New OREO Sales Recognition Standards Taking Effect

For the past few years ASC 360-40: Real Estate Sales has been the accounting guidance to recognize a sale of other real estate owned (OREO). This guidance required that in order to fully-recognize a gain on a seller-financed OREO sale, at the time of sale, the customer needed to have an adequate down payment. The guidance provided certain percentages of the total sales price based on the type of property. This will change when ASC 610: Other Income takes effect for non-public entities in 2019. This guidance borrows from ASC 606: Revenue from Contracts with Customersby relying on the satisfaction of five principles to recognize revenue:

  1. Identify the contract with a customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognize revenue when (or as) each performance obligation is satisfied

Built into the first step, “Identify the contract with a customer” is the element of collectability. The previous ASC 360-40 specified the required down payments to properly demonstrate the borrower commitment to pay the loan. Now, the bank’s personnel must adequately document their assessment of the borrower’s ability to pay the loan to justify the treatment of the sale as completed at the time of closing. This shouldn’t create a significant additional burden as this is the sort of justification that loan officers must put forward with any loan proposal.

This more principles-based approach provides transition guidance on the recognition of gains that are currently deferred under existing standards including how to report them in the Call Report. Although the new revenue recognition standard is effective for non-public banks in 2019, it may be early adopted. We encourage banks to contact us to discuss the new standard and actions needed to effectively implement its provisions.