Loan Impairment
Impairment of Notes Receivables US GAAP requires entities to assess whether financial assets are impaired and recognize the impairment. If a note receivable is impaired, the loss is measured by the creditor as the difference between the investment in the loan (usually the principal plus accrued interest) and the expected future cash flows discounted at the loan’s historical effective interest rate. US GAAP recognizes the uncollectible amount through an allowance account. Unlike IFRS, US GAAP prohibits the reversal of impairment losses. In the U.S., creditors sometimes work with customers and change the terms of the original agreement – giving customer more time to make the payments, reducing the interest rate, or even reducing the balance owed. This situation is often referred to as “restructuring” or “troubled debt restructuring.” This semester, we will look only at the rules for creditors but you should be aware that there are even more complicated standards to guide accounting by debtors in troubled debt restructuring situations. If you use old exams to study, you should skip all problems that ask for the debtor’s accounting procedures. With respect to IFRS, review Unit 6 on receivables in the VirginiaTech material. In short, IAS 39 also specifies that entities should assess whether their financial assets are impaired. If a portion of accounts receivable is impaired, the loss is measured as the difference between the asset’s carrying value and the present value of expected future cash flows discounted at the asset’s original effective interest rate. Entities can choose to recognize the uncollectible amount either directly or through an allowance account. IFRS refers to the allowance account as a ‘provision.’ The amount of the loss is recognized in profit or loss. IFRS allows entities to subsequently reverse impairment losses provided there is objective evidence to warrant reversing the original impairment. Reversal of impairment is recognized in