12.7.01 Banks selling nonfinancial assets repossessed upon a loan default and not considered a business will likely apply the guidance in FASB ASC 610-20, which is applicable to sales of nonfinancial assets to parties that are not customers. FASB ASC 606-10-20 defines a customer as "a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration." A bank’s "ordinary activities" include investing in financial assets and do not typically include investing in nonfinancial assets. FinREC believes that, although a seller-financed sale of real estate that is not considered a business would involve a product (a loan) that is part of a bank’s ordinary activities, the other good that is being obtained by the buyer (the property) is generally not an output of a bank’s ordinary activities and is therefore in the scope of FASB ASC 610-20. This section does not contemplate the accounting for the sale of a business by a bank nor the sale of assets considered to be an output of a bank’s ordinary activities.

12.7.02 Under FASB ASC 610-20-40-1a, an entity should apply the provisions of paragraphs 1–8 of FASB ASC 606-10-25 to determine whether a contract exists. FASB ASC 606-10-25-1 lists the criteria that need to be met for a contract to exist:

a.     The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.

b.     The entity can identify each party’s rights regarding the goods or services to be transferred.

c.     The entity can identify the payment terms for the goods or services to be transferred.

d.     The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).

e.     It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer (see FASB ASC 606-10-55-3A through 55-3C). In evaluating whether collectibility of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession as discussed in paragraph 606-10-32-7.

12.7.03 All five criteria in FASB ASC 606-10-25-1 need to be met for a contract to exist. When banks’ sell real estate, criteria b–d are typically met and evidenced through a written agreement between the parties, but criteria a and e may require further analysis. Specifically, the initial and continuing investment made by the buyer in a seller-financed sale of foreclosed assets should be considered in determining whether it is probable that an entity will collect substantially all of the consideration to which it will be entitled and whether the parties are committed to perform under the contract.

12.7.04 The seller should consider all facts and circumstances of the transaction to determine whether the buyer is committed to purchase the property. One indicator of a buyer’s commitment may be the loan-to-value ratio of the buyer’s financing. A significantly high loan-to-value ratio may indicate the buyer is not committed to purchase the property. Another indicator a seller may assess is whether the property will be used as the buyer’s primary residence or as an income property. Determination of a buyer’s commitment is a matter of judgment, and a seller should evaluate all facts and circumstances of the arrangement.

12.7.05 The estimated transaction price may be less than the contract price because, for example, an entity anticipates offering a price concession. It is important to note that the collectibility assessment to determine whether a contract exists relates to the amount of consideration to which an entity expects to be entitled in exchange for the goods or services that will be transferred to the customer (which is expected to be the transaction price), not the stated contract price as explained in paragraphs 3A–3C of FASB ASC 606-10-55. Therefore, before determining if a contract with a customer exists, an entity will first need to estimate the transaction price so the appropriate values can be assessed for collectibility. Generally, FinREC believes a bank that sells real estate and finances a portion of such sale at a market rate will not expect to offer the counterparty a price concession. However, if at contract inception, an entity expects to receive an amount less than the stated contract price, judgment should be applied to determine if the transaction price is less than the stated contract price because it includes a price concession. If a price concession exists, the transaction price would be the stated contract price adjusted for any adjustments as required by FASB ASC 606-10-32-3, including the price concession and any constraints on variable consideration in accordance with paragraphs 11–13 of FASB ASC 606-10-32.

12.7.06 If an entity determines that it is not probable that it will collect substantially all of the estimated transaction price from the customer (note that the estimated transaction price may be lower than the stated contract price), it cannot conclude that the contract criterion in FASB ASC 606-10-25-1e has been met. Entities may consider the example in paragraphs 95–98 of FASB ASC 606-10-55 on assessing collectibility in a sale of real estate when evaluating whether it is probable an entity will collect substantially all of the consideration to which it expects to be entitled. Refer to chapter 9, "Credit Losses," of the AICPA Audit and Accounting Guide Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgage Companies for further discussion of management’s process for assessing collectibility and estimating losses.

12.7.07 FASB ASC 606-10-25-5 states that

12.7.08 As discussed in FASB ASC 606-10-25-6, if it is not probable that the entity will collect the consideration it expects to be entitled to or the other criteria for being considered a contract are not met, the entity should continue to assess the agreement to determine whether the criteria are subsequently met. The agreement would not be considered a contract accounted for under FASB ASC 610-20 until all criteria under FASB ASC 606-10-25-1 are met.

12.7.09 FASB ASC 606-10-25-7 states that

a.     The entity has no remaining obligations to transfer goods or services to the customer, and all, or substantially all, of the consideration promised by the customer has been received by the entity and is nonrefundable.

b.     The contract has been terminated, and the consideration received from the customer is nonrefundable.

c.     The entity has transferred control of the goods or services to which the consideration that has been received relates, the entity has stopped transferring goods or services to the customer (if applicable) and has no obligation under the contract to transfer additional goods or services, and the consideration received from the customer is nonrefundable.

12.7.10 FASB ASC 606-10-25-8 states that "[a]n entity shall recognize the consideration received from a customer as a liability until one of the events in ASC 606-10-25-7 occurs or until the criteria in ASC 606-10-25-1 are subsequently met."

12.7.11 FASB ASC 610-20-32-1 refers to select paragraphs in FASB ASC 606 for measuring the consideration to be included in the calculation of the gain or loss recognized upon derecognition of a nonfinancial asset. Specifically, an entity should look to the guidance on determining the transaction price in paragraphs 2–27 of FASB ASC 606-10-32 as well as paragraphs 42–45 of FASB ASC 606-10-32 on accounting for changes in the transaction price.

12.7.12 Paragraphs 15–20 of FASB ASC 606-10-32 discuss how to take into account the existence of a significant financing component in the contract. Generally, the transaction price in a bank’s sale of real estate will be the amount in a purchase and sale agreement (that is, the contract price). This includes seller-financed sales of real estate when the financing is at market. However, in seller-financed sales of real estate where the financing terms are not consistent with market, the entity must then determine the transaction price by discounting the amount of promised consideration using a discount rate that would be reflected in a separate transaction between the entity and its customer at contract inception (see FASB ASC 835-30, Interest—Imputation of Interest).

12.7.13 Further, when determining the transaction price, an entity is required to determine whether credit risks that were known at contract inception represent implied price concessions (that is, a form of variable consideration). If they do, such amounts should not be included in the estimated transaction price.

12.7.14 However, when an entity believes it is probable that it will collect substantially all but not the full amount of consideration, it may be difficult to determine whether the entity has implicitly offered a price concession or whether the entity has chosen to accept the risk of default by the customer of the contractually agreed-upon consideration. FASB ASC 606 does not include detailed guidance for distinguishing between price concessions and the risk of impairment losses embedded in an at-market loan. Therefore, as noted in BC 194 of FASB Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, entities should consider all relevant facts and circumstances when analyzing the nature of collectibility issues that were known at the onset of the contract (see further discussion on the collectibility contract criterion discussed previously).

12.7.15 Sales of nonfinancial assets (such as real estate) would be recognized when control of the asset transfers to the buyer. Under FASB ASC 610-20-40-1, an entity selling a nonfinancial asset would apply the guidance in FASB ASC 606-10-25-30 on determining when an entity satisfies a performance obligation at a point in time by transferring control of the asset.

12.7.16 FASB ASC 606-10-25-30 provides the following indicators to consider when determining whether control of a promised asset has been transferred:

a.     The entity has a present right to payment for the asset.

b.     The customer has legal title to the asset.

c.     The entity has transferred physical possession of the asset.

d.     The customer has the significant risks and rewards of ownership of the asset.

e.     The customer has accepted the asset.

12.7.17 If an entity concludes that control of the asset has not transferred, a sale has not occurred and the asset is not derecognized. The indicators in FASB ASC 606-10-25-30 are not meant to be a checklist, all-inclusive, or necessarily determinative individually or in combination with one another.

12.7.18 FinREC believes that for banks’ sales of real estate, criteria a, b, c and e of FASB ASC 606-10-25-30 are typically met on the closing. The purchase and sale agreement documents the bank’s present right to payment for the property and transfers the legal title to the buyer. The buyer typically indicates that it has obtained physical possession of and accepted the property by either occupying the property directly (owner-occupied properties) or leasing out the property to tenants (income properties).

12.7.19 For criteria c and d of FASB ASC 606-10-25-30, banks are reminded to consider the guidance in FASB ASC 606-10-55-68 which states that

Banks may consider the guidance in FASB ASU No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. FASB ASU No. 2014-04 acknowledges that "A creditor may obtain legal title to the residential real estate property even if the borrower has redemption rights that provide the borrower with a legal right for a period of time after a foreclosure to reclaim the real estate property by paying certain amounts specified by law." Consequently, if such reclaim rights exists, a bank may be precluded from recognizing a gain or loss on the seller-financed sale of foreclosed real estate until the reclaim period expires. Specific facts and circumstances, including applicable laws and regulations, should be considered in evaluating whether control of the real estate property has been transferred.

12.7.20 Banks may have to perform further analysis on criterion d of FASB ASC 606-10-25-30 in certain cases to determine whether the significant risks and rewards of ownership of the property have transferred to the buyer. However, FinREC believes that banks’ sales of real estate typically do not have the common characteristics that would result in the banks retaining the significant risks and rewards of ownership of the property.

12.7.21 FASB ASC 606-10-15-2 states the following:

a.     Lease contracts within the scope of Topic 840, Leases, or Topic 842, Leases, upon adoption of that Topic.

b.     Contracts within the scope of Topic 944, Financial Services—Insurance.

c.     Financial instruments and other contractual rights or obligations within the scope of the following Topics:

1.     Topic 310, Receivables

2.     Topic 320, Investments—Debt Securities

2a.     Topic 321 Investments—Equity Securities [when adopted]

3.     Topic 323, Investments—Equity Method and Joint Ventures

4.     Topic 325, Investments—Other

5.     Topic 405, Liabilities

6.     Topic 470, Debt

7.     Topic 815, Derivatives and Hedging

8.     Topic 825, Financial Instruments

9.     Topic 860, Transfers and Servicing.

d.     Guarantees (other than product or service warranties) within the scope of Topic 460, Guarantees.

e.     Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. For example, this Topic would not apply to a contract between two oil companies that agree to an exchange of oil to fulfill demand from their customers in different specified locations on a timely basis. Topic 845 on nonmonetary transactions may apply to nonmonetary exchanges that are not within the scope of this Topic.

12.7.22 FASB ASC 606-10-15-4 states the following:

a.     If the other Topics specify how to separate and/or initially measure one or more parts of the contract, then an entity shall first apply the separation and/or measurement guidance in those Topics. An entity shall exclude from the transaction price the amount of the part (or parts) of the contract that are initially measured in accordance with other Topics and shall apply paragraphs 606-10-32-28 through 32-41 to allocate the amount of the transaction price that remains (if any) to each performance obligation within the scope of this Topic and to any other parts of the contract identified by paragraph 606-10-15-4(b).

b.     If the other Topics do not specify how to separate and/or initially measure one or more parts of the contract, then the entity shall apply the guidance in this Topic to separate and/or initially measure the part (or parts) of the contract.

12.7.23 Some entities charge periodic fees for a customer’s ability to use a credit card for a period of time. The TRG discussed these periodic card fees, considering whether they are within the scope of FASB ASC 310 and thus outside the scope of FASB ASC 606. Paragraph 20 of TRG Agenda Ref. No. 44, July 2015 Meeting — Summary of Issues Discussed and Next Steps, states that “TRG members agreed with the staff view that credit card fees are within the scope of Topic 310, Receivables.”

12.7.24 Paragraph 21 of TRG Agenda Ref. No. 44 states the following:

12.7.25 Entities may charge fees related to a customer deposit account. Deposit-related fees may be based on a customer’s account balance and activity (for example, wire transfer fees, account maintenance fees).

12.7.26 The TRG discussed deposit-related fees, considering whether such fees are within the scope of FASB ASC 606 or whether other topics, including FASB ASC 405, address their recognition. Paragraph 20 of TRG Agenda Ref. No. 55, April 2016 Meeting — Summary of Issues Discussed and Next Steps, states the following:

12.7.27 Paragraphs 36–54 of TRG Agenda Ref. No. 52, Scoping Considerations for Financial Institutions, provides considerations related to applying FASB ASC 606 to deposit fees.

12.7.28 Some financial institutions originate loans and subsequently sell them to third parties (for example, government-sponsored entities that securitize large quantities of similar loan assets). When a financial institution sells the loan to a third party, it sometimes retains the right to service the financial asset. Additionally, entities may acquire or assume the rights to service or subservice (“servicing”) financial assets.

12.7.29 The entity that services a loan (servicer) performs various services, such as collecting amounts contractually due (principal, interest, and escrow) as well as remitting payments such as escrowed taxes and insurance or amounts. Additionally, servicing financial assets may include tracking delinquent borrowers, pursuing collection from delinquent borrowers, and initiating foreclosure proceedings to obtain title to and liquidate any collateral to minimize losses on significantly delinquent financial assets. Entities that service financial assets may have to remit payments to guarantors, trustees, municipalities, and other service providers (such as subservicers or insurance providers) in addition to other responsibilities. Ultimately, the level of services provided by the servicer or subservicer (“servicer”) depends on the type of loan and contractually specified terms.

12.7.30 In exchange for servicing the loan, the servicer receives a contractually specified servicing fee. The servicing fees are commonly a percentage of the unpaid principal balance of the loans that are collected over the life of the loans as payments are received, but also may include certain ancillary fees (late fees, modification fees, and so on), as well as interest income earned on cash received and held prior to remittance to another party (float) or other fees in the case of subservicing.

12.7.31 The TRG discussed the question of whether servicing and subservicing income (“servicing income”) is within the scope of FASB ASC 860 and thus outside the scope of FASB ASC 606. Paragraphs 18 and 19 of TRG Agenda Ref. No. 55 state the following:

12.7.32 Given the TRG’s conclusion that FASB ASC 860 provides sufficient revenue recognition guidance, servicing and subservicing arrangements within the scope of FASB ASC 860 are not within the scope of FASB ASC 606. The TRG did not provide guidance on what types of servicing or subservicing fee arrangements are within the scope of FASB ASC 860.

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