Question

Which of the following is not true regarding the treatment of multiyear pledges, according to FASB Statement 116?

A) They are recorded at the present value of future collections.
B) They should be reported net of an allowance for estimated uncollectibles.
C) They should be recorded as temporarily restricted.
D) At the end of each accounting period, the difference between the new and previously recorded present value is recorded as interest revenue.

Answer 1

The incorrect statement in relation to the treatment of multiyear pledges according to FASB Statement 116 is that the adjustment in present value is recorded as interest revenue. Instead, it should be recognized as an adjustment of the recognized contribution revenue. The reasons why a bank's balance sheet assets may not all be physically present in the bank and the factors influencing the value of loans in the secondary market were also explained.

Step-by-step explanation:

The statement in question D which says, "At the end of each accounting period, the difference between the new and previously recorded present value is recorded as interest revenue," is not true regarding the treatment of multiyear pledges according to FASB Statement 116. The correct treatment is that changes in the present value of expected future cash flows due to the passage of time should be recognized as an adjustment of the recognized contribution revenue, not as interest revenue.

Bank Balance Sheet Assets

The money listed under assets on a bank balance sheet may not actually be in the bank because banks operate under a fractional reserve banking system. This means that banks are required to keep only a fraction of their depositors' money in reserve, allowing them to lend out the remainder to earn interest. The loans they make are recorded as assets on their balance sheet.

Valuing Loans in the Secondary Market

• If a borrower has been late on a number of loan payments, the perceived risk of the loan increases, which would result in a willingness to pay less for that loan.
• If interest rates in the economy have risen since the bank made the loan, the loan's fixed interest rate may be less attractive compared to new loans at higher rates, which would decrease its value.
• If the borrower is a firm that has just declared a high level of profits, the perceived risk of default may decrease, leading to a willingness to pay more for that loan.
• If interest rates in the economy have fallen since the bank made the loan, the loan's higher fixed interest rate becomes more attractive, which would increase its value.