Accounting for indemnification assets following gov acquisitions
The Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) recently addressed the issue of an inconsistency in practice for the post-acquisition accounting of indemnification assets related to government-facilitated transactions. Examples of this include both Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) facilitated acquisitions.
The inconsistency in question relates to loans accounted for pursuant to ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. ASC 310-30 requires that significant increases in estimated cash flows be accreted into income over the life of the loans. The accounting guidance for the indemnification asset is from ASC 805, Business Combinations. ASC 805 states that the subsequent measurement of an indemnification asset is measured on the same basis as the indemnified asset, subject to any contractual limitationson its amount and, for an indemnification asset that is not subsequently measured at fair value, on management's estimate of the collectability of the indemnification asset.
In practice, diversity exists in accounting for the estimated subsequent decreases in cash flows expected to be collected on the indemnification asset as a result of estimated increases in cash flows for loans covered by a loss sharing agreement (LSA).
Exposure draft issued
In March 2012, a consensus for exposure was reached by the EITF on this issue. The FASB ratified this consensus and issued a proposed Accounting Standards Update on April 17, 2012. The proposal states that a subsequent adjustment to an indemnification asset is measured on the same basis as the underlying indemnified asset (i.e. loans receivable), taking into account the contractual term of the LSA. For example, for loans that have a life greater than the remaining term of the LSA, the loss on the indemnification asset should be amortized over the remaining life of the LSA.
The comment period on the proposed Accounting Standards Update ends on July 16, 2012. An effective date for the proposed guidance has yet to be determined. For more information on this issue, please contact Tim Tiefenthaler, partner, at 702.759.4050.