What is FAS 114?

Libby Sharman
June 11, 2013
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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).

- Leases.

- Debt securities.

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FAS 114 requires that impaired loans that are within the scope of this Statement be measured based on:

(1) The present value of expected future cash flows discounted at the loan's effective interest rate.

(2) The fair value of the collateral, if the loan is collateral dependent.

(3) At the loan’s observable market price.

If the value of an impaired loan, determined using one of the aforementioned methods, is less than its recorded balance, the bank must recognize the impairment that was not previously provided for through a provision to its allowance for the difference and a corresponding bad debt expense.

To see how Abrigo complies with FAS 114 regulatory requirements, visit our website.



About the Author

Libby Sharman

Libby Sharman is a Vice President of Product Marketing at Abrigo.

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