This article was updated April 3, 2020, with additional information from the SEC.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, a stimulus package designed in response to the COVID-19 economic disruption, was signed into law on March 27, 2020.
The CARES Act includes provisions that temporarily delay the required implementation date of Financial Accounting Standards Board (FASB) ASC Topic 326, Financial Instruments—Credit Losses (CECL), and suspend the requirements related to accounting for a troubled debt restructuring (TDR), for certain entities.
The suspension of these standards represents extraordinary direct involvement of the US government in accounting standards setting—a responsibility generally held by the FASB as overseen by the Securities and Exchange Commission (SEC).
Temporary and Optional Delay of CECL
Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate will be required to comply with FASB Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Institutions, beginning on the date of the enactment (March 27, 2020), until the earlier of the following dates:
- The date on which the national emergency related to the COVID-19 outbreak is terminated
- December 31, 2020
The scope of Section 4014 is narrow and applies to entities that are “insured depository institutions,” as defined in the CARES Act. Entities that don’t meet this definition are required to apply ASU 2016-13 based on the applicable effective dates.
Suspension of TDR Guidance
Section 4013 of the CARES Act stipulates that a financial institution may elect to not apply GAAP requirements to loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR, and suspends the determination of loan modifications related to the COVID-19 pandemic from being treated as TDRs.
Modifications in the scope of the suspension include the following:
- Forbearance agreements
- Interest-rate modifications
- Repayment plans
- Any other similar arrangements that defer or delay payments of principal or interest
The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020, until the earlier of the following dates:
- Sixty days after the date on which the national emergency related to the COVID-19 outbreak is terminated
- December 31, 2020
The suspension of TDR accounting and reporting guidance may not be applied to any adverse impact on the credit of a borrower that isn’t related to the COVID-19 pandemic.
On April 3, 2020, the Office of the Chief Accountant issued a public statement communicating that for eligible entities that elect to apply either Sections 4013 or 4014 of the CARES Act, the SEC staff wouldn't object to the conclusion that this is in accordance with GAAP for the periods for which such elections are available.
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The potential implications of temporary relief from CECL on an institution’s financial reporting are nuanced and evolving. To learn more about the impact of the CARES Act, contact your Moss Adams professional.