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FASB Proposes More Amendments to Credit Loss Accounting Rules and Disclosures

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

The FASB on November 23, 2021, issued a narrow proposal to remove troubled debt restructuring (TDR) accounting rules from the new credit loss accounting standard for lenders that have already adopted the provisions.

The proposal aims to eliminate the recognition and measurement guidance for TDRs and instead require enhanced disclosures related to loan modifications to borrowers that are experiencing financial difficulty.

The changes would narrowly amend credit loss accounting rules in areas that do not provide useful information and add cost and complexity, according to the main tenets of the proposal.

Specifically, analysts have questioned the relevance of the TDR designation and the usefulness of the disclosures required about those modifications. Some have said that measurement of expected losses under the current expected credit loss (CECL) model already incorporates the forward-looking aspects of the TDR model and that relevant information for investors would be better conveyed through enhanced disclosures about certain modifications.

In addition to the TDR changes, the board proposed to clarify provisions related to vintage disclosures – the presentation of financing receivable information by year of origination in note disclosures.

Companies should disclose current period gross write-offs by year of origination for financing receivables and net investment in leases that fall within the scope of the CECL guidance, the proposal says.

The disclosure rules would enable analysts to better understand changes in the credit quality of a company’s loan portfolio as well as their underwriting performance.

The board will determine the effective date of the proposal for companies that have already adopted Topic 326, Credit Losses, after it considers public feedback on the changes, a text of the proposal explains.

In terms of transition, companies would generally apply the proposal prospectively. There is an exception for the transition method related to the recognition and measurement of TDRs. In that case, a company has the option to apply “a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption of the proposal,” the rule text says.

Companies have until December 23 to submit comments on the changes, published as Proposed Accounting Standards Update (ASU) No. 2021-006Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures.

The proposal stems from an ongoing post-implementation review (PIR) of ASU No. 2016-13Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the FASB said.

The standard was issued in 2016 to require a more timely reporting of losses from soured loans. Large public companies adopted the rules in 2020; small public companies, private companies, and not-for-profit entities have to adopt it in 2023.

The board said that through its PIR process it heard about a variety of implementation issues, including questions about the information requirements for public companies within the vintage disclosures as well as feedback that TDR recognition, measurement, and disclosure may no longer provide decision-useful information after the adoption of Topic 326.

For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.

Additional analysis of the credit loss standard can be found at Accounting and Auditing Update Service[AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service[SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13.


This article originally appeared in the November 24, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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