Collateral-dependent financial asset

A collateral-dependent financial asset is one for which repayment is expected to come substantially from operating or selling the collateral. That conclusion changes which evidence controls the expected-loss estimate; a recent appraisal alone does not establish it.

Establish the repayment source

Start with the borrower's expected cash flows. Determine whether ordinary repayment remains supportable or whether collateral now supplies substantially all expected repayment. Inspect lien priority, guarantees, senior claims, collateral condition, operating costs, and the entity's intent and ability to work with the borrower.

If repayment depends on sale, costs to sell affect the amount expected to be recovered. For example, a $500,000 receivable secured by property worth $440,000 with $20,000 of expected selling costs has a $420,000 net collateral amount before other required adjustments. The $80,000 difference is not automatically the final allowance: priority claims, timing, maintenance, and qualifying cash flows still matter.

Keep measurement dates aligned

Use a valuation that reflects the reporting-date condition. Reconcile appraisal date, inspection date, market changes, and costs to the financial-reporting date. Record who approved the collateral-dependent conclusion and what event will require reassessment.

Boundary and source

This page does not provide a legal lien opinion or property valuation. Read ASC 326-20-35-5 for the collateral-dependent practical expedient and its operating-versus-sale measurement distinction.