9. Loan Receivables Don Irving runs a loan syndicate. He acquires money from len
ID: 2458697 • Letter: 9
Question
9. Loan Receivables Don Irving runs a loan syndicate. He acquires money from lenders and uses that money to fund capital ventures. When loans are repaid, the money is collected by Irving, who then repays the other members of the syndicate. Irving currently accounts for the full amount of outstanding loans, including the portion provided by other syndicate members, as a loan receivable on the company’s balance sheet. He is about to be audited for the rst time and wants to make sure that all of his accounting practices follow GAAP. Research the appropriate GAAP and prepare a memo to Irving stating whether this treatment is appropriate and citing your sources.
Explanation / Answer
Generally, loan receivables are classified as either held for sale (HFS) or held for investment (HFI). Depending on their classification, loan receivables are measured at either (1) the lower of cost or fair value (for HFS loans) or (2) amortized cost (for HFI loans).
Loan receivables are also eligible for election of the fair value option under ASC 825-10, in which case they would be carried at fair value, with changes in fair value recognized in earnings..
A loan is impaired if it is probable that a creditor will be unable to collect all amounts due..
No specific guidance on the recognition, measurement, or presentation of interest income on an impaired loan, except for loans within the scope of ASC 310-30.
nder U.S. GAAP, ASC 470-50-40-4 indicates that upon redemption or repurchase of convertible debt that does not contain a beneficial conversion feature, an entity should recognize an extinguishment gain or loss equal to the difference between the reacquisition price and the net carrying amount of the extinguished debt. For convertible debt within the scope of the Cash Conversion Subsection of ASC 470-20, the reacquisition price of the extinguished debt is the portion of the redemption amount allocated to the extinguishment of the liability component (i.e., the fair value of the liability component as of the extinguishment date). ASC 470-20-40-3 states that if convertible debt that contains a beneficial conversion feature is extinguished before conversion, the amount of the reacquisition price equal to the intrinsic value of the conversion feature as of the extinguishment date is allocated to equity and the remaining amount is allocated to the extinguishment of the debt.
U.S. GAAP, other than for convertible debt accounted for in accordance with the Cash Conversion Subsection of ASC 470-20, entities either do not allocate consideration paid or allocate the consideration paid on the basis of the intrinsic value of the conversion feature as of the extinguishment date for instruments with beneficial conversion features. Under IFRSs, however, entities allocate the consideration paid between the liability and equity components on the basis of the fair value of the liability component.
Therefore, this treatment of Irving is correct.
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