Monday, February 21, 2011

Accretion- Preparing Journal Entries for Troubled Debt Restructuring

Accretion for Troubled Debt Restructuring
What is it?
  The accumulation of the interest differential between the PV and TDR monthly interest amounts with the expectation that the Allowance for Loan Loss (ALL) will be recovered at the end of the concession or at maturity. 
 Each month you will have an accreted amount which is based on the payments on the loan.  As payments are made, the ALL needs to be adjusted/recovered with the accreted amount. 
 If payments are missed or a lump is paid, a present value calculation is then performed.
 TValue software allows you to export the amortization schedule(s) to Excel. You can easily create a schedule to determine the accretion of the ALL.
The Mechanics
Create (2) TValue software schedules;
     one Troubled Debt Restructured (TDR) and one Present Value (PV) schedule.
1. Export both schedules to Excel and copy them side-by-side into one worksheet.  Make sure all payments align properly.
2. Create column for the accretion using one of two methods, either the Interest Differential or the Straight-Line method.  
Interest Differential:
              Calculate the difference between the PV interest and the TDR interest amounts for each payment, which is essentially the same as performing a present value calculation after each monthly payment.
Straight-Line (S/L):
              Take the Allowance for Loan Loss (ALL) and divide by the number of months in the concession, or the number of months in the term if the loan does not revert back to the effective interest rate.
Accretion Calculation for Monthly
Journal Entries
Allowance for Loan Losses       $97.29
Provision/Bad Debt Expense                 $97.29
To record monthly accretion/reversal of the ALL
1.Just do it. Whether it is monthly or quarterly, make sure you are adjusting your ALL and Provision/Bad debt expense.
2.Be consistent. Use either Interest Differential or Straight-Line method.

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