In a previous post, I discussed when a loss has to be recognized on a modified loan. A related question which recently came up on Bronte Capital is, when can interest on a modified loan be recognized, and when is the loan no longer considered a non-performing asset?
The answer, as you would expect, is a fairly involved accounting issue, but the short answer is there needs to be a credible evaluation the payments can be made, and a sustained period (minimum of six months) where the payments were made. The source is the FFIEC: Reports of Condition and Income Instructions Glossary Pages A-59 to A62. In part:
A loan or other debt instrument that has been formally restructured so as to be reasonably assured of repayment and of performance according to its modified terms need not be maintained in nonaccrual status, provided the restructuring and any charge-off taken on the asset are supported by a current, well documented credit evaluation of the borrower's financial condition and prospects for repayment under the revised terms. Otherwise, the restructured asset must remain in nonaccrual status. The evaluation must include consideration of the borrower's sustained historical repayment performance for a reasonable period prior to the date on which the loan or other debt instrument is returned to accrual status. A sustained period of repayment performance generally would be a minimum of six months and would involve payments of cash or cash equivalents. (In returning the asset to accrual status, sustained historical repayment performance for a reasonable time prior to the restructuring may be taken into account.) Such a restructuring must improve the collectability of the loan or other debt instrument in accordance with a reasonable repayment schedule and does not relieve the bank from the responsibility to promptly charge off all identified losses.
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