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CECL: Can You Reverse a Prior Charge-Off?

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CECL: Can You Reverse a Prior Charge-Off? A common question in bank accounting is whether a loan that was previously charged off can be “written back up” if the borrower’s financial condition improves and collectibility looks better. Management often asks if they can reverse the charge-off and re-book the asset to reflect the improved outlook. Under U.S. GAAP, once a financial asset is charged off (in full or in part), the charge-off establishes a new amortized cost basis for that asset. That new basis cannot be increased later based on improved recovery expectations. In other words, it is an unacceptable accounting practice to reverse a prior charge-off and re-book the asset, even if management concludes that prospects for recovery have improved. Instead, improved collectibility is reflected through the Allowance for Credit Losses (ACL) . Management should include expected recoveries of amounts previously written off when estimating the ACL. These expected recoveri...
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Accounting Implications of the GENIUS Act for Holders of Stablecoins (U.S. GAAP)

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Accounting Implications of the GENIUS Act for Holders of Stablecoins (U.S. GAAP) The GENIUS Act does not amend U.S. GAAP. However, by creating a federally defined legal category, “ payment stablecoins ,” it can significantly change the accounting evaluation for entities that hold certain stablecoins. This discussion is written specifically from the perspective of the holder of a stablecoin (not the issuer). Because U.S. GAAP classification depends heavily on legal rights and enforceability, the GENIUS Act may affect whether a holder evaluates a stablecoin as: an intangible asset, a financial asset, and/or potentially a cash equivalent. 1) Anchor Point: ASC Glossary Definition of a Financial Asset Under the ASC Glossary , a financial asset includes cash , evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to: receive cash or another financial instrument from a second entity, or exchange other financial i...
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Collateral-Dependent CECL for Lease Portfolios

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Collateral-Dependent CECL for Lease Portfolios Under U.S. GAAP, a lessor’s net investment in a lease for direct financing leases and sales-type leases is a financial asset measured at amortized cost and falls within the scope of CECL under ASC 326-20-15-2. Leasing companies and bank lessors often ask a focused question: When is the allowance for credit losses (ACL) required or permitted to be measured based on the value of the underlying equipment rather than under the general CECL model? The answer turns on whether the net investment meets the collateral-dependent criteria in ASC 326. 1. Required collateral-based measurement. ASC 326-20-35-4 requires measurement based on the fair value of the collateral when foreclosure is probable . In a leasing context, foreclosure generally aligns with repossession or retaking the underlying asset being probable. When this condition is met, the allowance is measured as the amortized cost of the net investment less the fair value ...
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Fair Value Hierarchy Disclosures for Hedged Loans

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Fair Value Hierarchy Disclosures for Hedged Loans We recently received a technical accounting question from a client regarding the fair value hierarchy disclosure requirements under U.S. GAAP. The question focused on whether a hedged loan must be included in the ASC 820 fair value hierarchy disclosures when only the benchmark interest rate risk is designated in a fair value hedge. Under ASC 820 , entities are required to disclose the fair value of assets and liabilities measured on a recurring or nonrecurring basis, categorized within the fair value hierarchy (Level 1, 2, or 3). However, this requirement applies only when the entire asset or liability is measured at fair value. In the case of a fair value hedge where only the changes in the benchmark interest rate are designated as the hedged risk, the hedged item (e.g., a fixed-rate loan) is not fully remeasured at fair value. Instead, a basis adjustment is recorded to reflect changes in fair value attributable solely to ...
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Accounting for Expenses Paid by Shareholders

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Accounting for Expenses Paid by Shareholders Start-up entities and shell companies often lack the cash flow to cover basic operating expenses. In these cases, principal stockholders may step in to pay expenses on behalf of the company. A common question arises: How should these payments be accounted for under U.S. GAAP? The SEC addresses this issue in Staff Accounting Bulletin (SAB) Topic 5-T . The guidance is clear: when a principal stockholder pays an expense on behalf of the company, the company must record the expense in its financial statements. The offsetting entry should be a credit to additional paid-in capital (APIC) , not a liability or omission. This treatment reflects the economic reality that the company received a benefit, even though it did not disburse cash. Ignoring the expense would understate both the company’s costs and its capital contributions. The APIC credit represents a capital contribution from the shareholder, not a loan or payable. Takeaway: Whe...
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HTM Classification Limits Under ASC 320

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HTM Classification Limits Under ASC 320 Clients often ask whether they can classify certain securities as held-to-maturity (HTM) under ASC 320. While management has flexibility in how it categorizes investments, U.S. GAAP places specific restrictions on what qualifies as HTM. Understanding these limits is key to proper classification and disclosure. Under ASC 320, a security can only be classified as HTM if the reporting entity has both the positive intent and ability to hold the investment until maturity. However, some securities are explicitly excluded from HTM classification due to their contractual features. For example, interest-only (IO) strips or similar securities that can be prepaid or otherwise settled in a way that prevents the holder from recovering substantially all of its cost basis cannot be classified as HTM. The risk of early settlement undermines the intent to hold the investment through maturity, which is a core requirement of the HTM category. Similar...
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CECL Considerations for Direct Financing Leases

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CECL Considerations for Direct Financing Leases One common question from lessors is how to apply the Current Expected Credit Loss (CECL) model under ASC 326 to direct financing leases . Specifically, how should the net investment in the lease be evaluated for credit losses when it includes both financial and non-financial components? Under ASC 326-20, lessors must measure expected credit losses on the entire net investment in the lease . This includes the lease receivable (the present value of lease payments and any guaranteed residual value) and the unguaranteed residual asset . While the unguaranteed residual does not meet the definition of a financial asset, it is still included in the scope of CECL for direct financing leases. At the June 2018 meeting of the FASB’s Transition Resource Group (TRG), the staff clarified that entities must estimate expected cash flows from the eventual disposition of leased assets. These estimates should reflect both potential gains and loss...
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