Glossary Terms: CECL Credit Losses

Amortized Cost

The sum of the initial investment less cash collected less write-downs plus yield accreted to date.

Amortized Cost Basis

The amount at which an investment is acquired, for accretion, amortization, collection of cash, previous other-than-temporary impairments recognized in earnings (less any cumulative-effect adjustments), foreign exchange, and fair value hedge accounting adjustments.

Capitalization Rate

Rate used to determine amount of interest to be capitalized in an accounting period.

CECL (Current Expected Credit Loss)

The CECL standard focuses on estimation of expected losses over the life of the loans, while the current standard relies on incurred losses.

Credit Quality Indicator

A statistic about the credit quality of financing receivables.

Credit Risk

For the purposes of a hedged item in a fair value hedge, credit risk is the risk of changes in the hedged item’s fair value attributable to both of the following:

• Changes in the obligor’s creditworthiness
• Changes in the spread over the benchmark interest rate with respect to the hedged item’s credit sector at inception of the hedge.

For the purposes of a hedged transaction in a cash flow hedge, credit risk is the risk of changes in the hedged transaction’s cash flows attributable to all of the following:

• Default
• Changes in the obligor’s creditworthiness
• Changes in the spread over the benchmark interest rate with respect to the related financial asset’s or liability’s credit sector at inception of the hedge.

Discount Rate

A rate or rates used to reflect the time value of money. Discount rates are used in determining the present value as of the measurement date of future cash flows currently expected to be required to satisfy the pension obligation or other postretirement benefit obligation.

Effective Interest Rate

The rate of return implicit in the loan, that is, the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the loan.

Expected Losses

A legal entity that has no history of net losses and expects to continue to be profitable in the foreseeable future can be a variable interest entity (VIE). A legal entity that expects to be profitable will have expected losses. A VIE’s expected losses are the expected negative variability in the fair value of its net assets exclusive of variable interests and not the anticipated amount or variability of the net income or loss.

Fair Value

The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.

Financial Asset

Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:

• Receive cash or another financial instrument from a second entity
• Exchange other financial instruments on potentially favorable terms with the second entity.

Freestanding Contract

A freestanding contract is entered into either:

• Separate and apart from any of the entity’s other financial instruments or equity transactions
• In conjunction with some other transaction and is legally detachable and separately exercisable.

Holding Gain or Loss

The net change in fair value of a security. The holding gain or loss does not include dividend or interest income recognized but not yet received or write-downs for other-than-temporary impairment.

Loan Commitment

Loan commitments are legally binding commitments to extend credit to a counterparty under certain prespecified terms and conditions. They have fixed expiration dates and may either be fixed-rate or variable-rate. Loan commitments can be either of the following:

• Revolving (in which the amount of the overall line of credit is reestablished upon repayment of previously drawn amounts)
• Nonrevolving (in which the amount of the overall line of credit is not reestablished upon repayment of previously drawn amounts).

Loan commitments can be distributed through syndication arrangements, in which one entity acts as a lead and an agent on behalf of other entities that will each extend credit to a single borrower. Loan commitments generally permit the lender to terminate the arrangement under the terms of covenants negotiated under the agreement. This is not an authoritative or all-encompassing definition.

Portfolio Segment

The level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses.

Reinsurance Recoverable

All amounts recoverable from reinsurers for paid and unpaid claims and claim settlement expenses, including estimated amounts receivable for unsettled claims, claims incurred but not reported, or policy benefits.

Troubled Debt Restructuring

A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.