Advisory Insights: Financial Institutions - Options for Syndicated Loans

3/15/2018 - By Erik Opager, CPA

One benefit of performing reviews of accounting operations for our Financial Institution (FI) clients is the chance to review a specific function that while infrequent, is unique to that client.

One such review is that of syndicated loans. These allow FIs to take part in large loans that they would otherwise not be able to originate alone. During a recent review of syndicated loans, the question was raised concerning the proper way to amortize purchase premiums or accrete purchase discounts. 

Amortization is paying off an amount owed over time by making planned, incremental payments of principal and purchase premiums. To amortize a loan means "to kill it off.” Accretion simply means to grow by gradual accumulation. 

Questions

Should the respective amortization/accretion simply be done through the stated maturity or contract date? Or, is it acceptable to recognize the amortization/accretion over the expected life of such loans, thereby taking prepayments into consideration?

Your Options

Recognizing the respective amortization/accretion over the expected life for such loans makes sense, but, several issues must first be addressed. To begin, it is necessary to determine if it is acceptable according to GAAP. Fortunately, this is addressed in ASC 310-20-35 which prescribes that the amortization/accretion be recognized as an adjustment of the yield over the life of the loan using the interest method. 

The objective of the interest method, according to ASC, is to arrive at a periodic interest income at a constant effective yield on the net investment in the receivable. The issue of estimating principal prepayments is addressed in ASC 310-20-35-26 which states, that prepayments shall not be considered to shorten the loan term, unless the entity holds a large number of similar loans for which prepayments are probable, and the timing and amount of prepayments can be reasonably estimated. This expected average life approach is consistent with the way amortization/accretion is recognized for mortgage pools in an FI’s investment portfolio. 

Unlike the amortization/accretion on an FI’s investment portfolio for which a bond accounting service is generally used, the accounting for the interest method is generally processed by an FI’s core loan system. Since core systems may only recognize straight-line basis over contract life, management must be able to calculate the respective estimated lives and the corresponding adjustments to the straight-line amortization/accretion. Any such determination should be thoroughly documented and once an appropriate method of accounting is applied, it must be consistently applied throughout the life of the loan or group of loans.

Finally, we always suggest management seek guidance from the FI’s external auditor before implementing an accounting method which recognizes amortization/accretion on a basis other than over the contract life of a loan or group of loans.

If you have any questions about this issue or other related issues for your financial institution, please email me or contact a member of our Financial Institutions team.

About the Author | Erik Opager, CPA
Erik is a consultant in the Financial Institutions Advisory Group of Saltmarsh Cleaveland & Gund, specializing in accounting and operations services. Prior to joining Saltmarsh, Erik worked as an accountant in the financial institution industry for nearly 25 years while also serving in the United States Navy, in a reserve capacity, for 23 years. His primary areas of experience include providing accounting, deposit operations, investment and asset/liability management review services to the firm’s financial institution clients.

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