Explanation:
Under sound financial accounting practices (such as troubled debt restructuring standards), a bank should measure the impairment of a restructured loan by reducing its recorded investment to its estimated net realizable value (or the present value of expected future cash flows, or fair value of collateral). The impairment or reduction must be recognized as a loss charged directly to the income statement in the current period, rather than being deferred or ignored.
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Q.47 A community bank has recently restructured several loans due to borrowers' financial difficulties. The bank's management is now considering the appropriate accounting treatment for these restructured loans. According to sound financial accounting practices, how should the bank reflect these restructured loans in its financial statements?
A
Keep the recorded investment of restructured loans unchanged to maintain consistency in the loan portfolio.
B
Increase the recorded investment of restructured loans to cover potential future losses.
C
Measure the restructured loan by reducing its recorded investment to net realizable value, charging the reduction to the income statement.
D
Record the reduction in loan value as a deferred charge, to be recognized in future financial periods.
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