FASB Proposal Would Replace Guidance for Creditors on Troubled Debt Restructurings

Chris Gaetano
Published Date:
Nov 23, 2021

The Financial Accounting Standards Board (FASB) has proposed dispensing with guidance for creditors on troubled debt restructurings (TDRs) entirely while, at the same time, adding new disclosure requirements  for loan refinancings and restructurings made to borrowers experiencing financial difficulty.

The proposed accounting standards update, Financial Instruments—Credit Losses (Topic 326), would modify Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB said that investors and other stakeholders have questioned the relevance of the TDR designation and the decision usefulness of disclosures about those modifications. Some noted 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.

With this in mind, the FASB proposal would get rid of the TDR guidance entirely. Rather than applying the recognition and measurement guidance for TDRs, an entity would apply the 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. It would also require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost.

For entities that have adopted the amendments in Update 2016-13 as of the issuance date of a final update of the proposed amendments, the FASB will determine the effective date for these proposed amendments after it considers stakeholders’ feedback on the proposed Update. For entities that have not yet adopted the amendments in update 2016-13, the effective dates for the amendments in this proposed update would be the same as the effective dates in update 2016-13.

The amendments in this proposed update would be applied prospectively. However,  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 of the proposed Update

Comments are due to the FASB by Dec. 23. 

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