Poll: Challenges with Present Value of Future Cash Flows method
During a webinar last month, Sageworks’ risk management consultants provided an overview of the three valuation methods for FAS 114 (ASC 310-10-35) impaired loans. Most institutions use the Fair Market Value of Collateral valuation method, which presents its own set of challenges.
However, institutions also utilize the Present Value of Future Cash Flows when loans aren’t considered collateral-dependent. This method should be used when there is an expectation of cash payments from the borrower. But this method can be subjective when determining the expected cash flows. It is also important to note that impairment for troubled debt restructures (TDRs) should be calculated using this method since the loan is restructured to provide for future payments from the borrower for at least a portion of the recorded investment.
During the webinar, over 160 bankers were polled on the most troubling aspect of performing an impairment analysis using the Present Value of Future Cash Flows method. The results were distributed fairly evenly, as demonstrated in the chart below. Almost 30 percent of respondents noted that generating an accurate present value cash flow schedule is the most troubling aspect and a little over 25 percent of respondents noted that it is the difficulty of assessing if and when to generate a balloon payment.