Question

National Bank loaned the Lyon Company $10 million, at an interest rate of 8%. The note was signed January 1, 2008, and was due December 31, 2022. Annual interest was last paid on December 31, 2016. At January 1, 2018, National believes it will not collect accrued interest, that it will only receive $500,000 of interest each year, and that it will only receive $8 million of principal at the end of the life of the note. Calculate the amount of impairment that National Bank would recognize for the Lyon note

Answer 1

The note was signed on 31.12.2008 for a period of 15 years amounting to $10 Million initially @ interest rate of 8%.

So, Annual interest = 8% of $10 Million= $0.8 Million

This Intrerest income was received uniformly till 31.12.2016.

However on 01.01.2018 , there were indications of imparement as the installement due on 31.12.2017 could not be realised.

Amount of Loan standing in the Books of Account as on 01.01.2018 = $10 Million + $0.8 Million (i.e. Unrealised interest of the year 2017 due on 31.12.2017)

But now, the remaining Cash flows are as follows:-

1. Interest of $0.5 Million each year for the remaining 5 years instead ov $0.8 Million &

2. Principal of $10 Million at the end of 5th year from January 01.2018 instead of $10 Million

Assuming 8% as the discount rate for the remaining cashflows,

Fair Value or Recoverable Value = $0.5M * PVIFA (8%,5) + $8M * PVIF (8%,5)

= $0.5M*3.99271 + $10M*0.6806

= $1.9964 M + $5.4447

=$7.4411 M

SO, Imparement loss that the National Bank would recognize= Carrying Amount- Recoverable Amount

=$10.8M - $7.4411

= $3.3589 M