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Home > News & Events > Financial Institution Letters |
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Financial Institution Letters Table of Contents | Previous | Next Accounting and Reporting Accounting Policies Derivative Loan Commitments With respect to floating derivative loan commitments, because the interest rate on such a commitment "floats" on a daily basis with market interest rates, the fair value of a floating derivative loan commitment approximates zero as long as the creditworthiness of the borrower has not changed. However, as with other derivative loan commitments, institutions must report the entire gross notional amount of floating derivative loan commitments in their regulatory reports. Commitments to originate mortgage loans that will be held for investment purposes and commitments to originate other types of loans are not within the scope of FAS 133 and, therefore, are not accounted for as derivatives.7 Institutions should report the unused portion of these types of commitments, which are not considered derivatives, as "unused commitments" in their regulatory reports. Forward Loan Sales Commitments Netting of Contracts Hedge Accounting
If an institution does not apply hedge accounting, either because the FAS 133 hedge criteria are not met or the institution chooses not to apply hedge accounting, forward loan sales commitments should be treated as nonhedging derivatives. If an institution does not apply hedge accounting, the institution will account for its warehouse loans at the lower of cost or fair value. Because nonhedging forward loan sales commitments are accounted for at fair value through earnings, such an approach causes volatility in reported earnings if the fair value of the warehouse loans increases above their cost basis. In this situation, the volatility is a result of recognizing the full amount of any decline in the fair value of the forward loan sales commitments in earnings while not adjusting the carrying amount of the warehouse loans above their cost basis. Income Statement Effect 6 In preparing Reports of Condition and Income (Call Reports), fixed, adjustable, and floating derivative loan commitments should not be reported as unused commitments in Schedule RC-L, Derivatives and Off-Balance Sheet Items, because these commitments must be reported as derivatives in this schedule. In preparing NCUA 5300 Call Reports (5300 Call Reports), fixed, adjustable, and floating derivative loan commitments should not be reported as unused commitments on Schedule G, Off-Balance Sheet Commitments and Contingent Assets and Liabilities (instead, refer to instructions, page 1a, line 13). For Thrift Financial Report (TFR) purposes, fixed, adjustable, and floating derivative loan commitments should be included when reporting outstanding commitments in Schedule CC, Consolidated Commitments and Contingencies. For Schedule CMR, Consolidated Maturity/Rate, refer to the instructions as various types of derivative loan commitments have differing reporting guidelines. 7 See FAS 133, paragraph 10(i). 8 Regardless of whether the underlying mortgage loans will be held for investment or for resale, commitments to purchase mortgage loans from third parties under either mandatory delivery contracts or best efforts contracts are derivatives if, upon evaluation, the contracts meet the definition of a derivative under FAS 133. Institutions should report loan purchase commitments that meet the definition of a derivative at fair value on the balance sheet. 9 FAS 133 does not provide specific guidance on financial statement presentation (i.e., where the fair value of derivatives or the changes in the fair value of derivatives should be classified). 10 When an institution has two (or more) derivatives with the same counterparty, contracts with positive fair values and negative fair values may be netted if the conditions set forth in FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts (FIN 39), are met. Those conditions are as follows: 1) each of the parties owes the other determinable amounts; 2) the reporting party has the right to set off the amount owed with the amount owed by the other party; 3) the reporting party intends to set off; and 4) the right of setoff is enforceable at law. In addition, without regard to the third condition, fair value amounts recognized for derivative contracts executed with the same counterparty under a master netting arrangement may be offset. 11 See Statement of Financial Accounting Standards No. 65, Accounting for Certain Mortgage Banking Activities (FAS 65), paragraph 4. 12 See FAS 133, paragraphs 2021, and related FAS 133 guidance for hedging instruments, hedged items, and forecasted transactions that qualify for fair value and cash flow hedge accounting.
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Last Updated 05/03/2005 | communications@fdic.gov |