In March 2022, 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.
Subsequent to the issuance of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the board conducted post-implementation review (PIR) activities. These amendments came in response to feedback from the PIR process.
Key Provisions in ASU 2022-02
ASU 2022-02 eliminates troubled debt restructuring guidance for organizations that adopted the amendments in ASU 2016-13 while providing for additional disclosures for loan modifications. ASU 2022-02 also amends the vintage disclosure guidance for public business entities.
New Disclosure Requirements
ASU 2022-02 prescribes new disclosure requirements for modifications of receivables to debtors experiencing financial difficulty. The definition of experiencing financial difficulty was carried forward into ASU 2022-02 from the prior ASC 310-40-15-20 definition. This definition should be evaluated for the purposes of the new disclosure requirements.
When evaluating a modification, a creditor should assess whether it should be accounted for as a new loan or a continuance of an existing loan under the guidance on loan refinancing and restructuring in ASC 310-20-35-9 through 35-11. The new ASU defines types of modifications as principal forgiveness, interest rate reduction, other than insignificant payment delays, or a term extension.
What to Disclose Each Reporting Period
For each reporting period, a creditor should disclose the following information as it relates to its modification made to a borrower experiencing financial difficulty during the reporting period.
By class of financing receivable (qualitative and quantitative information):
- Modification type
- Financial effect of the modification by type
- Borrower performance in the 12-month period following the modification
By portfolio segment:
- Qualitative information about how modifications and borrower subsequent performance factor into determining the allowance for credit losses
For each reporting period, a creditor should disclose the following information about financing receivables that had a payment default during the period and had been modified due to the borrower experiencing financial difficulty within the previous 12 months preceding the default.
By class of financing receivable, qualitative and quantitative information about defaulted receivables, including the following:
- Type of contractual change the modification provided
- Amount of receivable that defaulted, including period-end amortized cost basis for receivables defaulted
By portfolio segment:
- Qualitative information about how defaults are factored into the allowance for credit losses
Receivables may be modified in more than one manner. Any entity that modifies the same receivable in more than one manner shall provide disclosures sufficient for users to understand the different types of combinations of modification provided to borrowers.
In the new disclosure requirements, a restructuring that only results in a delayed payment evaluated to be insignificant, the entity won’t be required to disclose the modification made to the borrower.
Elimination of Troubled Debt Restructurings
ASU 2022-02, Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors eliminates guidance for troubled debt restructuring by creditors. Additionally, ASU 2022-02 enhances disclosure requirements for certain loan modifications by creditors for borrowers experiencing financial difficulty.
Updated Loan Refinancing and Restructuring Guidance
Topic 310-20 loan refinancing and restructuring guidance replaces recognition and measurement guidance for troubled debt restructuring.
Loan Losses for Loan Modifications
Upon adoption of ASU 2022-02, the allowance for credit losses for loan modifications will be determined in accordance with Topic 326.
For public business entities, the amendments in ASU 2022-02 require that organizations disclose current-period gross write-offs by origination year for those that have adopted the amendments in ASU 2016-13.
For organizations that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that haven’t yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13.
The amendments in ASU 2022-02 should generally be applied prospectively with limited exceptions.
Early adoption of ASU 2022-02 is permitted if an organization has already adopted ASU 2016-13.
As institutions prepare for the new disclosures related to modifications, many find that the processes, procedures, and controls historically used for identifying troubled debt restructurings won’t capture the data necessary for the new disclosure requirements.
For example, before 2022-02, an interest rate reduction that was still a market interest rate wouldn’t have been considered a concession, making a troubled debt restructure unnecessary for disclosure. After ASU 2022-02, an interest rate reduction to a borrower experiencing financial difficulty would require disclosure regardless.
Institutions should focus attention now on how they’ll capture data to meet the new disclosure requirements for 2023 and beyond.
Stay alert for future guidance related to how bankruptcies, stays, court orders, and trial modifications should be treated in the context of other-than-insignificant payment delays, and for guidance on what would constitute a disclosable modification caused by a major credit event as defined by ASC 310-10-50-38.
While there’s relief from the accounting and measurement guidance related to troubled debt restructurings, enhanced disclosure requirements for loan modifications will require organizations to ensure that their loan systems and internal control processes are set up to track loan modifications in sufficient detail to populate all disclosures.
We’re Here to Help
For more information on how these amendments could affect your business, contact your Moss Adams professional. You can also visit our Financial Services Practice page for additional resources.