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20X1
|
20X2
|
20X3
|
20X4
|
20X5
|
Gross cash
|
NPV at 15%
|
|
Original estimate
|
$25
|
$20
|
$20
|
$30
|
$0
|
$95
|
|
Present value
|
$21.74
|
$15.12
|
$13.15
|
$17.15
|
$67.16
|
||
Revision at end of 20X1
|
$25
|
$15
|
$15
|
$20
|
$20
|
$95
|
|
Present value
|
$21.74
|
$11.34
|
$9.86
|
$11.44
|
$9.94
|
$64.32
|
20X1
|
20X2
|
20X3
|
20X4
|
20X5
|
Gross cash
|
NPV at 15%
|
|
Original estimate
|
$25
|
$25
|
$25
|
$25
|
$5
|
$105
|
|
Present value
|
$21.74
|
$18.90
|
$16.44
|
$14.29
|
$2.49
|
$73.86
|
|
Revision at end of 20X1
|
$30
|
$25
|
$25
|
$25
|
$5
|
$110
|
|
Present value
|
$26.09
|
$18.90
|
$16.44
|
$14.29
|
$2.49
|
$78.21
|
Period |
Expected cash flows |
|
1/1/20X1 |
($110,000) |
|
12/31/20X1 |
$30,000 |
|
12/31/20X2 |
$50,000 |
|
12/31/20X3 |
$40,000 |
|
12/31/20X4 |
$30,000 |
|
12/31/20X5 |
$20,000 |
|
Effective yield |
17.95% |
Dr. AFS Investment – BI |
$110,000 |
|
Cr. Cash |
$110,000 |
12/31/20X1
|
|||||
Beginning reference amount
|
Interest Income
|
Cash received
|
Ending reference amount
|
||
$110,000
|
$19,750
|
$30,000
|
$99,750
|
||
Period
|
Revised expected cash flows
|
Original expected cash flows
|
Change in expected cash flows
|
NPV of revised expected cash flows discounted at market rate (fair value)
|
NPV of revised expected cash flows discounted at EIR
|
12/31/20X2
|
$45,000
|
$50,000
|
($5,000)
|
$38,793
|
$38,150
|
12/31/20X3
|
$30,000
|
$40,000
|
($10,000)
|
$22,295
|
$21,562
|
12/31/20X4
|
$30,000
|
$30,000
|
$0
|
$19,220
|
$18,280
|
12/31/20X5
|
$15,000
|
$20,000
|
($5,000)
|
$8,284
|
$7,749
|
Market yield
|
16.00%
|
Total
|
$88,592
|
$85,741
|
Present value of expected cash flows
|
||
Reference amount
|
$99,750
|
|
NPV of expected cash flows at EIR
|
$85,741
|
|
Allowance (pre FV “floor”)
|
$14,009
|
Reference amount
|
$99,750
|
|
Fair value
|
$88,592
|
|
Fair value floor
|
$11,158
|
Dr. Cash
|
$30,000
|
||
Cr. Interest Income
|
$19,750
|
||
Cr. AFS Investment - BI
|
$10,250
|
||
To record the cash received and interest income
|
|||
Dr. Credit Loss Expense
|
$11,158
|
||
Cr. Allowance for Credit Losses - AFS
|
$11,158
|
||
To record the allowance for credit losses
|
Updated accretable yield calculation
|
|||||
Reference amount, net of allowance for credit losses
|
Period
|
Original expected cash flow
|
Shortfall in cash flow
|
Expected cash flows
|
|
$88,592
|
|||||
12/31/20X2
|
$50,000
|
($5,000)
|
$45,000
|
||
12/31/20X3
|
$40,000
|
($10,000)
|
$30,000
|
||
12/31/20X4
|
$30,000
|
$0
|
$30,000
|
||
12/31/20X5
|
$20,000
|
($5,000)
|
$15,000
|
||
Updated accretable yield
|
16.00%
|
12/31/20X2
|
||||||
Beginning reference amount
|
Beginning allowance for credit losses
|
Reference amount, net of allowance for credit losses
|
Interest Income
|
Cash received
|
Write off
|
Ending reference amount
|
$99,750
|
$11,158
|
$88,592
|
$15,960
|
$45,000
|
$4,030
|
$66,680
|
Period
|
Revised expected cash flows
|
Original expected cash flows
|
Shortfall
|
NPV of revised expected cash flows discounted at market rate
(fair value) |
NPV of revised expected cash flows discounted at EIR
|
|
12/31/20X3
|
$30,000
|
$40,000
|
($10,000)
|
$25,862
|
$25,862
|
|
12/31/20X4
|
$30,000
|
$30,000
|
$0
|
$22,295
|
$22,295
|
|
12/31/20X5
|
$15,000
|
$20,000
|
($5,000)
|
$9,610
|
$9,610
|
|
Market yield
|
16.00%
|
Total
|
$57,767
|
$57,767
|
Present value of expected cash flows |
||
Reference amount |
$66,680 |
|
NPV of expected cash flows at EIR |
$57,767 |
|
Allowance (pre FV "floor") |
$8,914 |
Reference amount |
$66,680 |
|
Fair value |
$57,767 |
|
Fair value floor |
$8,914 |
|
Allowance 12/31/X1 |
$11,158 |
|
Write off |
($4,030) |
|
Current period credit loss expense |
$1,785 |
|
Allowance 12/31/X2 |
$8,914 |
Dr. Allowance for Credit Losses - AFS
|
$4,030
|
||
Cr. AFS Investment - BI
|
$4,030
|
||
To record the write-off of $4,030 which is a portion of the cash flows deemed uncollectible
|
|||
Dr. Cash
|
$45,000
|
||
Cr. Interest Income
|
$15,960
|
||
Cr. AFS Investment - BI
|
$29,040
|
||
To record the cash received and interest income
|
|||
Dr. Credit Loss Expense
|
$1,785
|
||
Cr. Allowance for Credit Losses – AFS
|
$1,785
|
||
To record additional credit loss expense (driven by passage of time). The calculation of credit loss expense is illustrated above as the change in the allowance for credit losses after the adjustment for write-offs.
|
However, unless the guidance in Topic 326 indicates that a credit loss has occurred, changes in the interest rate of a plain-vanilla, variable-rate beneficial interest generally should not result in the recognition and measurement of a credit loss (a plain-vanilla, variable-rate beneficial interest does not include those variable-rate beneficial interests with interest rate reset formulas that involve either leverage or an inverse floater).
> Nonaccrual Status-Cash Flows Not Reliably Estimable
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