[Federal Register Volume 72, Number 217 (Friday, November 9, 2007)]
[Rules and Regulations]
[Pages 63484-63485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-21927]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 211

[Release No. SAB 109]


Staff Accounting Bulletin No. 109

AGENCY: Securities and Exchange Commission.

ACTION: Publication of staff accounting bulletin.

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SUMMARY: This staff accounting bulletin (``SAB'') expresses the views 
of the staff regarding written loan commitments that are accounted for 
at fair value through earnings under generally accepted accounting 
principles. SAB No. 105, Application of Accounting Principles to Loan 
Commitments (``SAB 105''), provided the views of the staff regarding 
derivative loan commitments that are accounted for at fair value 
through earnings pursuant to Statement of Financial Accounting 
Standards No. 133, Accounting for Derivative Instruments and Hedging 
Activities. SAB 105 stated that in measuring the fair value of a 
derivative loan commitment, the staff believed it would be 
inappropriate to incorporate the expected net future cash flows related 
to the associated servicing of the loan. This SAB supersedes SAB 105 
and expresses the current view of the staff that, consistent with the 
guidance in Statement of Financial Accounting Standards No. 156, 
Accounting for Servicing of Financial Assets, and Statement of 
Financial Accounting Standards No. 159, The Fair Value Option for 
Financial Assets and Financial Liabilities, the expected net future 
cash flows related to the associated servicing of the loan should be 
included in the measurement of all written loan commitments that are 
accounted for at fair value through earnings. SAB 105 also indicated 
that the staff believed that internally-developed intangible assets 
(such as customer relationship intangible assets) should not be 
recorded as part of the fair value of a derivative loan commitment. 
This SAB retains that staff view and broadens its application to all 
written loan commitments that are accounted for at fair value through 
earnings.
    The staff expects registrants to apply the views in Question 1 of 
SAB 109 on a prospective basis to derivative loan commitments issued or 
modified in fiscal quarters beginning after December 15, 2007.

DATES: November 5, 2007.

FOR FURTHER INFORMATION CONTACT: Ashley W. Carpenter, Office of the 
Chief Accountant (202) 551-5300 or Craig C. Olinger, Division of 
Corporation Finance (202) 551-3400, Securities and Exchange Commission, 
100 F Street NE., 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: November 5, 2007.
Florence E. Harmon,
Deputy 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. 109 to the table found 
in Subpart B.

Staff Accounting Bulletin No. 109

0
The staff hereby amends and replaces Section DD of Topic 5, 
Miscellaneous Accounting, of the Staff Accounting Bulletin Series. 
Topic 5: DD (as amended) expresses the views of the staff regarding 
written loan

[[Page 63485]]

commitments that are accounted for at fair value through earnings under 
generally accepted accounting principles.

    Note: The text of SAB 109 will not appear in the Code of Federal 
Regulations.

Topic 5: Miscellaneous Accounting

* * * * *

DD. Written Loan Commitments Recorded at Fair Value Through Earnings

    Facts: Bank A enters into a loan commitment with a customer to 
originate a mortgage loan at a specified rate. As part of this written 
loan commitment, Bank A expects to receive future net 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 to a third party. If Bank A 
intends to sell the mortgage loan after it is funded, pursuant to 
paragraph 6 of FASB Statement No. 133, Accounting for Derivative 
Instruments and Hedging Activities, as amended by FASB Statement No. 
149, Amendment of Statement 133 on Derivative Instruments and Hedging 
Activities (``Statement 133''), the written loan commitment is 
accounted for as a derivative instrument and recorded at fair value 
through earnings (referred to hereafter as a ``derivative loan 
commitment''). If Bank A does not intend to sell the mortgage loan 
after it is funded, the written loan commitment is not accounted for as 
a derivative under Statement 133. However, paragraph 7(c) of FASB 
Statement No. 159, The Fair Value Option for Financial Assets and 
Financial Liabilities (``Statement 159''), permits Bank A to record the 
written loan commitment at fair value through earnings (referred to 
hereafter as a ``written loan commitment''). Pursuant to Statement 159, 
the fair value measurement for a written loan commitment would include 
the expected net future cash flows related to the associated servicing 
of the loan.
    Question 1: In measuring the fair value of a derivative loan 
commitment accounted for under Statement 133, should Bank A include the 
expected net future cash flows related to the associated servicing of 
the loan?
    Interpretive Response: Yes. The staff believes that, consistent 
with the recently issued guidance in FASB Statement No. 156, Accounting 
for Servicing of Financial Assets (``Statement 156''),\1\ and Statement 
159, the expected net future cash flows related to the associated 
servicing of the loan should be included in the fair value measurement 
of a derivative loan commitment. The expected net future cash flows 
related to the associated servicing of the loan that are included in 
the fair value measurement of a derivative loan commitment or a written 
loan commitment should be determined in the same manner that the fair 
value of a recognized servicing asset or liability is measured under 
FASB Statement No. 140, Accounting for Transfers and Servicing of 
Financial Assets and Extinguishments of Liabilities, as amended by 
Statement 156 (``Statement 140''). However, as discussed in paragraphs 
61 and 62 of Statement 140, a separate and distinct servicing asset or 
liability is not recognized for accounting purposes until the servicing 
rights have been contractually separated from the underlying loan by 
sale or securitization of the loan with servicing retained.
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    \1\ Statement 156 permits an entity to subsequently measure 
recognized servicing assets and servicing liabilities (which are 
nonfinancial instruments) at fair value through earnings.
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    The views in Question 1 apply to all loan commitments that are 
accounted for at fair value through earnings. However, for purposes of 
electing fair value accounting pursuant to Statement 159, the views in 
Question 1 are not intended to be applied by analogy to any other 
instrument that contains a nonfinancial element.
    Question 2: In measuring the fair value of a derivative loan 
commitment accounted for under Statement 133 or a written loan 
commitment accounted for under Statement 159, should Bank A include the 
expected net future cash flows related to internally-developed 
intangible assets?
    Interpretive Response: No. The staff does not believe that 
internally-developed intangible assets (such as customer relationship 
intangible assets) should be recorded as part of the fair value of a 
derivative loan commitment or a written loan commitment. Such 
nonfinancial elements of value should not be considered a component of 
the related instrument. Recognition of such assets would only be 
appropriate in a third-party transaction. For example, in the purchase 
of a portfolio of derivative loan commitments in a business 
combination, a customer relationship intangible asset is recorded 
separately from the fair value of such loan commitments. Similarly, 
when an entity purchases a credit card portfolio, EITF Issue No. 88-20, 
Difference between Initial Investment and Principal Amount of Loans in 
a Purchased Credit Card Portfolio, requires an allocation of the 
purchase price to a separately recorded cardholder relationship 
intangible asset.
    The view in Question 2 applies to all loan commitments that are 
accounted for at fair value through earnings.

 [FR Doc. E7-21927 Filed 11-8-07; 8:45 am]
BILLING CODE 8011-01-P