COMPTROLLER OF THE CURRENCY BANK ACCOUNTING ADVISORY SERIES

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COMPTROLLER OF THE CURRENCY
                        BANK ACCOUNTING ADVISORY SERIES
                                 December 2008

This edition of the Bank Accounting Advisory Series expresses the Office of the Chief
Accountant's current views on accounting topics of interest to national banks. Banks prepare
their Consolidated Reports of Condition and Income (call reports) using generally accepted
accounting principles (GAAP) and regulatory requirements. Accordingly, responses contained
in the series are based on GAAP and regulatory requirements.

These advisories are not official rules or regulations of the Comptroller of the Currency (OCC).
Rather, they represent either interpretations by the OCC's Office of the Chief Accountant of
generally accepted accounting principles, or OCC interpretations of regulatory capital
requirements.

Nevertheless, national banks that deviate from these stated interpretations may be required to
justify those departures to the OCC. The series is intended to inform the banking community of
the Office's views and rationale on issues of broad accounting interest. Additional releases will
be issued in the future on emerging accounting issues that affect banks.

Topic 11D, Fair Value Accounting, has been added. The following questions have been added
or revised in this edition:

       1A.   Investments in Debt and Equity Securities              Questions 6, 16 - 21
       1B.   Other-than-Temporary Impairment                        Questions 11, 12, 15
       2A.   Troubled Debt Restructurings                           Question 1 - 3, 8, 11, 27 - 32
       2B.   Nonaccrual Loans                                       Questions 19, 28 - 30
       2C.   Commitments         Question                                    6, 8, 13
       2E.   Loans Held for Sale                                    Question 22 - 31
       3B.   Sale and Leaseback Transactions                        Questions 1, 5
       3C.   Lease Cancellations                                    Questions 1 - 3
       4A.   Allowance for Loan and Lease Losses                    Questions 2 - 7, 10, 11, 13 - 15
                                                                       18, 19, 21 - 23, 25, 27 -
                                                                       29, 31 - 34, 37, 38, 40,
                                                                       45, 48, 49
       5A. Real Estate                                              Questions 1, 15, 16, 28 - 32
       5B. Life Insurance and Related Deferred Compensation         Question 1, 2
       5E. Data Processing Service Contracts                        Question 2
       6A. Accounting for Contingencies                             Question 4
       7A. Deferred Taxes      Question                                      7
       9A. Accounting for Asset Sales and Securitizations           Questions 1, 2, 8
       9C. Organization Costs         Question                               6
       10A. Accounting for Acquisitions                             Question 11
       11D. Fair Value Accounting                                   Questions 1 - 8


Zane D. Blackburn
Chief Accountant
                                                                         1

                      BANK ACCOUNTING ADVISORY SERIES
                             TABLE OF CONTENTS

TOPIC 1: Investment Securities
     1A. Investments in Debt and Equity Securities 

     1B. Other-than-Temporary Impairment 


TOPIC 2: Loans
     2A. Troubled Debt Restructurings
     2B. Nonaccrual Loans
     2C. Commitments
     2D. Origination Fees and Costs (including premiums and discounts)
     2E. Loans Held for Sale
     2F. Loan Recoveries

TOPIC 3: Leases
     3A. Lease Classification and Accounting 

     3B. Sale and Leaseback Transactions 

     3C. Lease Cancellations 


TOPIC 4: Allowance for Loan and Lease Losses
     4A. Allowance for Loan and Lease Losses

TOPIC 5: Other Assets
     5A. Real Estate
     5B. Life Insurance and Related Deferred Compensation
     5C. Asbestos and Toxic Removal Costs
     5D. Computer Software Costs
     5E. Data Processing Service Contracts
     5F. Tax Lien Certificates

TOPIC 6: Liabilities
     6A. Accounting for Contingencies

TOPIC 7: Income Taxes
     7A. Deferred Taxes 

     7B. Tax Sharing Arrangements 

     7C. Marginal Income Tax Rates 


TOPIC 8: Capital
     8A. Capital Treatment for Asset Sales and Securitizations
     8B. Sales of Stock
     8C. Quasi-Reorganizations
     8D. Employee Stock Options

TOPIC 9: Income and Expense Recognition
     9A. Accounting for Asset Sales and Securitizations 

     9B. Credit Card Affinity Agreements 

     9C. Organization Costs 

                                                                              2

                     BANK ACCOUNTING ADVISORY SERIES
                        TABLE OF CONTENTS, continued

TOPIC 10: Purchase Accounting, Corporate Reorganizations, and Consolidation
     10A. Accounting for Acquisitions 

     10B. Intangible Assets 

     10C. Push-Down Purchase Accounting 

     10D. Corporate Reorganizations 

     10E. Related Party Transactions (other than reorganizations) 


TOPIC 11: Miscellaneous Accounting
     11A. Asset Disposition Plans 

     11B. Hedging Activities 

     11C. Financial Statement Presentation 

     11D. Fair Value Accounting 

                                                                                                       3

TOPIC 1: INVESTMENT SECURITIES

1A. INVESTMENTS IN DEBT AND EQUITY SECURITIES

Facts:

Under Statement of Financial Accounting Standards No. 115 (SFAS 115) banks must classify
their investment securities in one of three categories: available-for-sale, held-to-maturity, or
trading. Securities categorized as held-to-maturity are reported at amortized cost, while
available-for-sale and trading securities are reported at fair market value. Banks include the net
unrealized holding gains and losses on available-for-sale securities in accumulated other
comprehensive income (loss), rather than as part of the bank's net income (loss). Net unrealized
holding gains and losses on trading securities are reported immediately in net income.

However, national banks do not include the net unrealized holding gains and losses attributable
to available-for-sale debt securities in their calculation of regulatory capital. The net unrealized
holding gains and losses on available-for-sale equity securities that have readily determinable
fair values are included in Tier 2 regulatory capital calculations, up to 45 % of the pretax
unrealized gain.

Question 1:                                                                   (September 2001)

Should the net unrealized holding gains and losses on available-for-sale securities be included in
the calculation of a bank's lending limit?

Staff Response:

The net unrealized holding gains and losses attributable to available-for-sale securities do not
affect the computation of a bank's legal lending limit (i.e., the amount that a bank can legally
lend to one customer). This limit is based on an institution's Tier 1 and Tier 2 capital, adjusted
to include the portion of the ALLL that was excluded for capital purposes.

Question 2:                                                                   (September 2001)

How should a bank account for the unrealized gains or losses on investments denominated in a
foreign currency?

Staff Response:

The net unrealized holding gains and losses on available-for-sale investments denominated in a
foreign currency should be excluded from net income and reported in accumulated other
comprehensive income. The entire unrealized gain or loss, including both of the portions related
to interest rate and foreign currency rate changes, is accounted for as an unrealized holding gain
or loss and reported in the separate component of stockholders' equity. Therefore, the income
statement effect of foreign currency gains and losses is deferred until the security is sold.

However, the gain or loss attributable to changes in foreign currency exchange rates would be
recognized in income, if the investment is categorized as held-to-maturity. Banks should follow
the accounting guidance provided in Statement of Financial Accounting Standards No. 52 for
such investments.
                                                                                                   4

Question 3:                                                                (September 2001)

What is the appropriate accounting for transfers between investment categories?

Staff Response:

Transfers between investment categories are accounted for as follows:

    Held-to-maturity to available-for-sale -- The unrealized holding gain or loss at the date
    of the transfer shall be recognized in accumulated other comprehensive income.

    Available-for-sale to held-to-maturity -- The unrealized holding gain or loss at the date
    of transfer shall continue to be reported in accumulated other comprehensive income, but
    shall be amortized over the remaining life of the security as a yield adjustment. This
    amortization of the unrealized holding gain or loss will offset the effect on income of
    amortization of premium or discount (see question 4).

    All transfers to the trading category -- The unrealized gain or loss at the date of transfer
    shall be recognized in earnings immediately.

    All transfers from the trading category -- The unrealized gain or loss at the date of
    transfer will have already been recognized in earnings and shall not be reversed.

Facts:

A bank purchased a $100 million bond on December 31, 1996 at par. The bond matures on
December 31, 2001. Initially, the bond was placed in the available-for-sale category. However,
on December 31, 1997, the bank decides to transfer the security to the held-to-maturity portfolio.
The market value of the security on the date of transfer is $92 million.

Question 4:                                                                (September 2001)

How should the bank account for the transfer?

Staff Response:

The bank should record the security at its market value, $92 million, at the date of transfer. In
essence, this becomes the security's amortized cost. The $8 million unrealized holding loss on
the date of transfer is not recognized in net income, but is included in accumulated other
comprehensive income. In addition, the unamortized discount of $8 million remains as an offset
to the security's face amount of $100 million, so that the security is valued at its market value
($92 million) when transferred.

Furthermore, future net income from this discount will not be affected. Although the $8 million
discount is amortized to interest income over the remaining life of the security, the amount in
accumulated other comprehensive income separate is amortized simultaneously against interest
income. Those entries offset each other and future income is not affected.
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