GAAP
Generally Accepted Accounting Principles
Generally accepted accounting principles (GAAP) for recognition of loan losses is provided by Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (SFAS No. 5) and No. 114, Accounting by Creditors for Impairment of a Loan (SFAS No. 114) which has been amended by SFAS No. 118. An estimated loss from a loss contingency, such as the collectability of receivables, should be accrued when, based on information available prior to the issuance of the financial statements, it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated SFAS No. 114 provides more specific guidance on measurement of loan impairment and related disclosures but does not change the fundamental recognition criteria for loan losses provided by SFAS No. 5. Accounting by Debtors and Creditors for Troubled Debt Restructurings are described in (SFAS No. 15). These documents are uploaded in the Financial Accounting Standard Board (FASB) folder.
SFAS No 144 states:
A creditor shall disclose, either in the body of the financial statements or in the accompanying notes, the following information about loans that meet the definition of an impaired loan in paragraph 8 of this Statement:
a. As of the date of each statement of financial position presented, the total recorded investment in the impaired loans at the end of each period and (1) the amount of that recorded investment for which there is a related allowance for credit losses determined in accordance with this Statement and the amount of that allowance and (2) the amount of that recorded investment for which there is no related allowance for credit losses determined in accordance with this Statement.
These accounting principles apply to all investors of the loans whether or not regulated by federal agencies.
It is highly unlikely to make financial sense for a federally regulated financial intuition to keep a non-performing asset on the books in order to be able to collect on deficiency judgment. On the other hand investors of loans sold on the secondary market typically deeply discounted can benefit on pursuing collection on deficiency judgments.
