Technical Accounting of the Day

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 ...

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...

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...

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...