Current Expected Credit Losses (CECL) accounting reporting requirements continue to evolve. The Financial Accounting Standards Board (FASB) recently released more CECL updates as part of its Post-Implementation Review (PIR), including treatment of Troubled Debt Restructurings (TDRs) and vintage disclosures. It’s important to note that for entities that adopted the amendments in Update 2016-13, the amendments described below are effective for fiscal years beginning after Dec. 15, 2022, including interim periods within those fiscal years. If an entity has not yet adopted the amendments in Update 2016-13, then the amendments in this update are effective upon adoption of CECL.
We’re providing a substantial high-level overview below – click here to read the full FASB Update.
Previously, FASB CECL guidance required financial institutions to measure and record the lifetime expected credit losses on TDRs. Comments on that guidance noted the additional designation of a loan modification as a TDR and the related accounting are duplicative. While the latest update eliminates that accounting guidance (Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors), it enhances disclosure requirements for certain loan refinancing and restructuring when a borrower is experiencing financial difficulty. The end result: the financial institution must evaluate if a modification results in a new loan or a modification of an existing loan, consistent with its accounting for other loan modifications.
What results in a new loan?
Under ASC 310-20-35-9 through 35-11, a modification results in a new loan for accounting purposes only if the following conditions are met:
- The modification is not a TDR.
- The terms of the modified loan are at least as favorable to the lender as the terms of comparable loans to other customers with similar collection risks that are not refinancing or restructuring a loan with the lender. This condition would be met if the modified loan’s effective yield is at least equal to the effective yield for such newly originated loans
- The modification is more than minor; for example, the present value of the cashflows under the modified terms is at least 10 percent different from the present value of the remaining cashflows under the original terms, or the specific facts and circumstances otherwise suggest that the modification is more than minor.
If a loan is modified and considered to be a continuation of the original loan, then any incremental expected loss must be recorded in the allowance for credit losses upon modification, subject to a discounted cashflow model using the post-modification contractual interest rate as the effective interest rate. If the loan modification is determined to be an extinguishment — a new loan, for example – then any unamortized new fees or costs and any prepayment penalties from the original loan must be recognized in interest income.
Specific disclosures related to modifications of receivables must be made for borrowers experiencing financial difficulty. The goal is to provide financial statement users with information about the magnitude of receivable modifications made to debtors experiencing financial difficulty that, for example, were caused by a major credit event and resulted in principal forgiveness, interest rate reduction, other-than-significant payment delay, or term extension.
The amendments in this update should be applied prospectively, except that for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.
Early adoption of these amendments is permitted if the amendments in Update 2016-13 have already been adopted, including adoption in an interim period. If an entity elects to early adopt the amendments in this update, then the guidance should be applied as of the beginning date of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures.