CFM4112 - Accounting for loan relationships: lenders: accrual and recognition of impaired debt

Balance sheet: impaired debt

Impaired debt is debt of any kind that is unlikely to be repaid in full. If a company buys debt that is unlikely to be repaid, it will pay less than the face value of the debt. A company might buy impaired debt because it thinks that the debtor’s position might improve. More typically it will acquire the debt when it acquires a business together with its assets and liabilities .

In its accounts, the company should initially only recognise the purchase cost of the debt. If it has bought the debt as part of a package, it may have to calculate the fair value of the debt (in a straightforward situation this may be the present value of the expected future cash flows) in order to allocate a total cost across all assets and liabilities and goodwill. If the company simply purchased the impaired debt in an arms length transaction, then the purchase price of the debt will be its cost.

If the debt improves, the improvement cannot be recognised until the cash is received – the debt will always be stated at the lower of cost and net realisable value.