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Revisions to Credit Loss Accounting Rules Coming for TDRs, Loans Acquired in Business Combinations

· 5 minute read

· 5 minute read

The FASB on July 14, 2021, added projects to its technical agenda to eliminate the accounting for troubled debt restructuring (TDR) for companies that have already adopted the credit loss standard, and to provide guidance for loans acquired in a business combination.

Both topics spring from a board review of its current expected credit losses (CECL) standard), new guidance that took effect in 2020 for large public companies.

The board also voted to keep its April 2019 project to address whether a company should be required to disclose gross write-offs and recoveries by vintage year when preparing credit-quality disclosures, viewing it as a pressing issue for analysts.

The topic could be aligned with its project on TDR, board members said.

“Today if we look at the disclosures we can see the problem loans, we can see the total amount of loans in various categories – in vintages and then we can build loss curves going forward,” FASB member Fred Cannon said. “However as we go forward we can see the number of problem loans in the next period and the number of loans in the next period, but we don’t know whether the changes were related to a chargeoff or a payoff, as a result that’s a missing piece of the puzzle,” he said.

The topics will be discussed at future meetings to flesh out the scope and other technicalities with the goal of developing public comment proposals.

Flesh out TDR Disclosures

The project on TDR accounting would remove a needless step in the CECL standard and would provide better TDR disclosure rules for those that have already applied the standard, according to board discussions.

“I think CECL and lifetime expected losses capture much of the economics already, that is, if there’s declining credit presumably recognizing lifetime expected credit losses captures that,” FASB Vice Chair James Kroeker said. “One aspect that may go unrecognized is interest rate concessions and now we’re seeing the low market rate of interest for certain loans if the concession is an interest rate concession,” he said.

Currently, the TDR test is twofold – a borrower experiencing financial difficulty, and that there’s a concession that would not have otherwise been provided. TDR disclosures should capture modifications that were made by borrowers that are experiencing financial difficulty, a different set of issues than just standard refinance issues and are likely tougher to identify, the discussions indicated.

Analysts have said “TDR disclosures do not provide decision-useful information and I think we’ve heard from a number of analysts,” FASB member Gary Buesser said. “However all the analysts indicated that the modification disclosures provided in light of the COVID-19 pandemic provided useful information and then the analysts went through a number of disclosures that they thought would provide more decision-useful information.”

The two new projects stem from the board’s post-implementation review (PIR) of Accounting Standards Update (ASU) No. 2016-13Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, a process that is being done in ‘real time’ to ensure that the standard worked as intended. The CECL standard requires companies to provide a more timely report of their expected losses from soured loans, a major change from prior requirements.

Acquired Loans Project Could Broaden

ASU 2016-13 simplified the accounting for acquired financial assets that have experienced credit deterioration since origination.

After the standard was issued, the board received feedback that determining if acquired financial assets qualify or do not qualify for purchased financial assets with credit deterioration (PCD) treatment remains complex and that the credit discount on certain loans is “double counted” upon acquisition.

The new project on loans acquired in a business combination would also look at the presentation of PCD to improve the model, according to board discussions.

FASB staff will study the current list of acquired loan portfolio as well as the other scoping issues on whether the project should be expended beyond loans in a business combination.

“Every investor that I spoke with that follow institutions in business combinations were relying on other information besides what was in the financial statements to do their analysis,” FASB Chair Richard Jones said.

“That to me was not indicative of the high quality accounting, so expanding the PCD for all loans acquired in a business combination makes sense,” Jones said. “I do believe we have carry on issues that we look into particularly on whether to expand that scope to include held-to-maturity debt securities, the acquisition of a loan portfolio, trade AR, credit card portfolio, available-for-sale securities, and beneficial interest.”

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 July 15, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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