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New statements on loan impairment and accounting for debt and equity securities.

The Financial Accounting Standards Board issued statements addressing creditors' accounting for impairment of certain loans and specifying the accounting treatment of all debt and equity securities that have readily determined fair values. John R. Meinert, current principal of J. H. Chapman Group, Ltd. and a former board chairman of Hartmarx Corporation, said the FASB statements may make the duties of management accountants more complex but will benefit financial statement users in the long run because "they will force companies to place realistic values on assets as they go along rather than rely on writeoffs every several years."

Statement no. 114, Accounting by Creditors for Impairment of a Loan, applies to all creditors and all loans regardless of whether they are collateralized - including all loans restructured in a troubled-debt restructuring involving a modification of terms. It does not apply to loans measured at fair value or the lower of cost or fair value, leases, debt securities or large groups of smaller balance homogeneous loans that are collectively evaluated for impairment.

Statement no. 114 requires impaired loans within its scope to be measured on the basis of the present value of expected cash flows discounted at their effective interest rates (the contractual interest rates adjusted for any deferred loan fees or costs, premiums or discounts existing at the inception or acquisition of the loans). It amends Statement no. 5, Accounting for Contingencies, to clarify that creditors should evaluate the collectibility of both contractual interest and principal of all receivables when assessing the need to accrue a loss. It also amends Statement no. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, to require creditors to measure in accordance with Statement no. 114 all loans that are restructured in a troubled-debt restructuring involving a modification of terms.

Statement no. 114 is effective for fiscal years beginning after December 15, 1994.

Statement no. 115, Accounting for Certain Investments in Debt and Equity Securities, supersedes Statement no. 12, Accounting for Certain Marketable Securities, and amends Statement no. 65, Accounting for Certain Mortgage Banking Activities, to remove mortgage-backed securities from its scope. It is effective for 1994 calendar-year financial statements but may be applied to earlier fiscal years for which annual financial statements have not been issued.

Statement no. 115 classifies securities according to three categories:

* Debt securities the enterprise has the positive intent and ability to hold to maturity are classified as hold-to-maturity securities and reported at amortized cost. Securities that may be sold because of interest rate changes or other factors no longer will be classified as hold-to-maturity securities.

* Debt and equity securities that are bought and held principally to be sold in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.

* Debt and equity securities that do not fall into either of the above categories are classified as available for sale and reported at fair value, with unrealized gains and losses excluded from earnings and shown as a separate component of shareholders' equity.

The statements are available for $10.50 each from the FASB order department, P.O. box 30816, Hartford, Connecticut 06150. Connecticut orders should include 6% sales tax.
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Publication:Journal of Accountancy
Date:Aug 1, 1993
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