It is possible that there is no need to establish a reserve for an impaired loan if the value of the related collateral is at least as much as the recorded value of the loan. The amount of impairment to recognize should be based on the present value of expected future cash flows, though a loan’s market price or the fair value of the related collateral can also be used. When loans are aggregated for analysis purposes, you can use historical statistics to derive the estimated amount of impairment. The creditor can use any impairment measurement method that is practical for the creditor’s circumstances. Impairment AllowanceĪn impairment allowance can be based on the examination of individual receivables, or groups of similar types of receivables. Impairment DocumentationĪny allowance for loan impairments should be fully documented with the appropriate analysis, and updated consistently from period to period. If the financial circumstances of these borrowers declines, the following issues may arise that require accounting treatment: Loan ImpairmentĪ loan is considered to be impaired when it is probable that not all of the related principal and interest payments will be collected. Glossary Of Insurance Terms And Definitions Insurance can be complicated, but our comprehensive guide to common insurance terms will give you everything you should know about insurance policies, coverages, and basic terminology. A business may own one or more loans that are payable by third parties. It may be necessary to account for a loan that is considered to be impaired.
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