Explanation:
According to sound financial accounting standards (such as US GAAP or IFRS guidelines on impaired loans and troubled debt restructurings), when a loan is restructured due to borrower financial distress, it is considered impaired. The bank should measure the impairment based on the present value of expected future cash flows, the observable market price, or the fair value of the collateral. The recorded investment in the loan is reduced to this net realizable value, and the impairment loss is recognized immediately in the income statement.
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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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