The FASB on February 2, 2022, affirmed its recent proposals to enhance the usefulness of vintage disclosures and to eliminate troubled debt restructuring (TDR) rules for certain lenders.
The changes take effect next year.
In general, the information helps investors understand the magnitude of a bank’s loans, the type of loans it offers, whether its borrowers pay on time or are risky, and the year the loan was originated.
The board affirmed that companies should disclose in the current reporting period the gross write-offs made by the year of the loan’s origination – information that analysts said was the most critical. Companies would not be required to disclose gross recovery information or cumulative write-off or recovery information, as accountants said that would be complex to operationalize.
“In terms of both ‘recoveries’ and ‘cumulative,’ I don’t think it’s critical for analysts and therefore I’m fine moving this project forward,” FASB member Fred Cannon said. “To quote Mick Jagger, ‘you can’t always get what you want, you get what you need’ with this update,” said Cannon, an analyst on the board.
Under Topic 326, Credit Losses, public companies are required to provide vintage disclosures upon adoption of the current expected credit losses (CECL) model, in essence detailing 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, they also need to provide information about credit quality indicators such as FICO credit scores.
Vintage disclosures are especially meaningful to analysts because they need them to build loss curves, the discussions indicated. The CECL model however does not allow them to understand the progression of credit because they are not able to know if the denominator of their ratio of credit is getting better because of pay-offs or it is getting worse because of charge-offs.
The decisions will finalize Proposed Accounting Standards Update (ASU) No. 2021-006, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which was issued in November 2021 to amend the CECL standard for both vintage disclosures and to simplify TDR accounting rules.
The CECL standard took effect in 2020 by large public companies; it takes effect in 2023 for small public companies, private companies, and not-for-profit entities.
The proposal received 32 comment letters.
TDRs Changes Only for Lenders that Adopted CECL
Related to TDRs, the board affirmed it would eliminate the recognition and measurement of TDRs for lenders that have adopted the CECL model and enhance disclosures of certain modifications made to borrowers experiencing financial statement difficulty. The concept of TDRs would still exist for borrowers, an important item to note.
“The issue of ‘once a TDR always a TDR’ alone – eliminating that cost is worth moving forward, and I think the benefits of standardized enhanced disclosure will be a significant improvement,” FASB Vice Chair James Kroeker said.
The proposal eliminates what becomes a redundancy in GAAP as the effect of most TDRs has already been captured in the allowance for credit losses because Topic 326 requires the estimate of lifetime expected credit losses, the discussions indicated. Therefore, TDR recognition and measurement no longer provides useful information for investor decisions after the adoption of the CECL standard.
The amendments would result in no recognition and measurement differences as it relates to the measurement of expected credit losses between modifications that would have been TDRs and all other modifications.
Moreover, the proposed change would result in all modifications being measured consistently.
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 February 4, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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