The FASB on March 31, 2022, published an amendment to credit loss accounting rules to enhance the usefulness of vintage disclosures and to eliminate troubled debt restructurings (TDRs) rules for certain lenders.
The changes will give investors a better understanding of the magnitude of certain loan modifications made by a bank, the type of modifications it offers, and the performance of the loans after modification. Investors will also get a stronger grasp of the bank’s underwriting performance and credit quality trends by year of origination.
“The new ASU responds to feedback we received from investors and other stakeholders during our extensive post-implementation review (PIR) of the credit losses standard,” FASB Chair Richard Jones said in a statement. “The amendments create a single model for loan modification accounting by creditors while providing improved loan modification and writeoff disclosures.”
The changes were issued as Accounting Standards Update (ASU) No. 2022-02, Financial Instruments–Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, and take effect next year. Early adoption is permitted as long as a company adopted the current expected credit losses (CECL) standard, Topic 326, Credit Losses.
The new amendment eliminates the recognition and measurement of TDRs for creditors that have adopted the CECL standard and enhances disclosures of certain modifications made to borrowers experiencing financial statement difficulty. Instead of applying current TDR guidance, creditors would apply the current loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan.
The change stems from a redundancy that crops up after the adoption of the CECL standard because CECL captures the impact of losses associated with TDRs in the allowance for credit losses. Continuing to include the information therefore would not provide useful information to investors, according to a tenet of the new ASU.
Companies are required to provide enhanced disclosures for certain loan modifications made to borrowers experiencing financial difficulty. But if there is only an insignificant delay in payment, that modification does not have to be disclosed. The standard also limits the look-back period to modifications made in the previous 12 months.
The guidance also addresses vintage disclosures, a key issue for analysts because they need them to build loss curves. Under the change, public companies are now required to disclose in the current reporting period the gross write-offs made by the year of the loan’s origination for financing receivables and net investment in leases within the scope of Subtopic 326-20.
Vintage disclosures give analysts insight into core information such as whether it is a commercial loan, consumer loan, real estate loan, or a mortgage, as well as the year the loan was made. In addition to disclosing the class of the financing receivable, companies also need to provide information about credit quality indicators such as FICO credit scores.
In general, the rules should be applied prospectively, the ASU states. For TDR recognition and measurement, there is an option for companies to apply a modified retrospective transition method where they will be able to report a cumulative effect adjustment to beginning retained earnings.
For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.
This article originally appeared in the April 1, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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