Issue 1: Expected Recoveries for Purchased Financial Assets with Credit Deterioration (PCD)
 
Under ASC 326, the allowance for credit losses is required to include estimates for expected recoveries. Stakeholders questions whether negative allowances were permitted on PCD assets. A negative allowance relates to situations when an entity determines it will recover all or a portion of the amortized cost basis of an asset previously written off. These situations typically occur because of applying regulatory charge off policies based on delinquency.

Expected recoveries are to be included in the allowance for credit losses for these financial assets. However, the expected recoveries should not exceed the total amortized cost basis that is expected to be, or already has been, written off.
 
If a valuation method other than a discounted cash flow method is used to determine the expected credit losses, the calculation of expected recoveries should not accelerate the recognition of any noncredit discount.

Issue 2: Troubled Debt Restructurings Transition
Stakeholders in the process of adopting ASC 326 noted significant operational challenges associated with calculating the prepayment-adjusted effective interest rate for troubled debt restructuring transactions that exist as of the adoption date utilizing the prepayment assumptions that were in effect immediately prior to the restructuring event.

An entity can make an accounting policy election to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions applicable on the adoption date of ASC 326 instead of the prepayment assumptions applicable immediately prior to the restructuring event.

Issue 3: Disclosures for accrued interest receivables
To meet certain disclosure requirements under ASC 326, a previous codification improvement^[4] allowed for a practical expedient to separately disclose the total accrued interest included in the amortized cost basis. However, this practical expedient did not nullify the requirements to include accrued interest receivable in disclosures of amortized cost basis under other Topics.

The amendment extends the practical expedient to all additional relevant disclosures involving amortized cost basis.

Issue 4: Financial assets backed by Collateral Maintenance Provisions
Stakeholders questioned whether an entity was required to evaluate the ability of the borrower to continue to replenish the collateral associated with the financial asset when applying the practical expedient, where an entity may determine that the expectation of nonpayment of the amortized cost basis is zero if the borrower continually replenishes the collateral securing the financial asset such that the fair value of the collateral is equal to or exceeds the amortized cost basis.
 
They also questioned how to determine the CECL reserve if the fair value of the collateral is less than the amortized cost.

The amendments clarify that an entity should consider the borrower’s ability to continue to replenish the collateral associated with the financial assets.
 
The amendments also clarify that when applying this practical expedient, expected credit losses should be estimated when the amortized cost basis of the financial asset exceeds the fair value of its associated collateral. The allowance would be limited to the difference between the fair value of the collateral and the amortized cost of the associated asset (that is, the unsecured portion of the amortized cost basis).