The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.
The amendments intend to improve the decision usefulness of information investors receive about refinancing, restructuring, or writing off certain loans.
The amendments that relate to troubled debt restructurings (TDR) apply to all entities after they adopt ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The amendments that relate to vintage disclosures apply to public business entities with investments in financing receivables that adopted ASU 2016-13.
The amendments address areas identified by the FASB as part of its Post-Implementation Review of ASU 2016-13, referred to as the current expected credit losses (CECL) standard.
Troubled Debt Restructurings
The guidance in ASU 2016-13 introduced the CECL model, which requires entities to measure all expected credit losses for financial instrument held at the reporting date.
The CECL standard also retained the designation and related disclosure requirements for TDRs by creditors provided in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors.
This means that under the current guidance in ASU 2016-13, credit losses from loans modified as TDRs are incorporated into the allowance for credit losses under the rules of Subtopic 310-40 and not the principals of Topic 326.
During the post-implementation review, stakeholders questioned the relevance of the additional TDR designation of a loan modification.
They noted that the accounting and disclosure of TDRs is unnecessarily complex and no longer provides decision-useful information as the measurement of expected losses under the CECL model incorporates the forward-looking aspects of the TDR model.
As a result, the amendments eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40.
Instead of applying the recognition and measurement guidance for TDRs, after an entity adopts ASU 2016-13, it should apply the loan refinancing and restructuring guidance in Subtopic 310-20, Receivables—Nonrefundable Fees and other Costs to determine whether a modification results in a new loan or a continuation of an existing loan.
The allowance for credit losses for loans modified to borrowers experiencing financial difficulties should be determined under Topic 326 instead of Subtopic 310-40.
The amendments also enhance the disclosure requirements for loan refinancing and restructuring by creditors when a borrower is experiencing financial difficulty.
The disclosure requirements apply to modifications of receivables within the scope of Topic 310 and to those that result in:
- Principal forgiveness
- Interest rate reductions
- Other than insignificant payment delays
- Term extensions
This is regardless of whether the modification results in a new loan or a continuation of an existing loan.
For modifications of receivables made to debtors experiencing financial difficulty during the reporting period, the amendments require disclosure—by class of financing receivable—of quantitative and qualitative information about:
- The types of modifications provided, including the amount of receivables modified and the percentage of modifications made to debtors experiencing financial difficulty to total loans
- The expected financial effect of the modification by type of modification
- The performance of the loans after modification
The amendments also require disclosure—by portfolio segment—of qualitative information about how the modification and the debtors’ subsequent performance factor into determining the allowance for credit losses.
As of the date of each balance sheet presented, the creditor must disclose the amount of commitments to lend additional funds to debtors experiencing financial difficulties when the creditor modified the terms of the receivables in the current reporting period.
In addition to the above disclosure requirements, the creditor should also consider providing information that helps financial statement users understand significant changes in the type or magnitude of modifications.
ASU 2016-13 requires public business entities to present the amortized cost basis of financing receivables and net investments in leases within each credit quality indicator by year of origination—vintage year.
An illustration within ASU 2016-13 provides an example of how a public business entity may meet the disclosure requirement to present financing receivable information by year of origination—commonly referred to as the vintage disclosures.
This illustration currently includes a line item for gross write-offs and gross recoveries for each origination year.
Due to the inconsistency between the guidance and illustration, stakeholders indicated that it was unclear whether the vintage disclosure had to present both gross write-offs and gross recoveries.
To address this feedback, the amendments clarify that a public business entity must only disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost.
Further, the illustration no longer includes the gross recoveries line item.
For entities that adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
For entities that haven’t yet adopted the amendments in ASU 2016-13, the effective dates are the same as the effective dates in ASU 2016-13.
Early adoption is permitted if an entity adopted ASU 2016-13.
The amendments should be applied prospectively. Except for the transition method related to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.
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