Accounting for Non-Accrual Loans

9/24/2009

When a loan is placed on non-accrual status, previously accrued and unpaid interest income is reversed. Additionally, if there is doubt about collectability, interest payments collected after non-accrual status must be applied to reduce principal. If it is deemed that the loan no longer needs to be on non-accrual status, previously foregone interest should only be recognized when collected. Additionally, interest payments applied to principal during non-accrual status cannot be reversed immediately into interest income. The bank now has a new basis in the loan and the discount is accreted into income based on the effective yield-to-maturity on the loan.