FASB Issues Guidance Regarding the Application of Statement 133 to Loan Commitments

Executive Summary

Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133), is one of the most complex accounting standards ever issued. Statement 133 requires all derivatives (with certain exceptions) to be recorded in the balance sheet as assets or liabilities at their fair value. It also requires gains and losses from derivatives to be recorded currently in earnings, unless special hedge accounting conditions are met.

Under recently cleared Derivatives Implementation Group (DIG) Statement 133 Implementation Issue C13, Scope Exceptions: When a Loan Commitment Is Included in the Scope of Statement 133, the issuer (but not the holder) must apply Statement 133 to loan commitments (sometimes referred to as interest rate lock agreements or "IRLCs") related to the origination or acquisition of mortgage loans that will be held for resale. Those loan commitments are subject to Statement 133 regardless of the existence of a material adverse change clause that may be invoked by a lender to terminate the arrangement based either on a subjective evaluation that a material adverse change has occurred or on criteria that are objectively determinable. All other loan commitments are excluded from the requirements of Statement 133. The guidance takes effect the first day of a reporting entity's first fiscal quarter beginning after April 10, 2002 (that is, July 1, 2002, for companies with calendar year-ends). The recognition of loan commitments related to the origination or acquisition of mortgage loans held for resale as derivatives may accelerate the recognition of some of the gain or loss on the sale of mortgage loans held for resale.

Continue Reading - Background- Statement 133 and Related Implementation Guidance

MENU TOP