Financial Lending Notes
March 25, 2010

Potential Effects of FASB 166

In summer 2009, the Financial Accounting Standards Board (FASB) issued the Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, which amends FASB Statement No. 140.

This new statement will impact how banks treat participation loans from an accounting perspective — specifically, whether or not banks can get participation loans off their books.

According to the statement, if the loan participation agreement transfers a participating interest in an entire financial asset and certain conditions are met, the transfer shall be accounted for by the transferor as a sale of a participating interest.

The implications of FASB 166 on banks could be significant. For example, if a bank sold $2 million of a $4 million loan as a participation but the transaction didn’t qualify as a sale, it would have to record the entire $4 million loan on its books as an asset and record a $2 million liability. If the bank’s legal lending limit were $3 million, it would be prohibited from making the transaction.

There are three conditions transfers must meet in order to qualify as a sale under FASB 166:

1. There cannot be any LIFO or FIFO preferences in the participation.

2. The buyer of the participation cannot get a “kicker” or rate discount.

3. The lead bank must be compensated for servicing the loan.

FASB 166 applies to participation loans entered into after Jan. 1, 2010, with no grandfather provisions.

Please contact us for more details on Statement No. 166 and how it may impact your bank.

 

Compliments of:

Porter Keadle Moore, LLP (PKM) is a full service accounting firm based in Atlanta, Georgia. PKM offers audit, tax and systems services to clients throughout the country. The firm focuses its efforts on companies registered with the Securities and Exchange Commission (SEC), community banks, the insurance industry, technology and life sciences companies and the real estate/construction industry.

Follow this link to learn more about PKM's banking practice.
 

To discuss this article contact Tim Messman, CPA with Porter Keadle Moore, LLP at tmessman@pkm.com.

Tim provides accounting and auditing services to financial institutions as well as clients in the construction, service, technology/life sciences and manufacturing/distribution industries. He routinely works with companies registered with the Securities and Exchange Commission; privately-owned companies and S Corporations. He has experience with Initial Public Offerings (IPOs), Mergers and Acquisitions, Sarbanes-Oxley compliance and internal control consulting.

 

Pat has over 23 years of experience in public accounting. He has worked with clients ranging from individuals to international Fortune 50 companies in a variety of tax consulting and compliance areas. He is most active in the real estate and banking industries, serving numerous clients across the Southeast. Pat has led PKM’s tax practice since 2003. Prior to joining PKM he was a partner with KPMG, where he spent 17 years of his professional career. You can contact Pat at ptuley@pkm.com.