Although not specifically prescribed in US GAAP for non-PCD assets, the accrual of interest income is generally suspended when the collection of interest is less than probable or the collection of any portion of the loan's principal is doubtful (i.e., a non-performing loan). Note the non-accrual guidance for PCD assets is different than for non-PCD assets.
Although GAAP does not address how a creditor should recognize, measure, or display interest income on an impaired loan (except for purchased financial assets with credit deterioration), ASC 310-10-35-53A allows a creditor to use existing methods of recognizing interest income on impaired loans, including cash basis, modified cost recovery, or some combination of both. When applying these methods, a reporting entity should also consider changes in the allowance for credit losses related to the passage of time.

6.10.1 Cash-basis method

Under the cash-basis method, interest payments received by the creditor are recorded as interest income provided the amount does not exceed the amount that would have been earned at the asset's original effective interest rate. The amount of interest income recognizable in any one period is usually limited to the lesser of the amount of interest that is actually received or the product of the recorded investment in the asset and the asset's effective interest rate.

6.10.2 Modified cost recovery method

Under the modified cost recovery method (often referred to simply as the cost recovery method), any interest or principal received is recorded as a direct reduction of the recorded investment in the loan.
Many financial institutions apply this method when collection of the recorded balance of the financial asset is doubtful. As a result of the application of this method, an investment may be recorded at an amount less than the present value of the projected cash flows on the loan.

6.10.3 Non-accrual loans: returning to accrual status

US GAAP does not prescribe when a non-PCD financial asset should be moved from non-accrual to accrual status, or when a cash basis or modified cost recovery method should revert back to the interest method of income recognition. However, banking regulatory agencies have issued guidance relating to accrual and non-accrual designation that many institutions follow.
Expand Expand

Welcome to Viewpoint, the new platform that replaces Inform. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

signin option menu option suggested option contentmouse option displaycontent option contentpage option relatedlink option prevandafter option trending option searchicon option search option feedback option end slide