A principal source of guidance on accounting for impairment in a loan portfolio under GAAP, Accounting Standards Codification Subtopic 310-10 was formerly known as the Statement of Financial Accounting Standards No. 114 (FAS 114), “Accounting by Creditors for Impairment of a Loan”. Under FAS 114, a loan is impaired when it is probable that the bank will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. FAS 114 applies to all loans except:
- Large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment (such as credit card, residential mortgage, and consumer installment loans) and which have not been restructured as troubled debt.
- Loans that are recorded at fair value or at the lower of cost or fair value (e.g., loans held for sale).
- Debt securities.