A majority of comments favored using the effective interest rate to discount the expected future flows of an impaired loan to determine its carrying amount as the Financial Accounting Standards Board prepares for public hearings Nov. 3 and Nov. 9 on its exposure draft of a statement of financial accounting standards designed to set rules for accounting by creditors for impairment of a loan.
But two important players--the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation--said a market interest rate should be used.
FASB received a summary of comments on several issues raised in the impairment project at its Oct. 28 board meeting.
The staff summary said a majority of respondents agreed that the impairment of a loan should be based on an undiscounted measure of expected future cash flows.
Except for banks and thrifts, a majority of respondents support measuring impairment based on the present value of expected future cash flows.
A small majority of respondents said an impaired loan should not remain an interest-earning asset because it is not expected to perform in accordance with original terms of the contract.
A majority of commenters said the change in present value of future cash flows attributable to the passage of time should be recognized as interest income. About half the respondents do not support discounting. Some objectors to recognition as interest income said it is not practical and should be treated as bad debt expense because it can be done with less additional cost.
Others argued that because loan impairment originally was recorded as bad debt expense, any reversal should be handled as a reduction in bad debt expense.
Some commenters said the change should be reported as a separate line item on the income statement to improve its clarity.