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Accounting by Creditors for the Impairment of a Loan
(SFAS No. 114, 118)


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Rules of SFAS No. 114 (As Amended by SFAS No. 118)

Statement of Financial Accounting Standards (SFAS) No. 114
        a. 
Accounting by Creditors for Impairment of a Loan
        b.  Issued in May 1993
        c.  SFAS No. 114 was amended by SFAS No. 118

Statement of Financial Accounting Standards (SFAS) No. 118
        a. 
Accounting by Creditors for Impairment of a Loan
             --
Income Recognition and Disclosures
             an amendment of FASB Statement No. 114

        b.  Issued in October 1994
        c.  SFAS No. 118 amended SFAS No. 114

A Loan (for the purpose of SFAS No. 114) is
             --> 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.

Examples of loan include (but are not limited to)
 
             --> accounts receivable (with terms exceeding one year)
 
             --> notes receivable

SFAS No. 114 applies to all loans
except:
        a.  Large groups of smaller-balance homogeneous loans
             (that are collectively evaluated for impairment)
             --> i.e., credit card, residential mortgage, consumer installment loans

        b.  Loans that are measured at fair value or at the lower of cost or fair value
             --> i.e., loans whose accounting is prescribed by SFAS No. 65
                   (Accounting for certain mortgage banking activities, September 1982)

        c.  Leases as defined in SFAS No. 13
             (Accounting for leases, November 1976)

        d.  Debt securities as defined in SFAS No. 115
             (Accounting for certain investments in debt and equity securities, May 1993)

SFAS No. 114 does not address
             --> how a creditor should assess
                   the overall adequacy of the allowance for credit losses.

A creditor should continue to recognize an allowance
             --> for credit losses necessary to comply with SFAS No. 5
                   (Accounting for contingencies, May 1975)
             --> in addition to the allowance calculated in accordance with SFAS No. 114.
                  
(Accounting by creditors for impairment of a loan, May 1993)

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)

A loan is impaired when
             --> the recorded investment in the impaired loan
             --> is less than
                   the present value of expected future cash flows
                   (discounted at the loan's effective interest rate)

Impairment is measured based on
             --> the present value of expected future cash flows
                   (discounted at the loan's effective interest rate)

Impairment may be measured based on
             --> the loan's observable market price
                   or
             --> the fair value of the collateral
                   (if the loan is collateral dependent.)

SFAS No. 114 (as amended by SFAS No. 118) does not address
             --> how a creditor should recognize, measure, or display
                   interest income on an impaired loan.

Recognition of interest income using
            a cost-recovery method or a cash-basis method

             --> Using these methods
             --> may result in a recorded investment in an impaired loan
             --> that is less than
                   the present value of expected future cash flows
                   or
                   observable market price of the loan
                   or
                   the fair value of the collateral.

In such cases,
             --> no additional impairment would be recognized
             --> while the loan would meet the definition of an impaired loan under SFAS 114.

  Accounting for the Impairment of Long-Lived Assets (SFAS No. 144)







 
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Inventory Valuation Methods
Depreciation Methods
Revenue Recognition Principle
Accrual Basis vs. Cash Basis Accounting
Basics of Journal Entries
Ratios for Financial Statement Analysis
Overview of Financial Statements








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