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OCC Bulletin 2010-19
June 7, 2010
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Chief Executive Officers of All National Banks, Department and Division Heads, All Examining Personnel, and Other Interested Parties
The guidance attached to this bulletin continues to apply to federal savings associations.
On June 7, 2010, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of Thrift Supervision (collectively, the agencies) issued the attached guidance to address supervisory considerations related to bargain purchase gains (BPGs) and the impact such gains have on the licensing approval process, including certain supervisory and licensing conditions that may be imposed on the acquiring bank. The guidance also highlights the accounting and reporting requirements unique to business combinations resulting in bargain purchase gains and FDIC- and NCUA-assisted acquisitions of failed institutions (assisted acquisitions). The guidance does not add to or modify existing regulatory reporting requirements issued by the agencies or current accounting requirements under generally accepted accounting principles (GAAP).
Recent market conditions have contributed to an increase in bargain purchases. In general, a bargain purchase occurs when the fair value of the net assets acquired in a business combination exceeds the fair value of the consideration transferred by the acquiring institution. GAAP requires this excess, previously referred to as “negative goodwill,” to be recognized immediately as a gain in earnings, which increases both GAAP equity and regulatory capital.
At the acquisition date, the acquiring bank will not have obtained all of the information necessary to measure the fair value of the assets acquired and the liabilities assumed in the business combination in accordance with the applicable GAAP requirements. Accordingly, GAAP allows the acquiring bank to initially record provisional fair values based on the best information available at the acquisition date. The acquiring bank should, however, retrospectively adjust these provisional amounts to reflect new information obtained during the measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements.
The measurement period, as defined by GAAP, is the period of time after the acquisition date, not to exceed 12 months, that is required to identify and measure the identifiable assets acquired and liabilities assumed in a business combination. The existence of a measurement period does not permit management to delay completion of comprehensive fair value measurements. Rather, at the earliest possible reporting date, management should establish and report appropriate fair value estimates.
Any retrospective adjustments to acquisition-date fair values will affect the provisional amount of goodwill or bargain purchase gain recognized in a business combination. Due to these potential retrospective adjustments, the acquisition-date estimated BPG and, therefore, the acquiring bank’s regulatory capital, is subject to adjustment during the GAAP measurement period. As articulated in the guidance, although BPGs are included in the computation of regulatory capital for reporting purposes, a financial institution’s primary regulator may determine that the acquisition-date estimated BPG lacks sufficient permanence as a component of regulatory capital for supervisory and licensing decision-making purposes. As such, certain supervisory and licensing conditions may be imposed on the acquiring bank related to, but not limited to, the following: (1) capital preservation; (2) dividend limitations; (3) independent audits, or agreed-upon procedures engagements; (4) independent valuations; and (5) legal lending limits.
When imposed, these conditions normally would be in place until the GAAP measurement period has ended and management’s fair value estimates and the related BPG has been validated through an independent external audit (or agreed-upon procedures engagement) or examiner review. The guidance refers to this time period as the “conditional period.”
For more information, contact the Office of the Chief Accountant (202) 649-6280.
Kathy MurphyChief AccountantOffice of the Chief Accountant