| Paragraph Number |
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Issued: May, 1993
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| 4 | loan -- a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor's statement of financial position. | |||
| 5 | This Statement applies
to all
creditors. It addresses the accounting by creditors for
impairment
of a loan by specifying how allowances for credit losses related to
certain
loans should be determined.
This Statement also addresses the accounting by creditors for all loans that are restructured in a troubled debt restructuring involving a modification of terms of a receivable |
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| Recognition of Impairment | ||||
| 5 | A loan is impaired when... it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. This Statement does not specify how a creditor should determine that it is probable that it will be unable to collect all amounts due according to the contractual terms of a loan. A creditor should apply its normal loan review procedures in making that judgment. An insignificant delay or insignificant shortfall in amount of payments does not require application of this Statement. A loan is not impaired during a period of delay in payment if the creditor expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay. Thus, a demand loan or other loan with no stated maturity is not impaired if the creditor expects to collect all amounts due including interest accrued at the contractual interest rate during the period the loan is outstanding. | |||
| 9. | Usually, a loan whose terms are modified in a troubled debt restructuring already will have been identified as impaired because the condition specified in paragraph 8 will have existed before a formal restructuring. . . . | |||
| 10. | The term probable is used in this Statement consistent with its use in Statement 5, which defines probable as an area within a range of the likelihood that a future event or events will occur confirming the fact of the loss. That range is from probable to remote, as follows: | |||
| Probable. The future event or events are likely to occur.. | ||||
| Reasonably possible. The chance of the future event or events occurring is more than remote but less than likely. | ||||
| Remote. The chance of the future event or events occurring is slight. | ||||
| Measurement of Impairment | ||||
| 11 | Measuring impaired loans requires judgment and estimates, and the eventual outcomes may differ from those estimates. . | |||
| 13 | When a loan is
impaired, a creditor
shall measure impairment based on the present
value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a
creditor
may measure impairment based on a loan's observable market price, or
the
fair value of the collateral if the loan is collateral dependent.
Regardless of the measurement method, a creditor shall measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. A creditor shall consider estimated costs to sell, on a discounted basis, in the measure of impairment if those costs are expected to reduce the cash flows available to repay or otherwise satisfy the loan. If the measure of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount), a creditor shall recognize an impairment by creating a valuation allowance with a corresponding charge to bad-debt expense or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to bad-debt expense. |
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| 14 | If a creditor measures an impaired loan using a present value amount, the creditor shall calculate that present value amount based on an estimate of the expected future cash flows of the impaired loan, discounted at the loan's effective interest rate. The effective interest rate of a loan is 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).3 The effective interest rate for a loan restructured in a troubled debt restructuring is based on the original contractual rate, not the rate specified in the restructuring agreement. If the loan's contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate (for example, the prime rate, the London interbank offered rate, or the U.S. Treasury bill weekly average), that loan's effective interest rate may be calculated based on the factor as it changes over the life of the loan or may be fixed at the rate in effect at the date the loan meets the impairment criterion in paragraph 8. The creditor's choice shall be applied consistently for all loans whose contractual interest rate varies based on subsequent changes in an independent factor. Projections of changes in the factor should not be made for purposes of determining the effective interest rate or estimating expected future cash flows. | |||
| 15. | If a creditor measures an impaired loan using a present value calculation, the estimates of expected future cash flows shall be the creditor's best estimate based on reasonable and supportable assumptions and projections. All available evidence, including estimated costs to sell if those costs are expected to reduce the cash flows available to repay or otherwise satisfy the loan, should be considered in developing the estimate of expected future cash flows. The weight given to the evidence should be commensurate with the extent to which the evidence can be verified objectively. If a creditor estimates a range for either the amount or timing of possible cash flows, the likelihood of the possible outcomes shall be considered in determining the best estimate of expected future cash flows. | |||
| 16. | Subsequent to the initial measurement of impairment, if there is a significant change (increase or decrease) in the amount or timing of an impaired loan's expected future cash flows, or if actual cash flows are significantly different from the cash flows previously projected, a creditor shall recalculate the impairment by applying the procedures specified in paragraphs 12-15 and by adjusting the valuation allowance. Similarly, a creditor that measures impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral-dependent loan shall adjust the valuation allowance if there is a significant change (increase or decrease) in either of those bases. However, the net carrying amount of the loan shall at no time exceed the recorded investment in the loan.Note: all of the reductions above may be absolute or contingent.) | |||
| 17. | The present value of an impaired loan's expected future cash flows will change from one reporting period to the next because of the passage of time and also may change because of revised estimates in the amount or timing of those cash flows. A creditor shall recognize the change in present value in accordance with either (a) or (b) as follows: | |||
| a. | The increase in present value of the expected future cash flows that is attributable to the passage of time shall be reported as interest income accrued on the net carrying amount of the loan at the effective interest rate used to discount the impaired loan's estimated future cash flows. The change in present value, if any, that is attributable to changes in the amount or timing of expected future cash flows shall be reported as bad-debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad-debt expense that otherwise would be reported. | |||
| b. | The entire change in present value shall be reported as bad-debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad-debt expense that otherwise would be reported. | |||
| 18. |
A
creditor that recognizes income in accordance with paragraph 17(a)
shall apply that method
to all loans for which impairment is measured based on the present
value of expected future
cash flows discounted at the loan's effective interest rate and shall
apply that method consistently
from one reporting period to the next. |
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| 19. | The
observable market price of an impaired loan or the fair value of the
collateral of an impaired collateral-dependent loan may change from one reporting period to the next. A creditor that measures impairment on either of those bases shall report a decrease in the measure of the impaired loan as bad-debt expense in the same manner in which impairment initially was recognized. An increase in the measure of the impaired loan shall be reported as a reduction in the amount of bad-debt expense that otherwise would be reported. |
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| Disclosures | ||||
| 20. | A creditor shall
disclose, either in the body of the financial statements or in the accompanying notes, the following information: |
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| a. | As of the date of each statement of
financial position presented, the recorded investment in the loans for
which impairment has been recognized in accordance with this Statement
and the total allowance for credit losses related to those impaired
loans. |
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| b. | For each period for which results of operations are presented, the activity in the allowance for credit losses account, including the balance in the allowance for credit losses account at the beginning and end of each period, additions charged to operations, direct write-downs charged against the allowance, and recoveries of amounts previously charged off | |||
| c. | The creditor's income recognition policy (paragraph 17(a) or (b)). A creditor that recognizes income in accordance with paragraph 17(a) also shall disclose the amount of interest income recognized in accordance with that paragraph. | |||