SOP 03-3 describes how to account for acquired loans that show significant credit impairment on their acquisition date. SOP 03-3 guides the accounting treatment on the acquisition date and over the remaining life the loan. The Statement does not apply to certain excluded classes of loans including loans that are not credit impaired on their acquisition date and loans originated by the institution.

SOP 03-3 is applicable for loans acquired in fiscal years beginning after December 15, 2004. The SOP specifies that loans be recorded at the investor's purchase price. The purchase price is presumed to be equal to fair value. Where the fair value is less than the purchase price (as in a recourse re-purchase) a loss is immediately recognized.

SOP 03-3 prohibits "carrying" over or creating valuation allowances when initially accounting for loans subject to this Statement. Most notably, SOP 03-3 requires interest recognition, on a level-yield basis over the life of the loan, any amount by which the cash flows expected at acquisition exceeds the investor's initial investment in the loan.

SOP 03-3 adjusts the criteria for determining when a loan should be considered non-accrual. A loan may be non-accrual for contractual interest recognition purposes but still be on accrual status for SOP 03-3 interest recognition purposes. Under SOP 03-3 a loan is considered non-accrual if its expected cash flows cannot be estimated or the loan is being held primarily for the value of its collateral.

Servicing systems are designed to keep track of contractual loan terms and payments. Such systems often lack mechanisms for recording a loan at its purchase price and accruing interest on a non-contractual basis.

Updated estimates of expected cash flows are required in each accounting period. The expected cash flows are necessary to determine impairment (or reversal of impairment), to calculate the accretable yield and to establish the effective yield for use in the next accounting period. This requires integration with loss models and/or the ability to utilize internally or externally generated payment forecast.

To further complicate the operational challenge of SOP 03-3, loans may undergo any of the events of a normal loan and the accounting process must take into account the SOP 03-3 basis and interest accrual methodology, such as:

• Loans can be either HFI or HFS (with LOCOM adjustments) and may switch between categories
• SOP 03-3 has its own definition of when a loan should become non-accrual and what that means
• Loan modifications and troubled debt restructurings may occur
• Variable rate loans are accounted for differently than fixed rate loans depending on whether a given decline in expected cash flows is due to credit deterioration or an contractually based interest rate reset to a lower rate.
• Cash payments are not applied to principal and interest as they would be for a performing loan. Servicing system entries typically need to be either be reversed or adjusted to the correct SOP 03-3 values

Ēvolv automates the calculation and creation of accounting entries for SOP 03-3 loans. It prepares GAAP compliant entries for upload to the general ledger. With Ēvolv, managers can view dashboard reports or access detailed portfolio or loan level reports that show the accounting entries created and relevant calculated balances including the carrying value of individual loans.

Ēvolv is broad scope loan accounting solution that does far more than just a SOP 03-3 accounting. Please call a Primatics Financial representative at +1 (800) 741-3051 or e-mail evolv@primaticsfinancial.com to learn how Ēvolv can help your company apply difficult loan accounting standards and automate costly and/or error prone manual processes.