Bank Accounting Advisory Series 2021

1 August 2021() Office of the Comptroller of the Currency bank AccountingAdvisory Series Message From the Office of the Chief Accountant The Office of the Chief Accountant (OCA) is pleased to present the August 2021 edition of the bank Accounting Advisory Series (BAAS). The BAAS expresses the OCA s interpretations of Accounting topics relevant to national banks and federal savings associations (collectively, banks or institutions, unless otherwise specified). We hope that you find this publication useful and that it continues to be a practical resource for banks and examiners. The BAAS is updated annually to address ongoing Accounting questions, newly issued and updated Accounting standards, and emerging issues observed through March 31, 2021. The 2021 update does not focus on questions related to the impact of the Coronavirus Disease 2019 (COVID-19) and does not reflect policy statements and rules issued in response to COVID-19.

2 COVID-19 policy statements and rules address specific challenges and are not intended to be used by analogy in non-COVID-19 situations. New and updated entries to the 2021 BAAS primarily reflect the OCA s interpretations related to updates to Accounting standards and frequently asked questions from the industry and examiners, unrelated to COVID-19 situations. The OCA remains actively engaged in the OCC s actions to assist banks and their customers in managing the effects of COVID-19-related economic disruptions. A comprehensive listing of OCC issuances related to COVID-19 economic disruptions can be found on the OCC s COVID-19 web page. We recognize that changing economic conditions and changing Accounting standards can be challenging and create uncertainty. The goal of the BAAS is to provide timely, relevant, and clear Accounting interpretations of generally accepted Accounting principles (GAAP) for bankers and examiners, even when the issues are complex and controversial.

3 If you have comments or questions related to the BAAS, please contact us at If you have comments or questions on Accounting issues arising from COVID-19-related economic disruptions, please contact us at Jeffrey Geer Associate Chief Accountant Office of the Comptroller of the Currency bank Accounting Advisory Series i August 2021 About This Edition of the BAAS This edition reflects Accounting Standards Updates (ASU) issued by the Financial Accounting Standards Board (FASB) through March 31, 2021. Because many ASUs have different effective dates for public business entities (PBE) and non-PBEs, we have differentiated staff responses for new ASUs that have been or may be adopted by banks. Blue text boxes contain staff responses that were updated to reflect changes to GAAP and should not be read in conjunction with staff responses that are based on different Accounting standards.

4 This edition includes appendix A, Newly Issued Accounting Standards, which describes new ASUs applicable to this edition of the BAAS and the first call report for which calendar year-end institutions must adopt the ASUs. In this edition, we use asterisks (*) to mark questions and answers that apply only to banks that have not yet adopted the current expected credit losses (CECL) methodology under ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The following questions have been added or updated in the 2021 edition of the BAAS: Subtopic 2E Loans Held for Sale Question 4 Subtopic 8C Employee Stock Options Question 2 Subtopic 11E Grants Received by Banks Questions 1 and 2 Subtopic 1A Investments in Debt and equity Securities Question 19 Subtopic 2E Loans Held for Sale Questions 3, 5 and 15 UPDATED NEW Subtopic 10B Intangible Assets Questions 1A and 7A In addition, as part of our annual review process, we made minor edits to some existing entries.

5 The edits do not alter the OCA s conclusions or interpretations. The abbreviations used in the following sections are spelled out in full in appendix B, Commonly Used Abbreviations and Terms. The BAAS does not represent rules or regulations of the Office of the Comptroller of the Currency (OCC). Rather, the BAAS represents the OCA s interpretations of GAAP based on the facts and circumstances presented. bank Accounting Advisory Series ii August 2021 Contents Message From the Office of the Chief Accountant .. i About This Edition of the ii Topic 1 Investment Securities ..1 1A. Investments in Debt and equity 1B. Other-Than-Temporary 2 2A. Troubled Debt 2B.

6 Nonaccrual 2C. 2D. Origination Fees and Costs ..71 2E. Loans Held for Sale ..75 2F. Loan Recoveries ..85 2G. Acquired Leases ..95 Topic 3 3A. Lessor Classification and Accounting ..95 3B. Lessee Classification and 3C. Sale-Leaseback 3D. Lease Exit Topic 4 Allowance for Loan and Lease Losses ..114 OREO and Other Assets ..144 Topic 5 5A. Other Real Estate 5B. Life Insurance and Related Deferred 5C. Miscellaneous Other Assets ..169 Topic 6 6A. Contingencies ..174 6B. Other Income Topic 7 7A. Deferred Taxes ..179 7B. Tax Sharing 7C. Marginal Income Tax bank Accounting Advisory Series iii August 2021 Topic 8 Capital ..187 8A. Sales of 8B. Quasi-Reorganizations ..189 8C.

7 Employee Stock Options ..191 Topic 9 Income and Expense 9A. Transfers of Financial Assets and 9B. Credit Card Affinity 9C. Organization Costs ..205 Topic 10 Acquisitions, Corporate Reorganizations, and Consolidations ..208 10A. 10B. Intangible Assets ..219 10C. Pushdown Accounting ..227 10D. Corporate 10E. Related Party Transactions (Other Than Reorganizations)..233 Topic 11 Miscellaneous Accounting ..238 11A. Asset Disposition Plans ..238 11B. Hedging Activities ..240 11C. Financial Statement 11D. Fair Value 11E. Grants Received by Topic 12 Credit Losses Under ASC Topic 326 ..252 12A. Credit Losses on Debt 12B. Troubled Debt 12C. Acquired 12D. Allowance for Credit Losses ..271 12E. Off-Balance-Sheet Credit Appendixes ..290 Appendix A. Newly Issued Accounting Appendix B. Commonly Used Abbreviations and Appendix C. FASB Codification References.

8 294 bank Accounting Advisory Series iv August 2021 INVESTMENT SECURITIES 1A. Investments in Debt and equity Securities Topic 1 Investment Securities NEW 1A. Investments in Debt and equity Securities For banks that have adopted ASC Topic 326 In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. See appendix A for more information, including effective dates, on the ASU and its subsequent amendments (collectively referred to as ASC Topic 326). See Subtopic 12A for questions and answers regarding investments in debt and equity securities that have different staff interpretations under ASC Topic 326. Asterisks (*) are used to mark questions and answers that apply only to banks that have not yet adopted ASC Topic 326.

9 Question 1 How should a bank account for the unrealized gains or losses on investments denominated in a foreign currency? Staff Response The net unrealized holding gains and losses on AFS investments denominated in a foreign currency should be excluded from net income and reported in AOCI. The entire unrealized gain or loss, including both of the portions related to interest rate and foreign currency rate changes, is accounted for as an unrealized holding gain or loss and reported in the separate component of stockholders equity . Therefore, the income statement effect of foreign currency gains and losses is deferred until the security is sold. The gain or loss attributable to changes in foreign currency exchange rates, however, would be recognized in income, if the investment is categorized as HTM. Banks should follow the Accounting guidance provided in ASC 830 for such investments.

10 Question 2* What is the appropriate Accounting for transfers of debt securities between investment categories? Staff Response In accordance with ASC 320-10-35, transfers between investment categories are transferred at fair value and accounted for as follows: bank Accounting Advisory Series 1 August 2021 INVESTMENT SECURITIES 1A. Investments in Debt and equity Securities HTM to AFS: The unrealized holding gain or loss at the date of the transfer shall be recognized in AOCI, net of applicable taxes. AFS to HTM: The unrealized holding gain or loss at the date of transfer shall continue to be reported in AOCI but shall be amortized over the remaining life of the security as a yield adjustment. This amortization of the unrealized holding gain or loss will offset the effect on income of amortization of the related premium or discount (see question 4).