Presentation Objectives

Accounting for OREO and
Repossessed Collateral
Doug Orth, CPA, CFE, Managing Partner
Orth, Chakler, Murnane and Co., CPAs
Gain an understanding of the
accounting and regulatory
expectations for OREO and
repossessed collateral.
Identify common problems related to
the accounting for OREO and
repossessed collateral.
Take away some “best practices” to
share with CFOs and other
The number 1 Objective of this Presentation is:
- Audience Participation - Audience Participation -
FAS 15, “Accounting by Debtors and Creditors for
Troubled Debt Restructuring”
FAS 144, “Accounting for the Impairment of Disposal of
Long-Lived Assets”
Accounting Standards Codification 310-10 and 310-40
Other Real Estate Owned = OREO
Repossessed collateral (non-real estate) = REPO
OREO includes real estate acquired through:
◦ Foreclosure
◦ Deed in lieu of foreclosure
◦ In-substance foreclosure (physical possession of property without
legal proceedings – property is abandoned by the borrower)
Short Sale = Agreement with borrower to sell property for
less than loan balance
OREO should be recorded at fair value, less costs to sell = new
cost basis
Fair value should be based on updated appraisal
Costs to sell include broker commissions, legal and title transfer
fees, closing costs, etc.
Consider private mortgage insurance (PMI) if considered
Difference between new cost basis and loan balance = chargeoff to the Allowance for Loan Losses account
New cost basis is reclassified from loans to members to OREO
Typical holding costs – should be charged to expense:
Maintenance – routine repairs; lawn maintenance; painting
Real estate taxes – current and arrears
Other costs – utilities; management/condo fees; advertising
Negative escrow balances – taxes and insurance
Typical holding costs charged to OREO:
Major repairs/renovations that add value to the property
◦ Note: Determine if the appraisal amount is “as is” without the major
repairs/renovations or assumes that the property will be updated
Monitor/update the reasonableness of new cost basis:
If property is not sold within reasonable time frame,
consider obtaining a new appraisal
Subsequent reductions in the fair value of OREO should be
charged to loss on assets via OREO allowance account
OREO is generally Held-for-Sale; however, OREO can be
rented or Held-for-Use (check with your state regulator)
 If OREO is rented, it should be recorded at fair value (without regards
to selling costs)
 The difference between the fair value and loan balance should be
charged-off to the Allowance for Loan Losses account
 The estimated value of the building should be depreciated over a
reasonable period as a charge to operating expenses
 Rental revenues and expenses should be recorded to the income
statement consistent with the nature of the revenue or expense
A gain or loss on the sale of OREO should be recorded for
the difference between the selling price of OREO, net of
selling costs, compared to the carrying amount of OREO
◦ Note: Material gains or losses recorded from the sale of OREO
should be considered when developing the net charge-off ratios for
mortgage loans
If OREO is sold shortly after taking possession of the
property, the gain or loss from the sale of OREO, can be
recorded to the Allowance for Loan Losses account
◦ Note: Once the Credit Union takes control of the property, it is no
longer considered a delinquent loan
IRS Form 1099-A, Acquisition or Abandonment of Secured
Property, should be filed the year that real property is
acquired by the Credit Union through foreclosure or
IRS Form 1099-C should be filed the year a “short sale”
occurs, leaving the Credit Union with an unrecoverable
loan balance
◦ For long-lived assets to be disposed of by sale, they should be
classified as assets held-for-sale at the asset’s fair value less
costs to sell
◦ Six criteria must be met prior to reclassification
◦ Reporting loan delinquency
Measuring impairment on vehicles:
 loan-by-loan approach
 average loss ratio on pool of repos
 average loss per unit
Writing down the impairment amount:
 at the individual loan level
 at the general ledger level
Line 27 - Foreclosed and Repossessed Assets
Requires the Credit Union to disclose the number and
dollar balances related to Real Estate, Automobiles and
Other Collateral
OREOs and REPOs are maintained
at outstanding loan balance
Holding costs are capitalized
OREO fair values are not reassessed
Negative escrow balances on OREO
Private mortgage insurance issues
Thank you for your attention and participation in today’s
Presented by:
Doug Orth, CPA, CFE
Orth, Chakler, Murnane and Co., CPAs
305-794-5457 cell
[email protected]

similar documents