A loan may be measured for impairment by reference to the fair value of the collateral if it is collateral dependent (i.e., if the repayment of the loan is expected to be provided solely by the underlying collateral). The fair value of the collateral should be adjusted to consider estimated cost to sell. Selling costs should be adequately documented and supported if estimated. If repayment or satisfaction of the loan is dependent only on the operation, rather than sale, of the collateral, the measure of impairment should not include estimated cost to sell the collateral.

The practical expedient of the fair value of the collateral for collateral dependent loans is subject to the fair value measurement guidance under ASC 820.

The impairment of all loans on which foreclosure is probable is measured based on the fair value of the collateral, regardless of the measurement method that might have been used prior to foreclosure becoming probable (see ASC 310-10-35-32). This is to ensure that the loss recognition is not delayed until actual foreclosure.