As the banking industry goes through rapid change and turmoil many institutions can now, more then ever, utilize a mergers and acquisitions strategy to drive stakeholder value. In order to take advantage of this opportunity firms have to remain cognizant of the operational and accounting challenges that arise under the new Financial Accounting Standards 141R and 160, issued by the FASB in December 2007, taking affect in periods after Dec 15 2008. The revised standard further extends the fair value concepts and will require measuring and recognizing the business at full acquisition-date fair value. For companies acquiring companies with loan portfolios, this will introduce a fair value adjustment at the loan level. This fair value adjustment will have subsequent accounting implications post acquisition date.

Much of the complexity around adopting the new standard will involve taking the guidance for FASB and making it operational at the time of acquisition. Below are a set of challenges that are especially relevant to acquirers of institutions with large loan portfolios:

1. As SFAS 141R requires loans that are acquired through business combination to be recognized at fair value on acquisition date a cost basis adjustment similar to a purchase premium/discount will have to be created against each loan. This adjustment is a result of the difference between fair value and loan principal balance and will be a challenge to keep track of at individual loan level for the acquiring institution. For banks that normally engage in whole loan purchase transactions that are subsequently held for both investment and sale this may be less of a challenge. However, for many institutions the tracking cost basis adjustments at a loan level will prove challenging and difficult to make operational.

2. Loans that have credit deterioration at acquisition need to follow SOP 03-3, which requires the initial investment of acquired loans to be carried at fair value without allowances being carried over from the acquiree bank. If acquired loans' expected cash flows are estimable, the interest income of SOP 03-3 loan needs to be on a level-yield basis based on the accretable yield, and the excess of contractual cash flows over expected cash flows needs to be disclosed as the non-accretable yield and not carried on the books. Subsequently, SOP 03-3 loans need to continue being evaluated for further impairments or impairment reversals depending on the changes in expected cash flows as well as actual cash payments. All these requirements represent significant system challenges.

3. Acquired loans that are designated with HFI intent that are not in scope of SOP 03-3 should follow SFAS 91, which requires interest income to be recognized on a level-yield or straight line method depending on loan types.

4. Acquired loans that are designated with HFS intent are subject to LOCOM process and the purchase premium and discount needs to be part of book value at loan level. For banks that do not have system support to keep track of purchase premium and discount at loan level, the LOCOM process can represent a challenge.

1. Ēvolv keeps track of all cost basis adjustments at loan level, including the purchase premium and discount from the acquired loan as well as loan origination fees and costs from originated loans.

2. Ēvolv has a full suite of SOP 03-3 functions and supports SOP 03-3 accounting for interest income recognition, loan balance reporting and impairment for loans with or without estimable expected cash flows. Ēvolv also supports SOP 03-3 loan modification and systematically determines whether the modification is a TDR (FAS 15) based on the borrower being in financial difficulty and a concession tests. If it determines that the modification is a TDR it process accordingly under SFAS 114. For loans without estimable cash flows, collateral value or market price based impairment is supported. Ēvolv stores the data points to provide clear audit trail, such as the expected cash flows used at acquisition and in subsequent periods.

3. For HFS loan populations Ēvolv keeps all cost basis adjustment at the lowest loan level for the SFAS 65 defined LOCOM process. This systems supports LOCOM either using the aggregate method or by marking individual loans (ie disaggregate method) and various LOCOM groups such as committed versus non-committed and/or by various product types. In addition, it also supports loan intent re-designations either from HFS to HFI or from HFI to HFS and applies the appropriate accounting treatment systematically.