USA Acctg for Chg in Loan Interest 23 to 12%

[sempai007]

We have a loan receivable that has been accruing interest at 23% since Mar 2012; payments are applied to interest first and then principal (however, at 23% borrower has not touched principal). Effective, Jan 01, 2014, I was advised that we will accrue at 12% "retroactively"! This results in a credit to the loan receivable, a credit to the interest receivable, and an unknown debit. The easy answer is to debit R/E since one could argue we overstated interest income at 23%; however, I know we almost never hit R/E. Another choice would be to recognize a loss in the current year. Is there another alternative such that I would have an unearned revenue for the difference in the rates and amortize somehow? I tried working through a few scenarios but to no avail. Here are some arbitrary figures to help with the analysis (written as Dr (Cr) ).

@ 23%: LoanRec 21,390,000; IntRec 450,663; IntInc (cumm) (9,932,173)
@ 12%: LoanRec 16,381,604; IntRec 152,681; IntInc (cumm) (4,952,564)
AJE: LoanRec (5,008,396); IntRec (297,982); IntInc (cumm) 4,979,609

 

[sempai007]

I'd like to add that I could not find literature on FASB (with my basic subscription), so that's how I found this website. I hope someone out has encountered this situation and can help.

 

[kirby]

That is a whopper of an adjustment. Restatement of your 2012 and 2013 results depends on whether the respective 2012 and 2013 adjustments were "material" to earnings in those respective years. Fastest way is to ask your auditors BUT ONLY AFTER you get mgmt. approval to do so, else you can get in hot water. Some auditors use a rule of thumb that if the adjustment is 5% of earnings or more then they will insist you restate.

Of course, if your auditors missed this HUGE ITEM for two years, well that's not a real top-notch team, but that's who you've got to work with.

But to your question, there is no "let's defer the loss and recognize it over time" accounting rule. Sorry.

 

[sempai007]

Thanks Kirby. This isn't a miss on the auditors. I am the Financial Reporting Manager for this particular loan portfolio (and there were no audit adjustments otherwise), but this decision was made above me. Yes, indeed it is a whopper of an adjustment. Thank goodness this isn't an SEC-reporting entity. Since this really is a change of accounting estimate, it appears the right thing to do is charge retained earnings? My superior had me book the adjustment (debit) to Interest Income as of 12/31/13, and for our January reporting package we will include a footnote on the equity statement with a reconciliation of beginning equity. After further consideration, I believe a charge to R/E is more appropriate given the materiality of this large adjustment....or a loss to the current-year P&L.

 

[kirby]

Time for you to read fasb 154 which specifically covers this. 154 does not sugarcoat this as "change of accounting estimate". It goes to the throat and calls this a correction of an error. So read that and my bet is you need to restate 2012 and 2013.

By the way are you sure this is an error and not a troubled debt restructure? That is a whole different ballgame....... It probably is not since you have been getting paid, but it doesn't hurt to check and be sure. Would explain why the rate changed and everyone was fine with the old rate as it was till now. But as always follow the golden rule : He who has the gold gets to make the rules (meaning follow what the boss says to do).