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Full disclosure: Loans and credit losses (updated January 23, 2025) · PwC's accounting podcast

• 0:00
  SPEAKER_01: Thought Leadership from PWC.
• 0:06
  SPEAKER_00: Welcome to PWC's Accounting Podcast.
• 0:09
  SPEAKER_00: I'm Heather Horn.
• 0:11
  SPEAKER_00: Thanks for tuning in to the next episode in our full disclosure summer series, a show all about presentation and disclosure, from the top of the financial statements down to the last footnote.
• 0:24
  SPEAKER_00: While it may sound like accounting 101, I guarantee you'll learn something new each episode.
• 0:30
  SPEAKER_00: Today's focus loans and credit losses.
• 0:34
  SPEAKER_03: There's certain I'll call it credit best practices that are applied to certain types of portfolios.
• 0:38
  SPEAKER_03: I think that'll continue and that'll always be used.
• 0:41
  SPEAKER_03: To me, it's a question around whether or not those best practices might get tweaked as the economic environment changes.
• 0:47
  SPEAKER_02: Through the adoption process, institutions learn that the data, the quality, and the availability of that data takes a lot of time.
• 0:56
  SPEAKER_00: Those are my guests, Tom Barbieri and Brett Dooley, PwC National Office Partners.
• 1:01
  SPEAKER_00: They're here to share some of the presentation and disclosure issues in a post-Cecal world.
• 1:09
  SPEAKER_00: Tom, Brett, so nice to have you both back.
• 1:12
  SPEAKER_00: Thanks for joining me again today.
• 1:14
  SPEAKER_00: And our topic for today is loans and credit losses.
• 1:18
  SPEAKER_00: But before we begin, Tom, I thought it'd be helpful just to level set for our audience of what exactly is in scope of our conversation today.
• 1:26
  SPEAKER_03: Sure, Heather, I'm happy to do that.
• 1:28
  SPEAKER_03: So today we're going to really talk about presentation of disclosure issues in a post-Cecal world, right?
• 1:35
  SPEAKER_03: Current expected credit loss model.
• 1:37
  SPEAKER_03: And so be thinking about that.
• 1:39
  SPEAKER_03: And that becomes really important because as we get to a lot of the disclosures around credit and credit losses, there's a lot of new disclosures that were introduced as a result of Cecil.
• 1:50
  SPEAKER_03: We're not going to get into all the depths of measurement and recognition and the purchase credit deterioration model, PCD model.
• 1:58
  SPEAKER_03: We're really just going to focus on sort of the balance sheet and disclosures that are required in the notes, if that makes sense.
• 2:04
  SPEAKER_00: Perfect.
• 2:05
  SPEAKER_00: So then with that, Tom, since you mentioned the balance sheet, what are some of the key reminders that our listeners should think about from a balance sheet presentation perspective?
• 2:13
  SPEAKER_03: I think the most critical thing is you really need to disclose your any loans or receivables you have separately on the face of the balance sheet at their aggregate amortized cost amounts.
• 2:24
  SPEAKER_03: And thinking about that, you know, there is guidance that suggests you should disclose major categories of those loans and receivables either separately in the balance sheet or in your footnotes.
• 2:33
  SPEAKER_03: And so there's going to be some judgment there in making that determination.
• 2:37
  SPEAKER_03: Now, one thing you might want to think about, because we're going to spend some time on this later, is that a lot of disclosures you need to make, particularly about credit losses and the allowance, have to be done at what's referred to as a portfolio segment level.
• 2:49
  SPEAKER_03: And that's really the level on which you determine your allowance for loan losses or credit losses.
• 2:55
  SPEAKER_03: And so that might shape your decision around how you think about what those categories are and breaking out your loans.
• 3:01
  SPEAKER_03: So if you're a sophisticated financial institution and you sort of run your allowance of auto loans, that might be the portfolio segment.
• 3:11
  SPEAKER_03: And so you might separately break out your amortized cost balance of auto loans in the footnotes or on the face of your balance sheet.
• 3:22
  SPEAKER_03: Versus if you're a commercial entity and all you really have is accounts receivable, you might separately determine that you want to break out your accounts receivable by domestic receivables versus international.
• 3:36
  SPEAKER_03: So a lot of judgments are going to be made around how you want to break that down.
• 3:39
  SPEAKER_03: Now the amount you're presenting, obviously, is going to include any discounts or premiums and any unamortized loan fees that are associated with that balance.
• 3:51
  SPEAKER_03: And so that would really make up what the balance is.
• 3:54
  SPEAKER_03: And then separately you need to present the your estimate of expected credit losses on the face of the balance sheet as an allowance that reduces that amortized cost basis of the financial asset.
• 4:04
  SPEAKER_03: So that's sort of the key there.
• 4:06
  SPEAKER_03: Now you might have certain loans in which you adopted the fair value option on, so they're not at amortized cost.
• 4:12
  SPEAKER_03: And so sometimes people separately present those on the face of the balance sheet, or they'll include that within their general loan balance, but separately identify how much of the loans in the balance are actually marked at fair value each period.
• 4:26
  SPEAKER_03: And then lastly, there is a requirement that you need to separately present any loans that are held for sale.
• 4:32
  SPEAKER_03: So those loans, if you recall, have to be held at lower of cost or fair value.
• 4:38
  SPEAKER_03: And that could be a situation in which you had a loan that was held for investment, you made the decision that you're going to sell it, you'd now call it hell for sale and have to carry it at that lower of cost of market.
• 4:48
  SPEAKER_03: Or it could include loans that at origination or acquisition, you know, you you never really intended to hold those for the foreseeable future for investment purposes.
• 4:57
  SPEAKER_03: And so keep that in the back of your mind as well, that those should be separately presented.
• 5:01
  SPEAKER_00: So, Tom, I should have asked you this when we were level setting and you did mention it, but just to make sure for our audience, you made the point that this could vary a little bit depending on whether you are a financial institution or non-financial institution.
• 5:15
  SPEAKER_00: But I do still think, even though companies have adopted this, there are still some questions more broadly if you know from a non-financial institution.
• 5:24
  SPEAKER_00: What does this really mean?
• 5:25
  SPEAKER_00: So to cut the chase, if you are not a financial institution and you're thinking about balance sheet, has there been much change under Cecil or is it basically what you had before?
• 5:36
  SPEAKER_03: Well, yeah, I there there has been a lot of change.
• 5:39
  SPEAKER_03: It might not have been a material result, but how you would think about credit losses for accounts receivable, right, has now has now changed.
• 5:47
  SPEAKER_03: And depending upon, quite frankly, um the tenor of those accounts receivable might drive really the difference between the allowance you might have had under old GAP in the pre-CISA world versus Cecil.
• 6:00
  SPEAKER_03: And then certainly on the disclosure side, there's been a number of changes that have had a significant impact, talking about the credit, um, credit quality of those underlying receivables and sort of uh, as we'll get into it, some of the disclosures around the allowance for losses, credit losses as well.
• 6:16
  SPEAKER_00: All right, so Tom, I think that's a helpful reminder because I do think uh to your point, there have been a lot of changes.
• 6:22
  SPEAKER_00: And I I think sometimes it's hard for people to get into the new mindset.
• 6:26
  SPEAKER_00: So I think that's good.
• 6:27
  SPEAKER_00: Then one other question for you, I know there's also some specific requirements for related parties.
• 6:32
  SPEAKER_00: Can you highlight those?
• 6:34
  SPEAKER_03: Yeah, that's a great point.
• 6:35
  SPEAKER_03: So any loans that you might have from related parties, so think loans receivables from officers, employees, or affiliated companies, those are required to be uh presented separately on the face of the balance sheet.
• 6:48
  SPEAKER_03: And and obviously that's just given their related party nature, you want to alert the reader to the fact that the you know those terms uh might be unique.
• 6:56
  SPEAKER_03: Um and so you know it's really really to alert the reader to that point.
• 7:00
  SPEAKER_00: Great.
• 7:01
  SPEAKER_00: So then since we hit the balance sheet, of course, the obvious next step is the income statement.
• 7:06
  SPEAKER_00: And I think Brett, I'll go to you for this.
• 7:09
  SPEAKER_00: And I know often the first thing people think of is interest income, but there's a lot of other impacts companies should be thinking about.
• 7:16
  SPEAKER_00: So can you give us the highlights?
• 7:18
  SPEAKER_02: Sure, Heather.
• 7:19
  SPEAKER_02: I I would think of this in uh three areas.
• 7:22
  SPEAKER_02: The first being uh interest income, as you mentioned.
• 7:25
  SPEAKER_02: Interest income on uh financial assets uh on financial receivables are recognized on an effective yield basis.
• 7:32
  SPEAKER_02: So that starts with contractual interest uh and then is adjusted for the amortization of any discounts or premiums, as well as loan origination, commitment, other fees and costs that are recognized as an adjustment of that yield.
• 7:46
  SPEAKER_02: In many cases, this effective yield calculation is relatively straightforward.
• 7:51
  SPEAKER_02: In some cases, it can be quite complex if you have a loan with a structured payout or if you're dealing with prepayable assets.
• 7:59
  SPEAKER_02: But in in most cases, uh it can be relatively straightforward.
• 8:03
  SPEAKER_02: The second area is the provision for credit losses.
• 8:06
  SPEAKER_02: Uh, so this relates to all financial instruments measured at amortized cost.
• 8:12
  SPEAKER_02: Uh, and what you see on the income statement is just the adjustment that's required to bring the allowance to get to management's uh current estimate of credit losses.
• 8:21
  SPEAKER_02: Often this is based on an estimate and a forecast, but sometimes there are fair value amounts that are embedded in there.
• 8:29
  SPEAKER_02: For example, if there are loans that are going to be collected through collateral, that that uh provision may be measured at the fair value of that collateral so that actually becomes a fair value estimate that's still embedded in that in that same line item.
• 8:45
  SPEAKER_02: And then the third area is service fee income.
• 8:48
  SPEAKER_02: Uh this may be uh or may include amortization of commitment fees that are being amortized on a straight line basis over that commitment period, or sometimes there are ancillary fees related to loans or loan servicing activities such as uh default or uh late payment fees that are recognized separately, whether through a service fee income line item or some sort of other income line item.
• 9:12
  SPEAKER_00: Okay, that's helpful.
• 9:13
  SPEAKER_00: And then before we turn to disclosure requirements, one question on loans, and this is back to my comment about non-FS companies.
• 9:22
  SPEAKER_00: Is this something we really see often with non-FS companies that they may have some types of loans that they're handling, even though you don't traditionally think of them as a quote lender?
• 9:32
  SPEAKER_00: Or is that again something we I mean, obviously see more with financial institutions, but you know, just trying to get a sense for that?
• 9:39
  SPEAKER_02: I think you can see a mix of both.
• 9:41
  SPEAKER_02: Certainly, non-financial institutions will have uh more accounts receivable.
• 9:46
  SPEAKER_02: Sometimes, depending on those payment terms, extend beyond a year, and so there is an interest rate component to that.
• 9:52
  SPEAKER_02: Um, certainly some of these issues are more prevalent for financial institutions.
• 9:58
  SPEAKER_02: Uh, but we're seeing more and more non-financial institutions get into some types of lending activities, whether it's to their uh customers or or others.
• 10:07
  SPEAKER_00: All right, that's helpful.
• 10:08
  SPEAKER_00: So then with that, it's a perfect segue into our first disclosure topic, which is loans.
• 10:14
  SPEAKER_00: And uh then we'll get into the allowance separately.
• 10:16
  SPEAKER_00: But so, Tom, I'll go back to you for this question.
• 10:18
  SPEAKER_00: And what should I be thinking about from a loan disclosure perspective?
• 10:23
  SPEAKER_03: Sure.
• 10:24
  SPEAKER_03: So I think the first area is just disclosure in your accounting policy footnote around your accounting policies around loans.
• 10:30
  SPEAKER_03: So loans that are held for investment, that you're accounting for those that amortized cost, and what might be the components of that amortized cost, any loans you have held for sale, you'd want to describe that accounting that it's done at low-com, et cetera.
• 10:43
  SPEAKER_03: If you do have loans held for sale, uh you might want to describe how transfers would occur, uh, either out of loans held for sale to held for investment or vice versa.
• 10:53
  SPEAKER_03: And then lastly, uh fair value option uh disclosures around any portfolios or any assets in which you've elected fair value option, alerting the reader to that.
• 11:03
  SPEAKER_03: And just staying on the subject of fair value.
• 11:05
  SPEAKER_03: You know, loans are subject to all of the fair value disclosures, both for non-recurring measurements and recurring fair value measurements.
• 11:12
  SPEAKER_03: And so keep that in the back of your mind.
• 11:13
  SPEAKER_03: You're gonna have to have a process about determining fair value of your loans, you're gonna have to figure out the appropriate leveling for those loans.
• 11:20
  SPEAKER_03: So all of those requirements are you know just as important.
• 11:22
  SPEAKER_03: Staying back on the accounting policies, as Brett mentioned earlier, you're gonna have to get into what your interest income uh accounting policies are.
• 11:30
  SPEAKER_03: And probably the key one there is there is an ability in the accounting literature to estimate prepayments in deriving what your interest income is, and that is an election you can make.
• 11:40
  SPEAKER_03: And so if you've made that election or not, you'd you'd want to describe exactly how you're recording your interest income.
• 11:46
  SPEAKER_03: And probably the last area to emphasizes the uh required disclosures around past due and non-acrual status of loans.
• 11:53
  SPEAKER_03: And so, you know, there is a requirement that NEs have to provide an aging analysis for loans that are passed due at the end of the reporting period.
• 12:02
  SPEAKER_03: And so that would really reflect what your carrying amount, your amortized cost is, and that has to be disaggregated at this portfolio segment level that I did I discussed before, which is like the level at which you determine your allowance for credit losses.
• 12:16
  SPEAKER_03: And so that's really a disclosure you need to keep in mind.
• 12:20
  SPEAKER_03: In addition, you know, an entity has to disclose your accounting policies around non-acrual.
• 12:25
  SPEAKER_03: So what is your policy for discontinuing accrual of interest, um, recording what you would do if you could had payments received on loans that were non-accrual?
• 12:35
  SPEAKER_03: In other words, how do you record those?
• 12:37
  SPEAKER_03: Is it a cost recovery method, a cash basis method, or some combination of that?
• 12:42
  SPEAKER_03: Anytime you've got path-door delinquent status, what's your policies around that uh for determining that, as well as your policies for recognizing write-offs within the allowance for credit losses?
• 12:53
  SPEAKER_03: So a lot there relative to path-do and non-accrual.
• 12:56
  SPEAKER_00: Definitely.
• 12:57
  SPEAKER_00: And I think, you know, I we said up front this is not about recognition and measurement, but just to give some sort of context for people who may be less familiar, in terms of non-accruing, so it sounds like Tom, what you're saying is that there are situations where you haven't written a loan off, but you may decide to stop accruing interest on it.
• 13:17
  SPEAKER_03: Exactly.
• 13:18
  SPEAKER_03: So let's say you've got a certain asset in which it's 90 days past due, you might feel at that point it would be inappropriate to continue interest income on that asset, given that it might have some collectibility issues.
• 13:30
  SPEAKER_00: All right, that's helpful.
• 13:32
  SPEAKER_00: So then I think another key point on this is that if there are contractual terms in loans and trade receivables as well that would expose a reporting entity to any risks or uncertainties, then companies also need to think about those disclosures.
• 13:47
  SPEAKER_00: So even more to think about.
• 13:48
  SPEAKER_01: Yeah, all right.
• 13:50
  SPEAKER_00: So then switching over to credit quality, Brett, I'll go back to you here.
• 13:54
  SPEAKER_00: So what are some of the key things that we, you know, that are required?
• 13:58
  SPEAKER_00: And I know there's a lot of judgments here.
• 13:59
  SPEAKER_00: So if you want to highlight those in particular, that would be great.
• 14:03
  SPEAKER_02: Sure, Heather.
• 14:04
  SPEAKER_02: Um, there's a number of judgments here because the the credit quality indicators and these disclosures are really built from the lens of management.
• 14:11
  SPEAKER_02: Uh, the general uh requirement and purpose of these disclosures is to allow the reader to understand the credit quality of the loan portfolio.
• 14:20
  SPEAKER_02: Uh, and these disclosures are broken down by class of financing receivable.
• 14:25
  SPEAKER_02: So for a financial institution, they may show these amounts separately for credit cards than they would for mortgage loans, and they would for various classes of wholesale loans, for example.
• 14:37
  SPEAKER_02: And what the exact uh credit quality indicators are is up to management to decide what's relevant.
• 14:44
  SPEAKER_02: We frequently see delinquency statistics, we frequently see the portfolio broken out by uh credit rating or by some sort of uh uh credit score, loan-to-value ratios are very frequently seen in mortgages, uh, and then um geography is often uh considered one of the indicators.
• 15:06
  SPEAKER_02: Um these indicators will be shown uh for the portfolio, like I said, by class of financing receivable, and then you're also required to show the amortized cost basis for each indicator by year of origination.
• 15:21
  SPEAKER_02: So we call these the vintage tables.
• 15:23
  SPEAKER_02: So it not only breaks down the portfolio within these buckets, whatever indicator you've shown, but also shows separately each bucket for the year of origination.
• 15:34
  SPEAKER_02: For a company that has only short-term receivables, this won't be a big deal.
• 15:39
  SPEAKER_02: But for a company with a large portfolio with a long range of tenors, these tables can be quite complex.
• 15:45
  SPEAKER_02: There's special guidance for revolving credit, uh, like credit cards or home equity loans.
• 15:50
  SPEAKER_02: There were questions about how to present this origination-based data, whether by draw date or by underwriting date.
• 15:58
  SPEAKER_02: And so the rules just keep it simple and present the revolvers in a separate column.
• 16:03
  SPEAKER_02: There are also uh specific disclosure requirements for impaired loans.
• 16:07
  SPEAKER_02: These loans are where it's probable that you're not going to collect all of the amounts due according to contractual terms.
• 16:14
  SPEAKER_02: And so reporting entities uh need to disclose accounting policies around these and the amounts of these types of loans.
• 16:21
  SPEAKER_02: And then for loans that have been partially charged off uh because of collectability issues, there's additional disclosure requirements for those.
• 16:29
  SPEAKER_02: And I'd I'd refer people to our financial statement presentation guide.
• 16:32
  SPEAKER_02: Uh, chapter eight has uh kind of a laundry list of those.
• 16:36
  SPEAKER_00: All right, you don't want to read that list to us, I take it, Brett.
• 16:38
  SPEAKER_00: Uh Brett, one question though, going back to what you said at the beginning and how this is through the lens of management, and you gave these examples of kind of splitting by delinquency, credit rating, you know, loan to value geography, et cetera.
• 16:51
  SPEAKER_00: How do we see people thinking about those in practice?
• 16:55
  SPEAKER_00: Is there sort of general ones that everyone uses, or do we really see a big difference among different companies, really depending on how they are thinking about their portfolio?
• 17:05
  SPEAKER_02: There are some differences, but there are some that that really cut across and are very common, like like delinquency.
• 17:12
  SPEAKER_02: When you're talking in consumer loans, doing some sort of credit score is very common.
• 17:18
  SPEAKER_02: In mortgages, loan to value is very common.
• 17:20
  SPEAKER_02: So I'd say there's there's pretty broad consistency.
• 17:23
  SPEAKER_02: Um, certain companies or certain classes of financing receivables may have one or two additional uh indicators that they use.
• 17:31
  SPEAKER_00: Okay.
• 17:31
  SPEAKER_00: And then Tom, I'm gonna send a question to you quickly.
• 17:35
  SPEAKER_00: So obviously, it hasn't been that long since companies have adopted Cecil.
• 17:40
  SPEAKER_00: And so my guess is we haven't seen much change in these uh, you know, these credit quality indicators.
• 17:46
  SPEAKER_00: But would you expect over time that companies would evolve in terms of what they're disclosing?
• 17:51
  SPEAKER_00: Or no, this is more of a static type of thing that you would continue to likely see the same things, you know, a few years from now?
• 18:00
  SPEAKER_03: Yeah, I I I I think in most cases we're likely going to see the same over a period of time.
• 18:06
  SPEAKER_03: I I think where it might change is if there's certain pressure that might be in certain economic environments on certain types of items that might really impact a certain portfolio of loans that maybe those might become more important when people are actually monitoring credit.
• 18:22
  SPEAKER_03: So, you know, to to Brett's point, you know, there's certain there's certain, I'll call it credit best practices that are applied to certain types of portfolios.
• 18:31
  SPEAKER_03: I think that'll continue and that'll always be used.
• 18:34
  SPEAKER_03: To me, it's a question around whether or not those best practices might get tweaked as the you know economic environment changes.
• 18:40
  SPEAKER_00: And I guess so that would be something like maybe if you had a particular class that had more issues in the COVID environment, maybe those would have been broken out separately, something like that.
• 18:51
  SPEAKER_00: Yeah, exactly.
• 18:52
  SPEAKER_00: This helpful context.
• 18:53
  SPEAKER_00: So then, Brett, let me go back to you and specifically talking now about the allowance.
• 18:58
  SPEAKER_00: Um, so we were talking about credit quality, let's move on to the allowance for credit losses.
• 19:02
  SPEAKER_00: And obviously, it's based on management's estimate.
• 19:06
  SPEAKER_00: And I know there are some required disclosures on how that's built up.
• 19:10
  SPEAKER_00: So, what can you share there?
• 19:11
  SPEAKER_02: Sure.
• 19:12
  SPEAKER_02: As you said, you know, the allowance is based on management's estimate, and the standard gives broad flexibility in the methods and data used to make that estimate.
• 19:21
  SPEAKER_02: And so consistent with that, we've got a set of broad, of fairly robust disclosures to help explain to users exactly what management did to come up with their estimate.
• 19:32
  SPEAKER_02: And it starts with a broad description of the methodology and approach, how expect loss estimates are developed, how many different models are used, how many different methodologies exist for different types of loans, and then for each one of those, a description of the accounting policies and methodologies used to come up with that allowance.
• 19:54
  SPEAKER_02: These things may include the data that was used to come up with the estimate of losses, whether that is historical data used, oftentimes there's a discrete forecast period that is used, some description of the economic environment that's assumed within that forecast period, and then how longer-term estimates have been arrived at as well.
• 20:17
  SPEAKER_02: All of that information is helpful for financial saving users to assess exactly how management uh went about their process to do this.
• 20:26
  SPEAKER_02: There are disclosure requirements around changes to that policy and estimates.
• 20:31
  SPEAKER_02: So as companies refine their methodology, as new data becomes available, uh describing the impact of that, both quantitatively as well as qualitatively, and the rationale for making those changes to the methodology.
• 20:46
  SPEAKER_02: And then some description around the risk characteristics of the loans, what is changing in the current economic environment?
• 20:53
  SPEAKER_02: Are there new risks that are that are emerging within the loan portfolio, and how those specific risks then translate to uh changes to the allowance for that period?
• 21:05
  SPEAKER_02: Again, all of this is disclosed by portfolio segment and and for securities, major security type.
• 21:11
  SPEAKER_02: So the granularity that we see in practice is often influenced by the size of the portfolio.
• 21:17
  SPEAKER_02: Financial institutions with large portfolios will often have many different segments that they're talking about, whereas a smaller institution, maybe with um you know, with just a receivable portfolio, will talk about this all together.
• 21:32
  SPEAKER_03: And maybe staying on the level of granularity.
• 21:35
  SPEAKER_03: Another aspect around the disclosures is that you're required to actually show a roll forward for the allowance for credit losses.
• 21:42
  SPEAKER_03: And that needs to be done at this portfolio segment level that Brett's talking about.
• 21:47
  SPEAKER_03: So again, that would include the beginning balance of the allowance, what the current period loss provision is.
• 21:54
  SPEAKER_03: Um if you had any assets that came on the books under the purchase financial assets with credit deterioration.
• 22:00
  SPEAKER_03: And we sort of have a day one allowance.
• 22:01
  SPEAKER_03: You'd actually show that in your roll forward.
• 22:04
  SPEAKER_03: And then you'd have any write-offs and recoveries of um amounts previously written off, and that would bring you to your ending balance.
• 22:10
  SPEAKER_03: So it's really breaking down all the numbers within the allowance for the reader by that portfolio segment.
• 22:17
  SPEAKER_03: And so a combination of that roll forward and the information that Brett spoke about really gives a good picture to the user around how you developed your allowance and how it changed throughout the year.
• 22:26
  SPEAKER_00: Yes.
• 22:26
  SPEAKER_00: When you were talking, I was thinking this is something users probably love, but probably not the easiest to always put together.
• 22:32
  SPEAKER_00: So good place to have some good controls to make sure you're tracking that information.
• 22:38
  SPEAKER_00: And then one question then for financial assets that are back to my question on non-accrual.
• 22:44
  SPEAKER_00: I know that there's some specific disclosures in terms of making sure that the users are able to understand credit risk and interest income.
• 22:53
  SPEAKER_00: But Brett, anything to add there for what I'll call these quote problem assets?
• 22:57
  SPEAKER_02: Yeah.
• 22:58
  SPEAKER_02: Yeah, obviously financial users have a specific interest often in these problem assets.
• 23:04
  SPEAKER_02: And so there's specific disclosures for different types.
• 23:07
  SPEAKER_02: And I'll I'll talk about them in four different uh four different groups, maybe.
• 23:11
  SPEAKER_02: First is loans that are a non-accrual.
• 23:15
  SPEAKER_02: Uh as Tom noted uh earlier, you know, loans that uh you've determined have a risk of non-payment, and so you've stopped accruing interest income.
• 23:25
  SPEAKER_02: Um you need to disclose the amortized cost basis of those loans, um, any interest income that you did recognize uh on those loans in that period, maybe because cash actually came in on them.
• 23:37
  SPEAKER_02: Um, and then breaking those down into how many of those loans are actually 90 days or more past due, but not on non-accrual.
• 23:44
  SPEAKER_02: So where you've got you know severe delinquency, but you haven't chosen to put it on non-accrual.
• 23:49
  SPEAKER_02: And then also the amortized cost basis for assets that are on non-accrual, but for under your methodology, there's no allowance for credit losses uh for them.
• 23:59
  SPEAKER_02: The second major category is on purchase credit deteriorated assets, uh, these PCD assets, that you're required to show a reconciliation between the purchase price and the par value of the financial assets purchased uh during that period.
• 24:16
  SPEAKER_02: And that reconciliation should include that kind of day one um allowance for credit losses at the acquisition date, and then any discount or premium to fair value that is attributable to other factors.
• 24:30
  SPEAKER_00: Okay, Brad, before you go on, one question on these PCD assets, and this might be a little esoteric, so just uh weigh in if you if you know the answer to this.
• 24:41
  SPEAKER_00: But would this model or these disclosures apply if a case of let's say you acquired a company?
• 24:48
  SPEAKER_00: So you're not a financial institution, but you acquired a company and they have receivables that are past due and you know that have credit issues, or is this very specific, again, from a financial institution perspective?
• 25:00
  SPEAKER_02: We often see it in financial institutions.
• 25:03
  SPEAKER_02: It's more of a material item for financial institutions, but it applies to all to all companies.
• 25:07
  SPEAKER_02: And so there there may be situations just as you described, where a portion of those receivables are considered uh PCD assets.
• 25:15
  SPEAKER_00: Okay, that's helpful because I my guess is a lot of people are not focused on that.
• 25:20
  SPEAKER_00: So it's good to have that reminder.
• 25:22
  SPEAKER_00: All right, I know you have a few more categories, so if you want to keep going.
• 25:26
  SPEAKER_02: Sure.
• 25:26
  SPEAKER_02: The last category are collateral dependent financial assets.
• 25:29
  SPEAKER_02: These are financial assets that are often in default and where repayment is expected to be provided through the either the operation or sale of collateral.
• 25:39
  SPEAKER_02: Um, and there are disclosures required then around that collateral, any changes to that collateral over time, um, and and you know, the type of collateral that exists.
• 25:50
  SPEAKER_02: Again, all by class of financing receivable or major security type.
• 25:56
  SPEAKER_00: Okay, that's definitely a lot to think about.
• 25:59
  SPEAKER_00: I do have a few more questions though before we wrap things up.
• 26:02
  SPEAKER_00: These aren't my official stump the gust, we'll get to those, but the supplementing what we've talked about.
• 26:07
  SPEAKER_00: So, Tom, I know cash flow statement is near and dear to you.
• 26:11
  SPEAKER_00: And we didn't talk about cash flow statement here.
• 26:14
  SPEAKER_00: So is there anything specific that uh preparers should be thinking about from a cash flow statement perspective?
• 26:20
  SPEAKER_03: Yeah, I I think a lot of the cash flow questions are are pretty straightforward, right?
• 26:23
  SPEAKER_03: If you have loans, you know, generally the cash flows associated with loans are gonna be investing activities.
• 26:29
  SPEAKER_03: If it's something relating to accounts receivable, then that's gonna be, you know, as part of a sales transaction, that's gonna be part of operating.
• 26:36
  SPEAKER_03: Probably the most challenging one that we see a lot in the you know financial instrument space is you know, you need to make a determination up front when you originate a loan, right, as to whether or not it's gonna be a loan held for investment or not.
• 26:51
  SPEAKER_03: And you do that by deciding whether or not you intend to hold the loan for the foreseeable future.
• 26:57
  SPEAKER_03: And that's something a lot of companies overlook.
• 27:01
  SPEAKER_03: They just sort of default and say all loans that originated are held for investment.
• 27:05
  SPEAKER_03: But and why that might not impact you too much, um, where really can impact us on the cash flows because oftentimes you know loans held for sale are shown in you know operating rather than um actually shown in in um investing activities.
• 27:20
  SPEAKER_03: So you can get sort of friction behind that.
• 27:22
  SPEAKER_03: So it's kind of a little bit of a sleeper issue.
• 27:24
  SPEAKER_03: It can also impact you know your labeling, your balance sheet as well, but it has a bigger influence, generally speaking, on the statement of cash flows.
• 27:31
  SPEAKER_00: All right, that's helpful.
• 27:32
  SPEAKER_00: And then another one would be on quarterly disclosures or interim disclosures.
• 27:38
  SPEAKER_00: Anything, and Brad, I'll send this one to you.
• 27:40
  SPEAKER_00: Anything specific that's different from a quarterly perspective, or is it pretty much you have to do all of this every quarter?
• 27:47
  SPEAKER_02: I think most of what we talked about is is all uh required quarterly.
• 27:52
  SPEAKER_02: There are a couple things in there that are annual, maybe, but uh most mostly quarterly.
• 27:56
  SPEAKER_00: All right.
• 27:57
  SPEAKER_00: I know it's extra work, but sometimes in a way, I think almost easier because then you just know you're gonna operate those processes each quarter, but it's important to keep that in mind.
• 28:05
  SPEAKER_00: Okay, so then Tom, going back to you, how about from an SEC comment perspective?
• 28:11
  SPEAKER_00: Again, you know, we went through our COVID year, which was the the first year of Cecil, and now we're most well a lot of the way through 2021.
• 28:19
  SPEAKER_00: Have we seen any SEC comment letter trends or not too much yet?
• 28:24
  SPEAKER_03: We haven't really seen an uptick in you know SEC comment letters on on Cecil.
• 28:30
  SPEAKER_03: I I you know, I am sure, I'm highly confident that the SEC is continuing to evaluate the sufficiency of disclosures around you know, from Cecil, particularly in the financial institution space.
• 28:42
  SPEAKER_03: Certainly they'll be focused on what's the story you're telling in your footnotes versus your mDNA, and are those consistent, as well as um what other information are you providing in in investor decks and webcast materials and making sure that you know clearly items you're highlighting in those forums are really going to be consistent with your notes.
• 29:06
  SPEAKER_03: And some of that gets the level of aggreg uh disaggregation that Brett was focused on, making sure that you have that.
• 29:12
  SPEAKER_03: There's been a lot of debates and dialogue around uh macro assumptions.
• 29:16
  SPEAKER_03: People are struggling with how much and how significant around those disclosures do you want to get in the financials, particularly with sophisticated financial institutions, which they may have, you know, real sophisticated models that look at these uh macro assumptions over the time horizon and stress them.
• 29:34
  SPEAKER_03: And and so, you know, look at the end of the day, I I think, you know, I'm highly confident.
• 29:40
  SPEAKER_03: I'm sure the SEC is just reflecting on everything.
• 29:43
  SPEAKER_03: It's been difficult to think about the fact that we implement the standard during a COVID year.
• 29:47
  SPEAKER_03: Um, and they'll probably see where um there might be some that are either inconsistent, right, in how they're telling a story to analysts with what's in the footnotes, or those that might be sort of behind the standard of their peers and colleagues and really poking at them first.
• 30:04
  SPEAKER_00: And then uh now I am gonna try to stomp you guys, so we'll see how well I do on that.
• 30:09
  SPEAKER_00: So my first question is obviously Cecil, huge amount of discussion, and you know, I think big buildup to be until it was actually issued.
• 30:19
  SPEAKER_00: But if we rewind in time, just curious what the first standard that talked either about allowance for doubtful accounts or any types of allowances on loans, etc.
• 30:31
  SPEAKER_00: If you guys have any guess what the first standard was that did that.
• 30:34
  SPEAKER_03: Well, my guess would only go as early as FAS 5, which dealt with loss contingencies.
• 30:40
  SPEAKER_03: I don't know if there's something before that.
• 30:42
  SPEAKER_02: Mine too.
• 30:43
  SPEAKER_02: I I feel like there's got to be some sleeper ARB in there, but I don't, I couldn't, I couldn't, um, I couldn't name it.
• 30:49
  SPEAKER_02: Yep.
• 30:50
  SPEAKER_00: Yeah, I think Airbnb 43 is always my guess, but uh we'll check the answer and I will share that with the audience.
• 30:59
  SPEAKER_00: Fact check.
• 31:01
  SPEAKER_00: The codification before CESEL, ASC 450 and ASC 310 were based on FAS 5 and FAS 113, and FAS 5 amended ARB 43 Chapter 6 contingency reserves in March 1975.
• 31:17
  SPEAKER_00: That's the sleeper Brett mentioned, and the ARB I always use as my guess since it goes all the way back to before 1953.
• 31:29
  SPEAKER_00: And then the other one, which could be even harder, which I apologize in advance.
• 31:34
  SPEAKER_00: Any guess for how many discrete disclosure requirements there are?
• 31:38
  SPEAKER_00: So obviously, depending on how a company does it, that could impact the number of disclosures, but how many disclosure requirements?
• 31:45
  SPEAKER_03: I'll throw out a number, but I'll say 75.
• 31:49
  SPEAKER_02: Perfect.
• 31:50
  SPEAKER_02: I I'm going I'm going higher than 75.
• 31:53
  SPEAKER_00: All right.
• 31:54
  SPEAKER_00: So we'll see who the winner of this is.
• 31:56
  SPEAKER_00: I'll I'll give the the answer to that.
• 32:01
  SPEAKER_00: Fact check.
• 32:03
  SPEAKER_00: Tom was so close with his answer of 75, but I guess we'll have to give it to Brett again, as it's a little higher than that.
• 32:10
  SPEAKER_00: At our last count, there are about 80 or so disclosure requirements for loans just in ASC 310 itself.
• 32:17
  SPEAKER_00: And that's before counting any disclosures around risks and uncertainties, fair value, and lost contingencies.
• 32:28
  SPEAKER_00: So then back to a little more serious here.
• 32:31
  SPEAKER_00: Obviously, we covered a ton of information today.
• 32:34
  SPEAKER_00: And if Tom, I'll go back to you.
• 32:36
  SPEAKER_00: If we're looking, if our listeners are looking for more information, where would you send them?
• 32:41
  SPEAKER_03: Yeah, the first place I'd send you is is our loan and investment guide.
• 32:44
  SPEAKER_03: And we have a whole you know chapter on you know presentation and disclosure in a post-CESAL world uh in there.
• 32:52
  SPEAKER_03: Um we also still have some information that's included in our financial statement presentation guide in chapter eight of that guide.
• 32:58
  SPEAKER_03: We have some additional, more general disclosures that you'd see with things like accounts receivable and general loans as well, so you can look there.
• 33:06
  SPEAKER_03: And as you mentioned earlier, right, Cecil's still new.
• 33:09
  SPEAKER_03: We still have some companies who are still in the process of adopting or still learning about the standard.
• 33:15
  SPEAKER_03: Um, we have a lot of good podcasts and videos that are available on our website uh that you have access to and you could really come up to speed pretty quickly on that model.
• 33:27
  SPEAKER_00: All right, that's actually a perfect lead-in to my last question for Brett, which is if we have listeners that have not yet adopted Seesaw, can you just name a best practice in terms of adoption that you would recommend?
• 33:40
  SPEAKER_00: They have so little time, so time to implement something.
• 33:43
  SPEAKER_02: I would say invest as much time early as you can.
• 33:46
  SPEAKER_02: Um, I think that through the adoption process, um, institutions learn that the data quality and the availability of that data uh takes a lot of time, especially when you're looking at both your historical loss data as well as your data information that you're gonna use to make economic forecasts.
• 34:07
  SPEAKER_02: And so the planning around that and the governance uh takes far more time in execution than than uh than I think many institutions plan for.
• 34:17
  SPEAKER_02: So start early and uh move quickly.
• 34:20
  SPEAKER_00: All right, great reminder.
• 34:22
  SPEAKER_00: And then Tom, last question for you would be for people who have already adopted Cecil.
• 34:28
  SPEAKER_00: Any thoughts on what you've seen in terms of best practices specific to dealing with all of these disclosures?
• 34:34
  SPEAKER_03: Yeah, I mean, I I think the good news is um most sophisticated organizations have disclosure committees, and you know, getting good engagement from your disclosure committee as part of your control process to weigh in on, in particular, the level of granularity and your disclosures in the context of the allowance for credit losses, I think is really critical.
• 34:56
  SPEAKER_03: Um so I think that's important.
• 34:57
  SPEAKER_03: And the other point I would I would tell you is the extent you're gonna do something on a non-gap basis, also getting that committee to weigh in and buy in that those are important disclosures and making sure you've got consistency in those non-gap disclosures as well, and that you're not really kind of violating anything that the SEC would expect from those disclosures.
• 35:18
  SPEAKER_03: So, yeah, I I think it's really those committees and getting good buy-in across the organization, which is key.
• 35:25
  SPEAKER_00: Yeah, and that goes back to I think Brett's thing too of communicating and making sure you have time, because if you're getting these committees involved, you don't want to wait till the last minute.
• 35:33
  SPEAKER_00: So, both, as always, it was a pleasure.
• 35:36
  SPEAKER_00: Thank you so much for joining me, and thanks for all the insight.
• 35:38
  SPEAKER_02: Good.
• 35:39
  SPEAKER_02: Thanks, Heather.
• 35:40
  SPEAKER_00: That does it for today.
• 35:42
  SPEAKER_00: Join me back here every Tuesday and Thursday for new podcast episodes.
• 35:46
  SPEAKER_00: This Thursday is the final episode of our mini-series on SPACs.
• 35:51
  SPEAKER_00: We'll wrap up by looking at what the SPAC headlines are saying now.
• 35:55
  SPEAKER_00: Are deals slowing down?
• 35:57
  SPEAKER_00: Are timelines changing?
• 35:59
  SPEAKER_00: And what are some easy operational wins post the DSPAC process?
• 36:04
  SPEAKER_00: All that and more coming to you on Thursday.
• 36:07
  SPEAKER_00: So that you never miss an episode, follow the PWC Accounting Podcast series wherever you listen to your podcast.
• 36:14
  SPEAKER_00: And to stay up to date on the latest content, let's connect on LinkedIn.
• 36:19
  SPEAKER_00: From Thought Leadership at PWC, I'm Heather Horn.
• 36:23
  SPEAKER_00: Thanks for tuning in.
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