Bullet point understanding or FAS 114 and TDR\'s

1. Bob Grant’s Brief on Impairment, FAS 114 and
Troubled Debt Restructurings
Contact: 248-321-1405. Rgrant56@gmail.com
I am Not an Accountant...but, I’ll try to Simplify
FAS 114: Accounting For Impairment of a Loan
· Evaluate individual loans for impairment under FAS 114. Want More Detail?
· Impairment represents a judgment about collectability in accordance with loan terms, not collateral.
· A real estate loan is not impaired solely because the fair value of the collateral is less than the loan  WWW.FASB.ORG/PDF/
FAS114.PDF
amount. An impaired real estate loan is not collateral dependent solely because the fair value of
the collateral is less than the book value.  WWW.FASB.ORG/PDF/
· A loan is impaired when, based on current information & events it is probable that a creditor will be FAS15.PDF
unable to collect all amounts due ( p and i ) according to contractual terms. Probable: the future
event or events are likely to occur. This does not require virtual certainty. It’s gray. Be prudent.  GOOGLE: ROBERT STORCH
· A loan is collateral dependent if repayment is expected solely from the underlying collateral. PRESENTATION
· Conversely, if there are other reliable sources of repayment besides the collateral, the loan is not
collateral dependent and impairment is measured based on present value of expected future cash
flows.
· If an individually impaired loan is collateral dependent, impairment is measured on the basis of fair
value of the collateral (less costs to sell, etc.), regardless if foreclosure is probable. Fair Value
considerations include: Timing and Reliability of Appraisals, Volatility of Collateral, Historical Losses on Interesting Facts about-
Similar Loans. Counterfeit Currency:
· If the measure of the impaired loan is less than the booked loan amount, recognize the impairment
by creating a FAS 114 allowance (or adjust the existing allowance). By the end of the Civil
Note: The estimated fair value is subject to review by the examiners, so management should determine War, between 1/3 and
and document that its measurement process was appropriate. 1/2 of all paper currency
was counterfeit. On July 5,
FAS 15 Accounting For Troubled Debt Restructurings (TDR) 1865 the Secret Service
was created under the U.S.
· Not all modifications are Troubled Debt Restructurings. A restructuring is a Troubled Debt Treasury Dept..
Restructuring if the creditor, for economic or legal reasons related to financial difficulties of the debtor, In less than a decade, coun-
grants a concession to the debtor it would not otherwise consider. terfeiting was sharply re-
· If the debtor is not experiencing financial difficulty, a modification is not a TDR. duced. In the past 10
· A TDR may include transfer of assets from debtor to creditor and/or a modification of loan terms. years, the breakdown of
· Modification of loan terms includes things like an extension of the maturity date at a contractual denominations counter-
interest rate lower than the current typical rate, extended amortization, forgiveness of accrued feited has changed dra-
interest, a reduction in the face amount of the debt, etc.. matically. The counterfeit-
· Even if a loan is current, if the debtor is experiencing financial difficulty and terms are modified as ing of $50 and $100 bills
above, it is a TDR. has increased by 60%. It is
· Receipt of assets in full or partial satisfaction of a loan is a TDR. estimated that 36% of
· A TDR is considered impaired, and FAS 114 applies. counterfeited currency
· Impairment on a loan modified in a TDR is normally measured using the present value of expected passed in the U.S. was pro-
cash flows. duced overseas, particu-
larly in Colombia, Italy,
Hong Kong, the Philippines
and Bangkok.
One Problem Loan Management Tip: Do not grant additional time without getting tangible
consideration.