Loan Impairment examples - blanks

Document Sample
Loan Impairment examples - blanks Powered By Docstoc
					Acct 414                                                                            Prof. Teresa Gordon



Troubled Debt Restructuring                                     Example 1

 1.        Viola Vacations signed a note to Empire Airways in the amount of
           $50,000. The terms specified annual 10% interest payments on the
           unpaid balance. The note is due today. Viola Vacations has not paid the
           interest for the last year and is unable to pay anything on the principal
           due.

 2.        Empire has agreed to a concession which involves the transfer of noncash
           items with a market value of less than the $55,000 amount of the past-
           due debt ($50,000 principal, $5,000 accrued interest already debited to
           interest expense and credited to interest payable).

 3.        Viola Vacations will transfer a parcel of real estate to Empire. The fair
           market value of the land (per the appraisal) is $30,000. Viola Vacations
           had purchased the land several years ago for $10,000.




                         Creditor’s Books
                                            Debit      Credit
Land                                                            Comparison to IFRS:
Notes receivable                                                Is revaluation possible?
Interest receivable
Allow for bad debts



Is this "fair value" accounting?




5561449d-64b7-4447-b0a4-a4812c9d98dc.xlsx      Example 1                                        Page 1
Acct 414                                                                      Prof. Teresa Gordon


Troubled Debt Restructuring                                  Example 2

1.         Viola Vacations signed a note to Empire Airways in the amount of
           $50,000. The terms specified annual 10% interest payments on the
           unpaid balance. The note is due today. Viola Vacations has not paid the
           interest for the last year and is unable to pay anything on the principal
           due.

2.         Empire has agreed to a concession which involves the transfer of noncash
           items with a market value of less than the $55,000 amount of the past-
           due debt ($50,000 principal, $5,000 accrued interest already debited to
           interest expense and credited to interest payable).

3.         Viola Vacations will issue to Empire Airways 4,000 shares (a 10%
           ownership interest) of its common stock which has a par value of $10 and
           has been estimated to be worth $12 per share. In return, Empire Airways
           will accept the stock in full settlement of the debt principal and accrued
           interest (i.e., $55,000).

                       Creditor’s Books
                                      Debit         Credit   What type of investment?
Investment Portfolio                                         Trading
Notes receivable                                             Available for sale
Interest receivable                                          Equity method
Allow for bad debts                                          Cost method


Is this "fair value" accounting?




5561449d-64b7-4447-b0a4-a4812c9d98dc.xlsx     Example 2                                   Page 2
Acct 414                                                                                                                                              Prof. Teresa Gordon



            Troubled Debt - Example 3 - CREDITOR

 TROUBLED DEBT RESTRUCTURING DEMONSTRATION PROBLEM #3 - DEBTOR

1.         Farview Farms had signed a $40,000 note to Idaho First Bank and Trust. The
           note specified annual payments of $10,000 per year plus 12% interest on the
           unpaid balance. Unseasonable weather two years in a row has ruined the
           crops which Farview intended to sell to make its loan payments. The bank
           has agreed to restructure the terms of the loan. [Assume that Farview has
           already recorded as interest expense the $4,800 unpaid accrued interest.]

2.         The new loan agreement specifies an immediate payment of $4,000 which
           represents 10% interest on the balance which was outstanding during the
           year. Farview will then pay interest only for three years at a 10% rate on a              Find present value of cash flows
           reduced principal amount of $25,000. Four years from now, the balloon                     using historical interest rate
                                                                                                     i=                    12%
           payment of $27,500 (principal + interest) will come due.
                                                                                                     n=                       4
                                                                                                     pmt=                 2500
                                                                                                     FV=                 25000
                        Creditor’s Books                    Debit        Credit                         PV=       $     23,481
At date of restructure:                                                                              ADD          $      4,000 Immediate payment (pv of $1 now is $1)
         Cash                                                                                        PV=      $     27,481 before payment of interest
         Accrued Interest Receivable                                                                      Creditor’s New Amortization Table:
         Note Receivable (old)                                                             Period Cash Flows     Interest    Difference Carrying
                                                                                                                Revenue                   Value
            Note Receivable (restructured)                                                       0                      12%                  27,481
            Allowance for doubtful accounts                                                      0     4,000                                 23,481
                                                                                                 1     2,500           2,818        318      23,799
End of year 1                                                                                    2          2,500       2,856       356      24,155
         Cash                                                                                    3          2,500       2,899       399      24,554
         Interest revenue                                                                        4          2,500       2,946       446      25,000
         Notes receivable (restructured)                                                                   25,000                                0
End of year 2




5561449d-64b7-4447-b0a4-a4812c9d98dc.xlsx                                Ex 3 - Creditor                                                                          Page 3
Acct 414                                                                                                                                                  Prof. Teresa Gordon



Example 3 - creditor (continued)

      Cost Recovery Method (FAS 118 Amendment to FAS 114)
      Under FAS 114 troubled debt accounting required creditors to use the interest method to recognize interest income on
      the restructured debt. Many financial institutions objected to this procedure because it caused them to recognize
      revenue that would later have to be written off as a loss if the debtor was unable to meet the terms of the restructured
      debt. Under the amendment, creditors are permitted to use other revenue recognition methods such as the cost
      recovery method. This method assumes that all cash collected goes toward principle until the entire amount has been
      recovered.
      If the creditors in the demonstration problems used cost recovery method instead, they would recognize revenue as
      shown below -- no interest income would ever be recorded.
                         Creditor’s Books              Debit        Credit            Troubled Debt Demonstration Problem #3
                                                                                         Period       Cash Rec'd    Revenue      Principal   Carrying
At date of restructure:                                                                                            Recognized    Received     Value
         Cash                                                                                                                                   27,481
         Accrued Interest Receivable                                                              0        4,000                                23,481
         Note Receivable (old)                                                                    1        2,500             0       2,500      20,981
         Note Receivable (restructured)                                                           2        2,500             0       2,500      18,481
         Allowance for doubtful accounts                                                          3        2,500             0       2,500      15,981
                                                                                                  4       27,500        11,519      15,981            0
End of year 1                                                                              Totals         39,000        11,519      23,481
         Cash
         Notes receivable (restructured)

End of year 4
         Cash
         Notes receivable (restructured)
         Income realized on impaired loans




5561449d-64b7-4447-b0a4-a4812c9d98dc.xlsx                            Ex 3 - Creditor                                                                                  Page 4
Acct 414                                                                                                                         Prof. Teresa Gordon



Troubled Debt Example 4 - CREDITOR


 1.        Farview Farms had signed a $40,000 note to Idaho First Bank and Trust. The
                                                                                           Find present value of cash flows
           note specified annual payments of $10,000 per year plus 12% interest on the     using historical interest rate
           unpaid balance. Unseasonable weather two years in a row has ruined the          i=
           crops upon which Farview intended to sell to makes it loan payments. The        n=
           bank has agreed to restructure the terms of the loan. [Assume that Farview      pmt=
           has already recorded as interest expense the $4,800 unpaid accrued interest.]   FV=
                                                                                             PV=
 2.        The new loan agreement specifies no immediate payments. Farview will pay        ADD                    Immediate pymt (pv of $1 now = $1)
           interest only for three years at a 11% rate on a reduced principal amount of    PV=                    before payment of interest
           $35,000. Four years from now, the balloon payment will come due, i.e.,
           $38,850 principal plus interest.

                        Creditor’s Books                 Debit              Credit
           At date of restructure:                                                                           Creditor’s New Amortization Table:
           Cash                                                                              Period       Cash      Interest  Difference Carrying
                                                                                                          Flows     Revenue                  Value
           Accrued Interest Receivable                                                                0
           Note Receivable (old)                                                                      0
           Note Receivable (restructured)                                                             1
           Allowance for doubtful accounts                                                            2
                                                                                                      3
           End of year 1                                                                              4
           Cash
           Interest revenue
           Notes receivable (restructured)




5561449d-64b7-4447-b0a4-a4812c9d98dc.xlsx                        Ex 4 - Creditor                                                             Page 5
             Acct 414                                                      Prof. Teresa Gordon




f $1 now = $1)




             5561449d-64b7-4447-b0a4-a4812c9d98dc.xlsx   Ex 4 - Creditor               Page 6
Acct 414                                                                                                                                                   Prof. Teresa Gordon



                 Troubled Debt - Example 5 - CREDITOR                                     new

    Troubled Debt (Question from F06 Exam 1). Bobs Brakes Inc. is a major                                Find present value of cash flows
    creditor of Adam’s Auto Repair Inc. Adam’s Auto Repair Inc. is experiencing                          using historical interest rate
    substantial financial difficulties. Its original note with Bobs Brakes Inc. was                      i=
    dated August 1, 2005 and has a face value of $100,000 and specified a 10%                            n=
    interest rate. The interest for the year ending August 1, 2006 has not been                          pmt=
    paid. On August 1, 2006, the debtor persuaded Bobs Brakes to reduce the                              FV=
    principal from $100,000 to $70,000 and to reduce interest payments to
    $3,500 per year for the remaining 3-year life of the debt. The modified                                PV=
    terms also waive payment of the accrued interest currently due. Both debtor                          ADD                    Immediate payment (pv of $1 now = $1)
    and creditor have fiscal years that coincide with the calendar year.                                 PV=                    before payment of interest

                 Assume accrued interest receivable has already been booked.

                                  Creditor’s Books                             Debit            Credit
      8/1/2006

                                                                                                                             Creditor’s New Amortization Table:
                                                                                                           Period       Cash       Interest   Difference Carrying
                                                                                                                        Flows      Revenue                  Value
                                                                                                                    0
                                                                                                                    0
                                                                                                                    1
   12/31/2006                                                                                                       2
                                                                                                                    3
                                                                                                                    4




      8/1/2007




5561449d-64b7-4447-b0a4-a4812c9d98dc.xlsx                                              Ex 5 - Creditor                                                                  Page 7
Acct 414                                                                                                                                                     Prof. Teresa Gordon




Example 5 - creditor (continued)
      Cost Recovery Method (FAS 118 Amendment to FAS 114)
      Under FAS 114 troubled debt accounting required creditors to use the interest method to recognize interest income on the restructured debt.
      Many financial institutions objected to this procedure because it caused them to recognize revenue that would later have to be written off as a
      loss if the debtor was unable to meet the terms of the restructured debt. Under the amendment, creditors are permitted to use other revenue
      recognition methods such as the cost recovery method. This method assumes that all cash collected goes toward principle until the entire
      amount has been recovered.
      If the creditors in the demonstration problems used cost recovery method instead, they would recognize revenue as shown below -- no interest
      income would ever be recorded.



                                Creditor’s Books                       Debit            Credit               Troubled Debt Example 5
                                                                                                               Period   Cash     Revenue       Principal   Carrying
                                                                                                                        Rec'd  Recognized      Received     Value

                                                                                                                      0
                                                                                                                      1
                                                                                                                      2
                                                                                                                      3
                                                                                                                      4
                                                                                                                 Totals




5561449d-64b7-4447-b0a4-a4812c9d98dc.xlsx                                       Ex 5 - Creditor                                                                          Page 8
Acct 414                                                                                                                                                                                             Prof. Teresa Gordon




IFRS vs. US GAAP - Loan Impairment (creditor)
6-9. On December 31, 2006, Jones Company sold manufacturing equipment to Steel
                                                                                                               At loan initiation, record sales at PV of cash flows
Corporation. Steel Corporation gave Jones Company a 5 year $200,000, zero interest note. The
market rate of interest for a note with similar risks is 10%. At December 31, 2008 Jones                       i=
Company reviews its financial assets for impairment. Jones Company concludes that the value of                 n=
the note is impaired and it only expects to collect $150,000 of the principal at maturity. By                  pmt=
December 31, 2009 Jones Company has determined they will probably collect $160,000 on the                      FV=
manufacturing equipment. Prepare the appropriate journal entries for December 31, 2008 and                      PV=
December 31, 2009 according to a) IFRS b) US GAAP. Explain why the journal entries differ
under the two sets of standards.

                                                                                                                                                       US GAAP & IFRS
                                                                                                                        At origination of loan          12/31/2006
                            Creditor’s Books                         Debit            Credit                         Creditor’s Original Amortization Table:
                                                                                                                Period   Cash Flows         Interest    Difference  Carrying
   12/31/2006 Initiation of loan                                                                  Table 1                                   Revenue                  Value
              Note receivable                                    $    124,184                     12/31/2006          0                           10%                124,184
              Sales                                                               $    124,184 12/31/2007             1               0         12,418       12,418  136,602
              COGS                                                           xx                   12/31/2008          2               0         13,660       13,660  150,263
              Inventory                                                                        xx 12/31/2009          3               0         15,026       15,026  165,289
              [SAME UNDER IFRS & US GAAP]                                                         12/31/2010          4               0         16,529       16,529  181,818
                                                                                                  12/31/2011          5               0         18,182       18,182  200,000
                                                                                                                      6
   12/31/2007 Recognition of interest revenue                                                     12/31/2012
              Interest revenue
              Notes receivable
                                                                                                                             12/31/2008

   12/31/2008 Recognition of interest revenue                                                                  Loan impairment recognized
              Interest revenue                                                                                 i=
              Notes receivable                                                                                 n=
                                                                                                               pmt=
  12/31/2008 Recognition of impairment                                                                         FV=
US GAAP      Note receivable (new)                                                                12/31/2008    PV=
              Allowance for doubtful accounts                                                                            $   150,263 carrying value
              Notes receivable (old)                                                                                     $  (150,263) impairment loss
                                                                                                                                                     IFRS and US GAAP
IFRS          Notes receivable (new)                                                                                    At date of impairment         12/31/2008
              Provision for bad and doubtful debts                                                           Creditor’s NEW Amortization Table after impairment:
                                                                                                               Period    Cash Flows       Interest    Difference   Book
              Note receivable (old)                                                               Table 2                                 Revenue                 Value
                                                                                                  12/31/2006         0                          10%
 12/31/2009 Change in expectations                                                                12/31/2007         1
US GAAP    No change - we don't recognize recoveries of                                           12/31/2008         2                                            112,697
           impairments previously recorded                                                        12/31/2009         3               0        11,270       11,270 123,967
12/31/2009 Note receivable                                                                        12/31/2010         4               0        12,397       12,397 136,363
           Interest revenue                                                                       12/31/2011         5               0        13,636       13,636 150,000

12/31/2010 Note receivable
           Interest revenue

12/31/2011 Assuming $160,000 is collected
           Cash
           Interest revenue
           Note receivable
           Bad debt expense (reduction)
               or "recovery of impaired loan"
                                                                     124,184          124,184       TRUE
 12/31/2009 Change in expectations                                                                             Under IFRS, partial recovery recognized
              Recovery of impairments ARE acceptable                                                           i=                 10%
IFRS          Note receivable                                                                                  n=                    2 PV=             $ 132,231
              Interest revenue                                                                                 pmt=                  0 carrying           123,967
                                                                                                               FV=           160000                        8,265 loss recovey
12/31/2009 Notes receivable (new)                                                                                PV= $ 132,231
           Provision for bad and doubtful debts
           Notes receivable (old)                                                                                                                       IFRS ONLY
              To adjust N/R for improved expectations                                                                    Change in estimated value       12/31/2009
             At this point, the carrying value = new present
             value of expected cash flows at original interest
             rate.                                                                                              IFRS ONLY - Creditor’s NEW Amortization Table:
                                                                                                                Period  Cash Flows       Interest   Difference        Carrying
12/31/2010 Note receivable                                                                        Table 3                                Revenue                       Value
           Interest revenue                                                                       12/31/2006          0                        10%
                                                                                                  12/31/2007          1
                                                                                                  12/31/2008          2
12/31/2011 Assuming $160,000 is collected                                                         12/31/2009          3                                                132,231
           Cash                                                                                   12/31/2010          4             0        13,223      13,223        145,455
           Interest revenue                                                                       12/31/2011          5             0        14,545      14,545        160,000
           Note receivable
                                                                         -                 -        TRUE




5561449d-64b7-4447-b0a4-a4812c9d98dc.xlsx                                                                                                                                        Ex 6 IFRS Example               Page 9

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:6
posted:3/22/2013
language:English
pages:9