SEC Staff Accounting Bulletin No. 105
Application of Accounting Principles to Loan Commitments
ACTION: Publication of Staff Accounting Bulletin
SUMMARY: This staff accounting bulletin summarizes the views of the
staff regarding the application of generally accepted accounting principles to
loan commitments accounted for as derivative instruments.
DATE: March 9, 2004
FOR FURTHER INFORMATION CONTACT: John James, Greg Cross or Eric
Schuppenhauer, Office of the Chief Accountant (202) 942-4400, or Louise Dorsey,
Division of Corporation Finance (202) 942-2960, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The statements in staff accounting
bulletins are not rules or interpretations of the Commission, nor are they
published as bearing the Commission's official approval. They represent
interpretations and practices followed by the Division of Corporation Finance
and the Office of the Chief Accountant in administering the disclosure
requirements of the Federal securities laws.
Date: March 9, 2004
Part 211 - (AMEND)
Accordingly, Part 211 of Title 17 of the Code of Federal Regulations is
amended by adding Staff Accounting Bulletin No. 105 to the table found in
Subpart B.
STAFF ACCOUNTING BULLETIN NO. 105
The staff hereby adds Section DD to Topic 5 of the Staff Accounting Bulletin
Series. Topic 5:DD provides guidance regarding loan commitments accounted for as
derivative instruments.
TOPIC 5: MISCELLANEOUS ACCOUNTING
* * * * * * *
DD. Loan Commitments Accounted for as Derivative Instruments
Facts: Bank A enters into a loan commitment with a customer to extend
a mortgage loan at a specified rate. Bank A intends to sell the mortgage loan
after it is funded. Under Statement No. 133, such a loan commitment should be
accounted for as a derivative instrument and measured at fair value.1
Bank A expects to receive future cash flows related to servicing rights from
servicing fees (included in the loan's interest rate or otherwise), late
charges, and other ancillary sources, or from selling the servicing rights into
the market.
Question 1: In recognizing the loan commitment, may Bank A consider
the expected future cash flows related to the associated servicing of the loan?
Interpretive Response: No. The staff believes that incorporating
expected future cash flows related to the associated servicing of the loan
essentially results in the immediate recognition of a servicing asset. However,
servicing assets are to be recognized only once the servicing asset has been
contractually separated from the underlying loan by sale or securitization of
the loan with servicing retained.2
Further, no other internally-developed intangible assets (such as customer
relationship intangible assets) should be recorded as part of the loan
commitment derivative. Recognition of such assets would only be appropriate in a
third-party transaction (for example, the purchase of a loan commitment either
individually, in a portfolio, or in a business combination).
Question 2: What disclosures should Bank A provide with respect to
loan commitments accounted for as derivative instruments?
Interpretive Response: Bank A should disclose its accounting policy
for loan commitments pursuant to APB Opinion No. 22, Disclosure of Accounting
Policies. Bank A should provide disclosures related to loan commitments
accounted for as derivatives, including methods and assumptions used to estimate
fair value and any associated hedging strategies, as required by Statement No.
107,3 Statement No. 133 and
Item 305 of Regulation S-K. Additionally, Bank A should provide disclosures
required by Item 303 of Regulation S-K and any related interpretive guidance.
Question 3: Will the staff expect retroactive changes by registrants
to comply with the accounting described in this bulletin?
Interpretive Response: The staff will not object if registrants that
have not been applying the accounting described in this bulletin continue to use
their existing accounting policies for loan commitments accounted for as
derivatives entered into on or before March 31, 2004. For loan commitments
accounted for as derivatives and entered into subsequent to that date, the staff
expects all registrants to apply the accounting described in this bulletin.
Financial statements filed with the Commission before applying the guidance in
this bulletin should include disclosures similar to those described in SAB Topic
11:M.
Endnotes
