Mind the GAAP

By Deutsch, Gary M. | Independent Banker, April 2011 | Go to article overview

Mind the GAAP


Deutsch, Gary M., Independent Banker


AN EXPERT TALKS FASB ACCOUNTING AND CRE LOAN WORKOUTS

Federal regulators issued in October 2009 a policy statement on commercial real estate loan workouts (FIL- 61-2009). This month's column answers questions on the potential accounting implications of CRE loan workouts following the policy statement, which is designed to guide financial institutions in prudently working with borrowers to restructure CRE loans while avoiding adverse loan classification during subsequent safety and soundness examinations.

The guidance addresses supervisory expectations for an institution's risk management elements for loan workout programs, loan workout arrangements, classification of loans, and regulatory reporting and accounting considerations. (See sidebar on CRE guidance.)

Q Let's say, in practice, a community bank primarily uses the current appraisal method to determine impairment dollars involved with CRE loan workouts. Should it be using the present value of future cash flow more frequently?

Gary M. Deutsch: You should use the present value analysis method when modifying the terms of a loan (including 1-4 single-family residential properties, condos, multifamily properties and CRE loans) that is not collateral-dependent and when the modification meets one or more of the following criteria:

* reduction (absolute or contingent) of the stated interest rate for the remaining original life of the debt;

* extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk;

* reduction (absolute or contingent) of the face amount or maturity amount of debt as stated in the instrument or other agreement and

* reduction (absolute or contingent) of accrued interest.

The Financial Accounting Standards Board (FASB) in its Accounting Standards Codification paragraph 310-10-35-22 states that when a loan is impaired, the creditor shall measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate. However, as a practical expedient, the creditor may measure impairment based on the loan's observable market price or the fair value of collateral if the loan is a collateral-dependent loan.

Also, FASB states that a creditor shall measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. Although many institutions use the current appraisal method, this measurement approach is not consistent with generally accepted accounting principles (GAAP) unless the loan can only be repaid through the sale of the collateral or foreclosure is probable.

Q Does a modification of loan terms to extend the maturity or amortization period of a loan to provide a borrower with cash flow relief count as a troubled debt restructuring?

Deutsch: According to the FASB's Accounting Standards Codification in paragraph 310- 40-15-9, troubled debt restructuring (TDR) accounting is required when the extension of a maturity date or dates is at a stated interest rate that is lower than the current market rate for new debt with similar risk. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Mind the GAAP
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.