FRB: Supervisory Letter SR 02-22 on Interagency Advisory on Accounting for Accrued Interest Receivable Related to Credit Card Securitizations -- December 4, 2002

TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATION STAFF AT EACH FEDERAL RESERVE BANK AND TO EACH BANKING ORGANIZATION SUPERVISED BY THE FEDERAL RESERVE

SUBJECT: Interagency Advisory on Accounting for Accrued Interest Receivable Related to Credit Card Securitizations

The Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision today issued the attached "Interagency Advisory on the Accounting Treatment of Accrued Interest Receivable Related to Credit Card Securitizations." The purpose of the guidance is to clarify the appropriate accounting treatment for financial institutions that securitize credit card receivables and record an asset commonly referred to as Accrued Interest Receivable (AIR). The agencies consulted with the staffs of the Securities and Exchange Commission and Financial Accounting Standards Board in developing this guidance.

The guidance clarifies that, when the institution's (seller's) right to the AIR is subordinated as a result of a securitization, the seller generally should include the AIR as a subordinated retained interest in accounting for the sale of credit card receivables and in computing the gain or loss on sale. Consistent with generally accepted accounting principles (GAAP), this means that the value of the AIR, at the date of transfer, must be adjusted based on its relative fair (market) value. This adjustment will typically result in the carrying amount of the AIR being lower than its book (face) value prior to securitization. In addition, the AIR should be reported in "Other Assets" in regulatory reports and not as a loan receivable.¹ If an institution has not followed this accounting approach in the past, it should adopt it in the next regulatory report that it files (i.e., as of December 31, 2002) and in all subsequent periods.

While the interagency guidance applies to banks and savings associations, it should also be followed by bank holding companies that file GAAP-based regulatory reports. Accordingly, bank holding companies should look to this guidance for purposes of preparing FR Y-9C Reports.²

Reserve Banks are instructed to distribute this SR letter and attached guidance to all state member banks and bank holding companies in their districts, as well as to their examination staffs. Questions pertaining to this letter and the interagency advisory should be directed to Charles Holm, Assistant Director, (202) 452-3502, Gregory Eller, Project Manager, (202) 452-5277, or Dennis Hild, Senior Financial Analyst, (202) 452-3622.

Notes:

For information and guidance on the regulatory capital treatment of Accrued Interest Receivable, see SR letter 02-12 “Regulatory Capital Treatment of Accrued Interest Receivables Related to Credit Card Securitizations,” dated May 17, 2002. Return to text
On the FR Y-9C, the AIR should be reported in Schedule HC-F, item 5 and in Schedule HC-S, item 2.b, column C (if reported as a stand-alone asset) in December 31, 2002 reports. Return to text