Yield 7,952
Effective Yield 5.22%
Day 2/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
Day 1/Post-Transition Date
Year Balance Credit Loss Cash Flow
0 100,000 (99,567) << Basis
1 96,869 31 3,341
2 93,768 30 3,303
… … … …
Positions Amount
UPB (Face) 100,000
EIR (Prepayment) 5.69%
Non-Credit Discount (433)/.43%
Credit Discount/ALLL (567)/.57%
NPV 98,893
ALLL (674)/.67%
Day 2/Post-Transition Date

46. 46
• Guidance
• TRG
• Illustration
• Summary
Valuation Item Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
PCI/PCD
Day 1/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Impairment 0
Valuation Adj. (Rem.) (1,000)
Accretable Yield 7,952
Effective Yield 5.22%
Day 2/Pre-Transition Date
Positions Amount
UPB (Face) 100,000
Fair Value 99,000
Valuation Adj. (Day 1) (1000)
Day 1/Post-Transition Date
Year Balance Credit Loss Cash Flow
0 100,000 (99,567) << Basis
1 96,869 31 3,341
2 93,768 30 3,303
… … … …
Positions Amount
UPB (Face) 100,000
EIR (Prepayment) 5.69%
Non-Credit Discount (433)/.43%
Credit Discount/ALLL (567)/.57%
NPV 98,893
ALLL (674)/.67%
Day 2/Post-Transition Date

47. 47
• Guidance
• TRG
• Illustration – ASU 2016-13 Examples
• Summary
PCI/PCD

48. 48
• Guidance
• TRG
• Illustration
• Summary
Day 2 - ALLL, Yield, and Accretion
IRR/Yield 15.46%
Year Balance Cash Flow
0 2,176,204 (1,918,559)
1 1,119,794 1,186,982
2 0 1,186,982
Valuation Item Amount
UPB (Face) 2,176,204
Fair Value 1,918,559
Valuation Adj. (Day 1) 257,645
Balance ALLL Discount Basis
2,176,204 (217,620) (257,645) 1,918,559
Year Discount Accretion Discount
1 (257,645) 165,941 (91,704)
2 (91,704) 91,704 0
Non-PCI/PCD
Day 1

49. 49
• Guidance
• TRG
• Illustration
• Summary
Day 2 - ALLL, Yield, and Accretion
Valuation Item Amount
UPB (Face) 2,176,204
Fair Value 1,918,559
Valuation Adj. (Day 1) 257,645
PCI/PCD – Loss Rate
Day 1
IRR/Yield 7.33%
ALLL 2,176,204 10% 217,620
Year Discount Accretion Discount
1 (40,025) 26,103 (13,922)
2 (13,922) 13,922 0
Year Balance Cash Flow
0 2,176,204 (2,136,179)
1 1,119,794 1,186,982
2 0 1,186,982

50. 50
• Guidance
• TRG
• Illustration
• Summary
Day 2 - ALLL, Yield, and Accretion
Valuation Item Amount
UPB (Face) 2,176,204
Fair Value 1,918,559
Valuation Adj. (Day 1) 257,645
PCI/PCD – Discounted Cash Flow
Day 1
IRR/Yield 8.46%
Balance ALLL Discount Basis
2,176,204 (185,012) (72,633) 2,103,571
Year Discount Accretion Discount
1 (72,633) 47,285 (25,348)
2 (25,348) 25,348 0
Year Balance Cash Flow Loss
0 2,176,204 (1,918,559) 0
1 1,119,794 1,186,982 0
2 217,620 969,362 217,620

51. I: Applicable Guidance & Updates
II: Transition Resource Group (TRG)
III: Illustrations
IV: Summary
51

52. 52
• Guidance
• TRG
• Illustration
• Summary
Summary
• Non-PCD: Entire discount is part of the amortized cost
basis and may not be reclassified to ALLL
• PCI: May not re-evaluate “purchased impaired” status
at transition
• PCI: TRG working through pooling considerations
• PCD: Credit component of remaining discount
reclassified to ALLL
• PCD: Say goodbye to re-estimations, impairment, and
rigorous accretion calculations

53. CPE Code - Part 3
53

54. Poll Question

55. 2018 CECL Transition Workshops
Locations:
» Atlanta, GA – March 14
» New York, NY – April 12
» Nashville, TN – June 14
» Los Angeles, CA – July 12
Agenda includes recommendations for a Practical CECL
Transition as well as hands-on case studies:
» Review CECL principles
» Data, segmentation, methodology, average life, forecasting
» Executing the practical CECL transition methodology
Practical CECL Case Studies and Learning
» Chicago, IL – August 9
» Washington, DC – October 11
» Austin, TX – November 8
Sageworks.com/cecl-workshops

56. Q&A