September 7, 2023

Submitted electronically to: [email protected]

Ms. Hillary Salo
Technical Director, FASB
801 Main Avenue
PO Box 5116
Norwalk, CT 06856-5116
Re: File Reference No. 2023-ED400, Financial Instruments – Credit
Losses (Topic 326) – Purchased Financial Assets

Dear Ms. Salo,

The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to comment on the Financial Accounting Standards Board’s (the “Board”) proposed Accounting Standard Update “Financial Instruments – Credit Losses (Topic 326) – Purchased Financial Assets” (“proposed Update”).

I. EXECUTIVE SUMMARY

The origination and the acquisition of financial assets for investment and for resale is central to a global financial institution’s business model. Our members recognize that the measurement of financial assets at amortized cost creates a complex financial reporting conundrum due to the interplay of the timing of recognition of interest income and expected credit losses. SIFMA also appreciates the Board’s continued effort to achieve the right balance of comparable, relevant and decision-useful information for financial statement users. We, however, do not believe the proposed Update resolves this conundrum or represents an improvement to financial reporting over the existing requirements in the current expected credit loss (CECL) model. It may appear that the proposed Update resolves or reduces existing complexity for certain purchased financial assets acquired at fair value with significant non-credit discounts. However, it significantly reduces comparability between purchased and originated financial assets and the related timing and amount of recognized interest income and expected credit losses. SIFMA, therefore, does not support the proposed Update as currently drafted for the reasons elaborated in
this comment letter.

SIFMA’s members adopted CECL, after significant implementation efforts and great cost in January 2020, the earliest effective date. This new expected credit loss model was immediately put to the test in a stress environment as a global pandemic hit, followed shortly after adoption by major geopolitical events. Supported by the feedback received through the post-implementation review process (PIR process), we believe CECL performed as intended, despite its known shortcomings, and investors were able to use the disclosed information to navigate in uncertain times. Further, SIFMA believes investors have come to understand the consequences of the CECL model, including the requirement to recognize lifetime expected credit losses in earnings as a portfolio grows. Nevertheless, the acquisition of a large portfolio of performing financial assets at fair value shines a spotlight on the initial recognition requirement (the “double count”) that is not as evident in a static loan portfolio or a loan portfolio that grows organically through origination and over a longer time-period.

1 ) The proposed Update requires further examination and alignment with CECL:
SIFMA believes that the proposed Update expansion of the gross-up approach, where initial lifetime expected credit losses determined at a portfolio level is recognized on the balance sheet rather than through earnings, to all purchased financial assets including to financial assets acquired at the same or substantially the same fair value as recognized by the originator (e.g., little to no credit discount embedded in the purchase price) lacks sufficient conceptual support within the broader foundation of the CECL model. Therefore, SIFMA believes the proposed Update reopens the long-standing debate on where to draw the line between initial measurement of financial assets held at amortized cost, the timing of recognition for estimated expected credit losses in a portfolio in relation to the timing and recognition of interest income and whether such expected credit losses should be presented as a component of interest income. These concepts were summarized in the basis for conclusions in ASU 2016-13, paragraphs BC 35 – BC 49 and paragraphs BC 84 – BC 93 and broadly settled with the issuance of CECL.

2) CECL is a single model for all financial assets measured at amortized cost:
CECL requires all financial assets measured at amortized cost (purchased or originated and across all types of asset classes) to be initially and subsequently measured net of expected credit losses determined on a portfolio basis. The current accounting guidance for purchased assets with other than insignificant credit deterioration (PCD) is not a separate measurement basis or model for expected credit losses. Rather, it provides narrow scope guidance for the recognition of contractual cash flows not expected to be collected at a specific asset level for which the buyer is compensated through a discount to the purchase price. The proposed Update will needlessly create two separate initial and subsequent accounting models for the recognition and measurement of interest income and credit losses for economically equivalent risk positions (purchased vs originated).

3) Reconsideration of initial recognition through net income for all financial assets (aka the “Double Count”):
In lieu of the proposed Update, SIFMA strongly recommends that the Board develop a separate project to take a more deliberate and unifying approach and take the time we believe is necessary to redeliberate:

• Whether initial lifetime expected credit losses should be grossed-up on the balance
  sheet for all financial assets (originated and non-PCD).
• Where the gross-up should be classified (amortized cost basis or as a “negative allowance”).
• The appropriate income statement classification (that is, as a component of interest income or as an offset to provision for credit losses).
• The timing for recognition of the reversal of the gross-up asset into the income statement (for example, straight-line, as the credit exposure is reduced or as estimated credit losses change or an alternative methodology).

If the Board disagrees and decides to move forward with the proposed Update, SIFMA has the following overall comments. A more detailed response to each of the Board’s specific questions is provided in Section II of this letter.

• SIFMA strongly recommends that the Board move forward with a prospective transition approach for assets acquired after the date of adoption. The proposed modified retrospective transition approach for all assets acquired as of and since the adoption of CECL is not practical for global financial institutions and potentially not operational since it requires reconstructing interest income and the allowance and provision for credit losses for each period since CECL’s initial adoption. We also do not believe it will provide decision-useful information for financial statement users today as the historical adjustment would need to be recalculated from “stale” model inputs known to be inaccurate today.
• If the Board disagrees with SIFMA’s recommendation of a prospective transition approach for acquired financial assets after the date of adoption, we request that the Board provide a fair value option election for any purchased financial assets affected by the adoption of the proposed Update with the effect of the election recognized in current earnings on the date of adoption. SIFMA also requests a one-time election upon transition to transfer HTM securities to AFS as we expect that substantially all HTM securities will be subject to the gross-up approach in the proposed Update. This one-time election would align with the election available at the adoption of CECL and provide a path to a more simplified transition for certain classes of purchased financial assets or certain single or portfolio assets that no longer exist on the date of adoption.
• SIFMA believes it is necessary to amend the presentation of the effects of the grossup on the effective yield calculation for non-PCD assets. The expanded scope delinks the conceptual basis for adding the gross-up to the amortized cost basis to individual assets without “prepaid” credit losses observed through fair value in the purchase price discount.2 We believe an alternative balance sheet and income statement classification should be further deliberated for non-PCD assets. One alternative could be to recognize the gross-up for non-PCD assets as a negative allowance rather than adding it to the amortized cost basis and amortizing the grossup asset against the provision rather than interest income, using a reasonable methodology.
• SIFMA proposes in our detailed comments below certain scope exclusions, specifically acquisitions of short-lived assets and revolving lines of credit to make the proposed Update more operable. If the Board disagrees with these scope exclusions, we propose certain practical expedients to reduce the operational complexity.
• SIFMA believes additional standard setting is required to apply the proposed Update to common financial assets, including revolving arrangements and HTM securities.

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

2 ASU 2016-13 BC88 – “… The Board struggled with applying a gross-up method for financial assets purchased at or near par when there generally has not been a more-than-insignificant increase in credit risk because those assets should apply the same model as originated financial assets. The Board felt it had to draw a line and placed weight on user feedback stating that increased comparability is achieved by grossing up the allowance when there has been a more-than-insignificant increase in credit risk.”