What Are the Three Valuation Methods for ASC 310-10-35 (FAS 114) Loans?

Jan 21, 2015

This brief video covers the topic of the ASC 310-10-35 (FAS 114) portion of the ALLL calculation. A Sageworks consultant details out the requirements for impairment analyses using the Fair Market Value of Collateral, Present Value of Future Cash Flows and the Loan Pricing methodologies.


Video Transcript:

There are three valuation methods when we are assessing and analyzing our FAS 114 loans to do our impairment analysis. They are:

1. Collateral valuation methods
2. Present Value future cash flow valuation methods, and
3. Loan pricing method

It is very important when assessing our impairment analysis that we utilize the appropriate valuation method in line with guidance. Basic rules around that would be: if we have a loan that is collateral dependent, we will use the collateral valuation method and take the fair market value of the collateral against our loan to identify the appropriate reserve. If the loan is not collateral dependent, predominantly institutions will want to utilize present value future cash flows as the appropriate valuation method to generate the reserve. In essence, when using present value of cash flows, if there is any opportunity where we can get cash payment with the restructured loan process and agreement, that is the preferred approach (in terms of guidance). Lastly, the loan pricing method is seldom used because most institutions find it difficult to sell loans that are already in an impaired status and it becomes a guessing game at what the appropriate price could be.