If the impaired value of the loan is less than the recorded investment in the loan, the creditor should recognize the impairment by creating an ALLL with a corresponding charge to provision for credit losses expense, or by adjusting an existing ALLL for the impaired loan with a corresponding charge or credit to provision for credit losses expense. The term "recorded investment in the loan" is distinguished from "net carrying amount of the loan" because the latter term is net of an ALLL, while the former term is not. The recorded investment in the loan does, however, reflect direct write-downs of the investment (i.e., charge-offs). See ARM 3560.132 for the definition of recorded investment in a loan.

The FASB concluded that, because of the subjectivity inherent in the valuation of an impaired loan, and because estimates of the timing and amount of an impaired loan's cash flows (or observable market price or the fair value of the collateral) may change, impairment should be recognized through an ALLL rather than a direct write-down of the impaired loan. The ALLL subsequently may change to reflect changes in the measure of the impaired loan. Although ASC 310-10 or ASC 310-40 does not address the circumstances in which a creditor should record a direct write-down of an impaired loan, a creditor would typically charge-off all or part of the ALLL against the loan account in an amount corresponding to the portion of the loan that the creditor has deemed to be uncollectible (see ARM 3560.32).

The carrying value of impaired loans should be periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time.