OUR THOUGHTS ON:

Substantial Increase in Required Finance Receivable Disclosures: Are You Ready?

Audit

By Lara Fuller

In light of the recent financial crisis, in July 2010, the FASB issued a new accounting standard to improve transparency in financial reporting by companies that hold financing receivables. The definition of a finance receivable according to the standard is a contractual right to receive money on demand or on fixed or determinable dates and is recognized as an asset on the company’s books. Some receivables, such as trade receivables, have been specifically excluded from the standard.

This new standard affects both public and nonpublic companies. For public companies, the first phase of the standard was effective for periods ending after December 15, 2010, and the second phase was effective for periods beginning after December 15, 2010. For nonpublic companies, the entire standard is effective for periods ending on or after December 15, 2011. Therefore, for many companies, this will be a big issue for the statements that are about to be under audit.

In general, the new standard will require much more extensive disclosures related to the finance receivables. In addition, it will require the new and some existing required disclosures to be at disaggregated levels, known as portfolio segments and classes of financing receivables. The standard defines a portfolio segment as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Classes then disaggregate those segments in order to provide information that allows the reader to understand the exposure to credit risk arising from the finance receivables.

Amendments to current required disclosures that now must be disclosed on a disaggregated basis include:

  • A rollforward schedule of the allowance for credit losses from the beginning of the reporting period to the end of the reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of the impairment method;
  • For each disaggregated ending balance in the item above, the related recorded investment in financing receivables;
  • The nonaccrual status of financing receivables by class of financing receivables; and
  • Impaired financing receivables by class of financing receivables.

The additional disclosures now required by the new standard include the following:

  • Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;
  • The aging of past-due financing receivables at the end of the reporting period by class of financing receivables;
  • The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses;
  • The nature and extent of financing receivables modified as troubled debt restructurings within 12 months that defaulted during the reporting period by class of financing receivables and their effect on the allowance for credit losses; and
  • Significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segment.

Although not required, comparative disclosures are encouraged. Because of all these new and more robust required disclosures, it is important for companies, if they have not already done so, to review the new requirements and gather the necessary information so that they are ready to prepare their financial statements at year-end.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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