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Understanding FAS-114 Loans

February 7, 2017
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The Financial Accounting Standards Board (FASB) provides certain guidelines, defining when to classify loans into FAS 5 (unimpaired loans) or FAS 114 (impaired loans) status.

Evaluating FAS 114 (ASC 310-10-35), also known as Accounting Standards Codification Subtopic 310-10, loans for impairment, and identifying the reserve for each one of those individually assessed loans is one of the most critical steps in the allowance for loan lease losses calculations process.

When Should a Loan be Classified as FAS 114?

Under certain conditions, the FASB provides straight-forward guidance for determining which loans should be evaluated under FAS 114 status. The FASB guidance clearly prescribes that loans labeled under Troubled Debt Restructure (TDR) or those that have entered nonaccrual status should be evaluated under FAS 114 status. At other times, like with loans that are considered impaired but aren’t labeled TDR or nonaccrual, latitude is given for the determination of the appropriate reserve.

A loan is evaluated for FAS 114 status when it is considered impaired, which means the creditor has some expectation that the repayment of the loan will not be fully realized, according to the Federal Reserve Systems' "Interagency Policy Statement". In other words, there is information available as of the evaluation date indicating the creditor will be unable to collect all amounts due according to the contractual terms (which includes both principal and interest). The resulting reserve for this particular loan would be the amount of loss that can be reasonably estimated. If the loss was actual, then the loan loss should be partially or completely charged off—the emphasis on what is probable and estimated versus actual comes from this difference.

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There are three types of loans that should be evaluated as impaired:

  • Loans that have been labeled as a Troubled Debt Restructure (TDR). Most, if not all, of these loans should be evaluated under FAS 114.
  • Loans that are considered to be in nonaccrual status. The financial institution may have a dollar threshold that must be met, but bankers should still ensure that the appropriate loans in this category are being evaluated under FAS 114, in case some of these are not picked up by the risk rating criteria.
  • Loans that are at a certain level of delinquency (i.e., Days Currently Past Due > 90, or loans that have reached certain delinquency levels a set number of times). The delinquencies are indicative of the borrower’s difficulty meeting the payments, so these loans should be considered for impairment.

Three Valuation Methods for FAS 114 Loan Impairments: 

  1. Fair Market Value of Collateral
  2. Present Value of Future Cash Flows
  3. Loan Pricing

The lending institution must evaluate each loan individually to determine a reasonable estimate of the amount that can be realized or recovered. Accounting guidance approves three valuation methods: the Fair Market Value of Collateral, the Present Value of Future Cash Flows and the seldom-used Loan Pricing method, in which the bank “shops” the loan around to come up with a market price (the value) that another institution would be willing to pay for that loan. With the three different methods available, the resulting reserve can be very different. It is critical for a financial institution to use the most appropriate method from an accounting standpoint. For more information on how to classify a loan as FAS 5 or FAS 114, and valuation methods for FAS 114 impairment loans, contact us.



About the Author


Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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