[Federal Register Volume 69, Number 50 (Monday, March 15, 2004)]
[Rules and Regulations]
[Page 12067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5731]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 211

[Release No. SAB 105]


Staff Accounting Bulletin No. 105

AGENCY: Securities and Exchange Commission.

ACTION: Publication of staff accounting bulletin.

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SUMMARY: This staff accounting bulletin summarizes the views of the 
staff regarding the application of generally accepted accounting 
principles to loan commitments accounted for as derivative instruments.

DATES: Effective March 9, 2004.

FOR FURTHER INFORMATION CONTACT: John James, Greg Cross or Eric 
Schuppenhauer, Office of the Chief Accountant (202) 942-4400, or Louise 
Dorsey, Division of Corporation Finance (202) 942-2960, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The statements in staff accounting bulletins 
are not rules or interpretations of the Commission, nor are they 
published as bearing the Commission's official approval. They represent 
interpretations and practices followed by the Division of Corporation 
Finance and the Office of the Chief Accountant in administering the 
disclosure requirements of the Federal securities laws.

    Dated: March 9, 2004.
Jill M. Peterson,
Assistant Secretary.

PART 211--[AMENDED]

0
Accordingly, part 211 of title 17 of the Code of Federal Regulations is 
amended by adding Staff Accounting Bulletin No. 105 to the table found 
in subpart B.

Staff Accounting Bulletin No. 105

    Note: The text of SAB 105 will not appear in the Code of Federal 
Regulations.

    The staff hereby adds Section DD to Topic 5 of the Staff 
Accounting Bulletin Series. Topic 5:DD provides guidance regarding 
loan commitments accounted for as derivative instruments.

Topic 5: Miscellaneous Accounting

* * * * *

DD. Loan Commitments Accounted for as Derivative Instruments

    Facts: Bank A enters into a loan commitment with a customer to 
extend a mortgage loan at a specified rate. Bank A intends to sell 
the mortgage loan after it is funded. Under Statement No. 133, such 
a loan commitment should be accounted for as a derivative instrument 
and measured at fair value.\1\ Bank A expects to receive future cash 
flows related to servicing rights from servicing fees (included in 
the loan's interest rate or otherwise), late charges, and other 
ancillary sources, or from selling the servicing rights into the 
market.
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    \1\ Paragraph 3 of FASB Statement No. 149, Amendment of 
Statement 133 on Derivative Instruments and Hedging Activities, 
amended paragraph 6(c) of Statement No. 133, Accounting for 
Derivative Instruments and Hedging Activities, to add: ``* * * loan 
commitments that relate to the origination of mortgage loans that 
will be held for sale, as discussed in paragraph 21 of FASB 
Statement No. 65, Accounting for Mortgage Banking Activities (as 
amended), shall be accounted for as derivative instruments by the 
issuer of the loan commitment (that is, the potential lender).'' 
Similar guidance is provided in Statement 133 Implementation Issue 
No. C13, Scope Exceptions: When a Loan Commitment Is Included in the 
Scope of Statement 133.
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    Question 1: In recognizing the loan commitment, may Bank A 
consider the expected future cash flows related to the associated 
servicing of the loan?
    Interpretive Response: No. The staff believes that incorporating 
expected future cash flows related to the associated servicing of 
the loan essentially results in the immediate recognition of a 
servicing asset. However, servicing assets are to be recognized only 
once the servicing asset has been contractually separated from the 
underlying loan by sale or securitization of the loan with servicing 
retained.\2\
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    \2\ See paragraph 61 of FASB Statement No. 140, Accounting for 
Transfers and Servicing of Financial Assets and Extinguishments of 
Liabilities.
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    Further, no other internally-developed intangible assets (such 
as customer relationship intangible assets) should be recorded as 
part of the loan commitment derivative. Recognition of such assets 
would only be appropriate in a third-party transaction (for example, 
the purchase of a loan commitment either individually, in a 
portfolio, or in a business combination).
    Question 2: What disclosures should Bank A provide with respect 
to loan commitments accounted for as derivative instruments?
    Interpretive Response: Bank A should disclose its accounting 
policy for loan commitments pursuant to APB Opinion No. 22, 
Disclosure of Accounting Policies. Bank A should provide disclosures 
related to loan commitments accounted for as derivatives, including 
methods and assumptions used to estimate fair value and any 
associated hedging strategies, as required by Statement No. 107,\3\ 
Statement No. 133 and Item 305 of Regulation S-K. Additionally, Bank 
A should provide disclosures required by Item 303 of Regulation S-K 
and any related interpretive guidance.
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    \3\ FASB Statement No. 107, Disclosures about Fair Value of 
Financial Instruments.
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    Question 3: Will the staff expect retroactive changes by 
registrants to comply with the accounting described in this 
bulletin?
    Interpretive Response: The staff will not object if registrants 
that have not been applying the accounting described in this 
bulletin continue to use their existing accounting policies for loan 
commitments accounted for as derivatives entered into on or before 
March 31, 2004. For loan commitments accounted for as derivatives 
and entered into subsequent to that date, the staff expects all 
registrants to apply the accounting described in this bulletin. 
Financial statements filed with the Commission before applying the 
guidance in this bulletin should include disclosures similar to 
those described in SAB Topic 11:M.

[FR Doc. 04-5731 Filed 3-12-04; 8:45 am]
BILLING CODE 8010-01-P