Slide1 l.jpg
This presentation is the property of its rightful owner.
Sponsored Links
1 / 12

Loan Impairments & Troubled Debts PowerPoint PPT Presentation


  • 120 Views
  • Updated On :
  • Presentation posted in: General

Loan Impairments & Troubled Debts. Sequence of Events. Debtor & creditor enter a debt arrangement. Creditor. Debtor. Loan Origination. Debtor encounters difficulty. Estimate Loss. Poor Debt Management. This is a loan impairment. Loan Impairment. Creditor realizes

Download Presentation

Loan Impairments & Troubled Debts

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Loan impairments troubled debts l.jpg

Loan Impairments & Troubled Debts

Sequence of Events


Slide3 l.jpg

Debtor & creditor enter a debt arrangement

Creditor

Debtor

Loan

Origination

Debtor encounters

difficulty

Estimate

Loss

Poor Debt

Management

This is a loan

impairment

Loan

Impairment

Creditor realizes

difficulty & estimates

loss

Estimate

Effect

Insolvency

(Unable to

Service Debt)

Later, the debtor

becomes insolvent

Modification

of Terms

Creditor & debtor

agree to a

modification of terms


Slide4 l.jpg

Creditor

Debtor

Loan

Origination

Estimate

Loss

Poor Debt

Management

Loan

Impairment

Estimate

Effect

Insolvency

(Unable to

Service Debt)

Modification

of Terms

Bankruptcy

Economic

Recovery

With altered agreement,

maybe the debtor will make it & maybe not

?


Slide5 l.jpg

Assets/Equity used

to settle debt

Debt Terms

Modified

Concessions

Granted to Debtor

  • Troubled debt restructure provides for concession to debtor by creditor:

    • Transfer of assets or equity shares to settle all or part of debt

    • Modification of terms of debt


Slide6 l.jpg

Concessions

Granted to Debtor

Assets/Equity used

to settle debt

Debt Terms

Modified

Creditor

Debtor

Loss equal to difference between carrying value of receivable and fair market value of compensation received.

When assets or equity are used to settle debt, there are effects on debtor and creditor

Creditors record ordinary loss (or charge allowance account) for difference between carrying value of debt and fair market value of asset received.


Slide7 l.jpg

Concessions

Granted to Debtor

Assets/Equity used

to settle debt

Debt Terms

Modified

Creditor

Debtor

Gain on debt restructure equal to difference between book value of debt and FMV of compensation given.

Loss equal to difference between carrying value of receivable and fair market value of compensation received.

Book gain or loss on difference between book value and FMV of assets given. No gain or loss for securities

Debtors will recognize a gain. Value of assets surrendered in satisfaction of debt will be less than carrying value of debt. That is nature of concession

Debtors must first update their books to reflect the fair value of assets surrendered


Slide8 l.jpg

Concessions

Granted to Debtor

Debt Terms

Modified

Book value

of debt <

restructured

cash flows?

YES

NO

Low interest rate

0% interest

Another concession often granted to debtors involves renegotiation of amounts due to creditor.

The modification of debt terms results in a restructure of future cash flows.

Debtor recognizes gain on difference between book value of debt and restructured cash flows. No interest expense.

No gain is recognized by debtor. Debtor finds implicit rate that equates cash flows with book value of debt.

Can result in low or zero rate of interest on debt.


Slide9 l.jpg

Concessions

Granted to Debtor

Assets/Equity used

to settle debt

Debt Terms

Modified

Book value

of debt <

restructured

cash flows?

Creditor

Debtor

YES

NO

Loss equal to difference between carrying value of receivable and fair market value of compensation received.

Gain on debt restructure is equal to difference between book value of debt and FMV of compensation given.

No gain is recognized. Debtor finds implicit rate that equates cash flows with book value of debt and recognizes interest expense.

Debtor recognizes gain on difference between book value of debt and restructured cash flows. No interest expense.

First book gain or loss on difference between book value and FMV of assets given. No gain or loss for securities

Accounting for Troubled Debt Restructuring

Prepared by Jeff Harkins, edited by T Gordon


Creditor accounting l.jpg

Creditor Accounting

  • Modification of terms is indication of impairment of debt

  • Creditor will follow basic rules for debt impairment (FAS114 & FAS118)

  • Only difference from non-troubled debt situation:

    • The creditor will disclose any commitments to loan a “troubled debtor” additional funds


Slide11 l.jpg

Are assets or an ownership

interest transferred from debtor to creditor in settlement of debt?

When the debt is settled, debtor and creditor accounting is basically parallel.

No

For a modification of terms, the creditor will generally recognize a LARGER loss (in comparison to gain recorded by debtor) because the creditor uses the original “historic” interest rate implicit in the loan.

Is entity

the creditor?

Yes

Discount cash flows to

be received under

modified terms using

original interest rate

Difference between

carrying value of

receivable and present

value is ordinary loss

for creditor


Slide12 l.jpg

Are assets or an ownership

interest transferred from debtor to

creditor in settlement of debt?

No

Is entity

the creditor?

Yes

Discount cash flows to

be received under

modified terms using

original interest rate

Difference between

carrying value of

receivable and present

value is ordinary loss

for creditor

Is the debt settled

In full??

Record ordinary gain or

loss on asset. Difference

between fair value of

asset or equity interest

and amount due on

debt is a gain for debtor and

ordinary loss for creditor

Yes

Yes

No

Record ordinary gain or

loss on asset. Difference

between fair value of

asset or equity interest

and amount due on

debt is ordinary

gain for debtor and

ordinary loss for creditor

No

The difference between

carrying value of debt

and total future cash

flows is recorded as an

ordinary gain for

debtor. No interest

expense will be

recorded in future years.

Are cash flows to be

made under the modified terms

greater than the carrying value of

the debt after transfer

of asset or equity

interest?

No

No gain is

recorded by debtor. Find

interest rate to equate cash flows

to carrying value of debt. Use

this interest rate to amortize

restructured debt over

its term

Yes

Troubled Debt Restructuring

After FAS 145


  • Login