ASC 310-10-35-22 requires that the impaired value measurement be based on one of the following methods:

The impairment measurement of a loan may be based on a loan's observable market price or the fair value of the collateral (less cost to sell) as a practical expedient and alternative to discounting future cash flows. However,

ASC 310-10-35-32 specifically directs that impairment for loans where foreclosure is probable is to be measured based on the fair value of the collateral.

Measuring impairment of a loan requires judgment and estimates; the eventual outcomes may differ from those estimates. Creditors have latitude to develop measurement methods that are practical in their circumstances. The creditor is not required to apply the same measurement method to all of its impaired loans and may select a different method for different loans. The method selected may vary based on the availability of information and other factors, including the creditor’s reasonable expectations for the recovery of the investment in the loan. However, the measurement method for an individual impaired loan should be applied consistently to that loan and a change in method should be justified by a change in circumstances.

In practical terms, most loans deemed impaired and subject to measurement are also placed on non-accrual status (i.e., interest is not accrued on the loan). It should be noted that ASC 310-10 does not provide guidance on when a loan should be placed on non-accrual status. Lenders should determine whether a loan should be placed on non-accrual status according to the entity's policy of when collection of interest is not probable and guidance provided by its regulators (See ARM 3560.12).

The amount of required ALLL is equal to the difference between the loan's impaired value (defined at the beginning of this section) and the related recorded investment (see definition of recorded investment in loan at ARM 3560.132). The required charge or credit to bad-debt expense is equal to the difference between the required ALLL and any existing ALLL related to that loan.

The net carrying amount of the loan is equal to the recorded investment in the loan less the ALLL. When a portion or the whole loan is deemed uncollectible, the recorded investment in the loan is typically written down by recording a charge-off against the loan and the ALLL. In addition, the net carrying amount of the loan should not exceed the recorded investment in the loan.