Citicorp. the nation's leading bank holding company. has urged the Financial Accounting Standards Board to retain the current accounting standard for impaired loans rather than continue with a proposal that may be less useful to lenders and users of financial statements.

Citicorp representatives blasted the proposal during a Nov. 9 public hearing at FASB's headquarters in Norwalk. Conn., saying that it would create a false financial picture that could lead bank management. investors, analysts and regulators to make incorrect decisions.

But there has been no indication that FASB will discontinue the project despite the widespread opposition. Speculating. FASB Director of Research Timothy Lucas said that the board probably would stick with the proposed discounting method and simply try to address the concerns expressed in the comments.

FASB is proposing to measure impairment by discounting the troubled loan's expected stream of future income to today's dollar amount by using the interest rate in the original loan agreement. Comparing the original future cash flow amount with the new amount would show how bad the loan is and the amount the lender can realistically expect to recover.

For troubled loan restructuring. the board is proposing a remeasurement of the loan at fair value at the date of modification.

Many at the hearing--accountants. bankers and insurers-opposed the idea of two accounting treatments for impaired loans. Most lean toward aggregation of troubled loans--that is, if FASB has its way in the end. While distinctly opposing the discounting method. most critics prefer the loan's effective (original or contractual) interest rate over the market rate. which is a quicker route to getting fair value.

Objection to the market rate stems from the difficulty of getting numbers for assets that have no readily available market. Bankers ridicule this approach by calling it a "guesstimate." an approach approximating an intelligent guess but capable of yielding inaccurate results.

Lucas said board members may take a hard look at the proposal's effect on the income statement. "It wouldn't surprise me if the board decided to make changes in that area." he said.

Robert Martinsen. chairman of Citicorp's credit policy committee. said the proposal reflects a misunderstanding of the basic nature of the credit process and appears to mirror the belief that timing and the amounts of future cash flows on impaired loans can be estimated with reasonable precision.

"Even in the best of cases. R is impossible to predict the future with any degree of certainty. This is particularly true in today's volatile business environment." he said. "Even for highly creditworthy borrowers. the sources and timing of actual repayment may come in a manner that was not anticipated at the outset."

But FASB's Lucas said that precision was hardly the board's intention. "The draft never implied that that we can do this with great precision." he asserted. "I don't think we envisioned. anticipated or ever intended to imply precision."

In troubled debt restructuring. FASB seems to ignore the underlying economic transaction by proposing a readjustment of the modified loan to fair value. using a market interest rate, according to Martinsen. This approach. he said. is based on the board's theory that the restructured loan represents a 'new' loan and, thus. is unaffected by its original terms.

Echoing the majority view. Martinsen said the 'new' loan is actually a continuation of the original debtor/ creditor relationship. The 'new' loan would not have been possible if it were not for the original relationship. The restructured terms have little to do with fair value. he added.

The current accounting standard simply requires that credit losses or reserves for the uncollectible portion of the loan's carrying amount would be recognized whether or not the loan is restructured. The standard makes restructuring neither a cause for loss nor a trigger for loss recognition.

Some board members wanted to know what is wrong with recognizing losses upfront as opposed to deferring recognition of the same losses to some future period. For federal banking regulators. early recognition of losses would enable them to track and diagnose a bank's financial health. and intervene at the first sign of trouble. they said. For banks. early recognition would mean setting aside more money designed to cushion against possible losses while trying to comply with increased capital requirements.

But Martinsen finds FASB's "upfront" notion unacceptable. for two reasons: (1) The loan is no longer performing according to agreement. and (2) cash interest receipts are not likely to match projections. --G.B.

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