Summary of Statement No. 114

Accounting by Creditors for Impairment of a Loan—an amendmentof FASB Statements No. 5 and 15 (Issued 5/93)

Summary

This Statement addresses the accounting by creditors for impairment of certain loans. It is applicable to all creditors and to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, leases, and debt securities as defined in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. It applies to all loans that are restructured in a troubled debt restructuring involving a modification of terms.

It requires that impaired loans that are within the scope of this Statement be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent.

This Statement amends FASB Statement No. 5, Accounting for Contingencies, to clarify that a creditor should evaluate the collectibility of both contractual interest and contractual principal of all receivables when assessing the need for a loss accrual. This Statement also amends FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, to require a creditor to measure all loans that are restructured in a troubled debt restructuring involving a modification of terms in accordance with this Statement.

This Statement applies to financial statements for fiscal years beginning after December 15, 1994. Earlier application is encouraged.