Skip to main content

Looking for Valuant? You are in the right place!

Valuant is now Abrigo, giving you a single source to Manage Risk and Drive Growth

Make yourself at home – we hope you enjoy your new web experience.

Looking for DiCOM? You are in the right place!

DiCOM Software is now part of Abrigo, giving you a single source to Manage Risk and Drive Growth. Make yourself at home – we hope you enjoy your new web experience.

Determining the appropriate method of impairment evaluation

Sageworks
May 1, 2013
Read Time: 0 min

A common challenge institutions face in their FAS 114 (ASC 310-10-35) impairment analysis and evaluations is determining when it is appropriate to utilize the Fair Market Value of Collateral method vs. the Present Value of Future Cash Flow method – the two primary methods of evaluation afforded under the accounting guidance.

Accounting guidance is very clear in advising simply that all impaired loans considered “collateral-dependent” should be evaluated utilizing the Fair Market Value of Collateral method. The difficulty, however, lies in determining whether a loan should be considered “collateral-dependent” or not for the impairment analysis.

Per the guidance, a loan should be considered collateral dependent if repayment is expected solely on the basis of sale or operation of the collateral (if repayment is expected to be based on operation of the collateral, the selling expenses would not be taken into account).

Alternatively, if repayment is still expected to be based on ongoing payments from the borrower (i.e., the loan is a TDR, and the borrower has been paying as agreed), the institution should evaluate the loan using the Present Value of Future Cash Flow method.

In those instances where this determination and, consequently, the appropriate valuation method may not be obvious, the institution should select the valuation method that it believes to be the most appropriate and be certain to clearly document the substantiation of why that particular method was deemed appropriate for the loan in question.

Sageworks ALLL Customer Video

For calculating the impairment reserve required for collateral-dependent loans, a FAS 114 worksheet should be used that describes the collateral and selling costs. A sample FAS 114 worksheet is available from Sageworks.

For a more robust analysis and complete ALLL solution, consider using Sageworks ALLL. Watch the demo or check out this customer video.

About the Author

Sageworks

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

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.