Memo No.
Issue Date
Meeting Date(s)
October 22, 2018
TRG Meeting November 1, 2018
Chris Cryderman
Co-author, Practice Fellow
Ext. 467
Doug Jepsen
Co-author, Postgraduate Technical Assistant
Ext. 388
Damon Romano
Practice Fellow
Ext. 334
Jay Shah
Project Manager
Ext. 340
Trent LaFrano
Postgraduate Technical Assistant
Ext. 239
Shayne Kuhaneck
Assistant Director
Ext. 386
Transition Resource Group for Credit Losses
Project Stage
Vintage Disclosures for Revolving Loans
Disclaimer: This paper has been prepared for discussion at a public meeting of the Transition Resource Group for Credit Losses. It does not purport to represent the views of any individual members of the Board or staff. Comments on the application of generally accepted accounting principles (GAAP) do not purport to set out acceptable or unacceptable application of GAAP. Stakeholders are strongly encouraged to listen to feedback about this staff paper from TRG members and Board members during the TRG meeting and to read the meeting summary, which will be prepared by the staff after the meeting.
Memo Purpose
1. Stakeholders informed the staff of questions they have on the guidance in Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, relating to the presentation of revolving loans that convert (or are modified) to term loans within the vintage disclosure. This memo summarizes implementation questions in this area and provides the staff’s analysis of the issues. The staff will seek input from members of the Transition Resource Group for Credit Losses (TRG) on these implementation questions.
Question for TRG Members
1. Does the TRG have feedback on the staff’s interpretation of the issues in this memo?
2. Does the TRG believe that entities should be required to make disclosures with respect to the presentation of revolving loans that have converted to term, regardless of their views on Question 2? If so, what additional disclosures does the TRG propose and would additional standard setting be required?
Background and Description
Vintage Disclosure Requirements
2. The amendments in Update 2016-13 require entities to disclose credit quality information regarding their financial assets. Paragraph 326-20-50-4 clarifies that those disclosures should allow investors to understand how management monitors and assesses the risk arising from the credit quality of its financial assets. As further noted in paragraph BC106, the required disclosures are intended to help “users of the financial statements in understanding…management’s estimate of expected credit losses…and changes in the estimate of expected credit losses that have taken place during the period.”
3. To meet these objectives, Update 2016-13 requires entities to provide qualitative and quantitative information about the credit quality of their financial assets, including the statistics or indicators used to measure credit quality, such as writeoffs or amounts recovered. Among other disclosures, paragraph 326-20-50-5 requires entities to provide a description of relevant credit quality indicators, to disclose the amortized cost basis within each credit quality indicator by class of financing receivable or major security type, and to identify the dates (or range of dates) in which the information corresponding to the credit quality indicators was last updated.
4. Entities also must disclose the amortized cost basis by year of origination, as required by paragraph 326-20-50-6, which states in part:
When disclosing credit quality indicators of financing receivables and net investment in leases (except for reinsurance recoverables and funded or unfunded amounts of line-of-credit arrangements, such as credit cards), an entity shall present the amortized cost basis within each credit quality indicator by year of origination (that is, vintage year). [Emphasis added.]
5. Although most assets within the scope of Topic 326 must be presented by origination year in the vintage disclosure, the above guidance specifically exempts “funded or unfunded amounts of line-of-credit arrangements, such as credit cards” from the origination year presentation requirement. Those revolving loan agreements are still subject to the amortized cost basis disclosure required by paragraph 326-20-50-6 but may be presented in aggregate instead of by origination year.
6. For most loan arrangements, the presentation of the amortized cost balance by year of origination is relatively straightforward. The timing of the lender’s underwriting decision corresponds with the borrower’s receipt of funds and the recognition of a financial asset on the lender’s balance sheet. In the vintage disclosure, the amortized cost basis of the financial asset would be presented in the year of the loan’s origination.
7. For revolving lending arrangements, determining the appropriate origination year is more complex. In a revolving lending arrangement, such as a line-of-credit, the timing of the underwriting decision may not align with the borrower’s drawdown of funds. Instead, the borrower has the right to drawdown and repay amounts up to the total available balance at any time until the maturity date specified in the terms of the loan arrangement. In some instances, the borrower may not drawdown funds until years after the initial underwriting by the lender.
8. The Board concluded that entities may disclose aggregated revolving loan balances into a single column, regardless of the timing of the initial underwriting decision. Like other types of loans, the revolving loan amounts are still presented by both class of financing receivable and credit quality indicator.
Loan Modification Guidance and Troubled Debt Restructurings
9. When a loan modification or restructuring occurs, paragraph 326-20-50-7 directs entities to use the guidance found in paragraphs 310-20-35-9 through 35-12 to determine whether a “modification, extension, or renewal of a financing receivable should be presented as a current-period origination” within the vintage disclosure.
10. The guidance in paragraphs 310-20-35-9 through 35-12 provides the criteria for determining if a restructuring should be accounted for as a new loan or as a continuation of the prior lending arrangement. Paragraph 310-20-35-9 as amended by Update 2016-13, states in part:
If the terms of the new loan resulting from a loan refinancing or restructuring, in which the refinancing or restructuring is not itself a troubled debt restructuring, are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks who are not refinancing or restructuring a loan with the lender, the refinanced loan shall be accounted for as a new loan. This condition would be met if the new loan’s effective yield is at least equal to the effective yield for such loans and modifications of the original debt instrument are more than minor. [Emphasis added.]
11. According to this guidance, a restructuring (that is not a troubled debt restructuring) that offers the borrower terms that are at least as favorable to other customers with “similar collection risks” would be presented as a current-year loan origination in the year of the restructuring for purposes of the vintage disclosure.
12. Alternatively, loan restructurings sometimes represent troubled debt restructurings. As defined in the glossary found in Section 310-40-20, troubled debt restructurings occur when creditors restructure a debt “for economic or legal reasons related to the debtor’s financial difficulties” and grant “a concession to the debtor that [they] would not otherwise consider.” Update 2016-13 amended paragraph 310-40- Page 4 of 8 35-10 to clarify that “a loan restructured in a troubled debt restructuring shall not be accounted for as a new loan,” but as an extension of the original loan.
13. Revolving loans that are converted to fixed-term arrangements are subject to the loan modification and troubled debt restructuring guidance in the preceding paragraphs. If the conversion results in a new loan for accounting purposes, the amortized cost basis of the new loan would be included in the origination year column corresponding to the conversion date, similar to a regular term loan origination. If the conversion results in a continuation of the original lending relationship, the guidance is silent with respect to the appropriate classification within the vintage disclosure.
Issues Raised in TRG Submission
14. Stakeholders raised questions through the submission of a paper to the TRG (the submission) about the proper presentation of loans initially established as line-of-credit (revolving) arrangements that later convert to term loans within the vintage disclosure.
15. Loan arrangements have numerous terms and structures, and the submission explains several possible variations of the conversion from a revolving loan to a term loan. Some of the variations include whether the lender performs a new underwriting (or credit decision) as part of converting the revolving loan into a fixed term or whether the conversion was included in the original loan contract and occurred outside of the lender’s control. For example, the revolving loan may have automatically converted to a term loan at a specific date or the borrower may have exercised the option to effectuate the conversion at his or her discretion.
16. Regardless of the mechanics of the conversion, the underlying question concerns the appropriate column in which the converted loans should be presented in the vintage disclosure. The submission included the following views on the proper presentation of revolving loans that have been converted to term loan arrangements:
(a) View A: The loans should always be included in the revolving loan totals, even after conversion to a term loan.
(b) View B: The loans should be presented in the vintage year that corresponds with the start date of the term loan (the conversion date).
(c) View C: The loans should be presented in the vintage year that corresponds with origination date of the original revolving credit arrangement.
(d) View D: Lenders should make and disclose a policy election by class of receivable and apply one of View A, B, or C.
(e) View E—Alternative View Raised During Outreach: Term loans should be presented in the vintage year that corresponds with lender’s most recent credit decision.
Stakeholder Views, Feedback, and Staff Analysis
Stakeholder Views
17. In the submission, stakeholders expressed diversity in views with respect to this issue. The arguments presented in the submission with respect to the differing views are summarized below.
18. Proponents of View A noted that because the converted loan is a continuation of the revolving loan for accounting purposes, the most appropriate presentation would be to disclose the loan as a revolving loan. This presentation would coincide with the lender’s initial credit decision at loan origination.
19. Opponents of View A noted that including the converted loan in the revolver column would mischaracterize the current nature of the loan and would not provide appropriate transparency regarding the credit composition of the loan portfolio. Some stakeholders expressed concern that View A would not reflect changes in the amount of revolving loans outstanding. Stakeholders opposing View A also stated that the other alternatives provide more useful information about a lender’s underwriting decisions without undue cost or complexity.
20. Proponents of View B stated that presenting the converted revolver in the vintage year that corresponds with the start date of the term loan best reflects the new term structure of the lending arrangement. For some loan types, conversion to a term loan represents a significant change in the loan’s risk characteristics. In those instances, proponents of View B noted that presenting the loan in the vintage year column that corresponds with conversion date better aligns with the purpose of the vintage disclosure. Also, supporters of View B consider this approach to align with the concept of pooling loans with similar risk characteristics in other areas of Update 2016-13.
21. Opponents of View B noted that including the converted loan in the vintage year corresponding to the start date of the term loan might result in an appearance of loan growth that does not exist. Financial statement users may not understand the nuances of loan modification rules and could interpret subsequent increases in the amortized cost basis presented in a specific vintage year as an error. Some stakeholders also maintain that if the conversion is not considered a new loan under the loan modification guidance, it would be inappropriate to change the presentation of the loan to a year other than the origination date.
22. Proponents of View C noted that many revolving loans convert to a fixed term without the issuer making a new underwriting decision. For this reason, those stakeholders stated that including the converted loan in the vintage year that corresponds with the origination date of the revolving credit arrangement reflects the Board’s intent to provide information about lenders’ underwriting decisions.
23. Opponents of View C echoed some of the sentiments expressed by opponents of View B, specifically that the inclusion of these loans in a prior origination year may confuse financial statement users.
24. Proponents of View D noted that presenting the converted revolvers in accordance with Views A, B, or C would be appropriate as long as entities disclose the amount of revolver loans that have been converted to term loans and the manner in which the entity presents term loans that were formally revolver loans in the vintage disclosure table.
25. The submission did not provide any arguments opposing View D.
Feedback and Outreach
26. After receiving the submission, the staff conducted additional outreach with stakeholders to solicit feedback with respect to this issue. Like the submission, outreach respondents expressed diverse views with respect to this issue.
27. Most stakeholders opposed View A and noted that presenting a term loan within the revolver column would be misleading to financial statement users and would not meet the spirit of the vintage disclosure requirement. A few participants supported View A because of operability concerns and because revolving loans that convert to term arrangements are an immaterial portion of their loan portfolios. One stakeholder questioned what additional value financial statement users would receive by shifting small, often immaterial amounts of loans from the revolver column to one of the columns for a specific origination year.
28. Although stakeholders conceptually agreed with View C because it aligns with the Board’s intent in Update 2016-13 to provide additional information about the lender’s credit decisions, stakeholders expressed concerns with operationalizing this view. Stakeholders noted that origination information is generally housed in the loan system, which is separate from an entity’s financial reporting system. In addition, some stakeholders noted that home equity lines of credit (HELOC) loans are the instruments that most likely will include terms for which a revolver is automatically converted to a term loan. Stakeholders pointed to HELOC loans because when those loans convert to term, the origination date generally is much older than what would be disclosed in the vintage table; therefore, for HELOC loans, entities most likely will have to transfer the loan to the “prior” column, which will not be useful to financial statement users.
29. Most stakeholders gravitated to Views B and D. Stakeholders supporting View B—presenting converted revolvers by start date—noted that it would be straightforward to operationalize. In addition, some stakeholders noted that View B has strong conceptual merits because the credit quality of a term loan is fundamentally different from that of a revolving loan. In addition, presenting the converted revolvers as of the start date of the term arrangement would provide financial statement users with the most decision-useful information about changes in credit quality.
30. Stakeholders who supported View D preferred this view because of the flexibility it would provide reporting entities. Those stakeholders noted that an accounting policy election would allow entities to present the converted revolvers according to the alternative they believe best aligns with the economics of their loan portfolios. In addition, some stakeholders who supported View D noted that the most decision-useful information would be to disclose to financial statement users what amount of the loans were classified as revolvers but were subsequently converted to a term loan regardless of which column the term loan is reclassified to.
31. With regards to View E—which would require entities to present converted revolver loans in the vintage year that corresponds with lender’s most recent credit decision—some stakeholders stated that they believe View E could be a workable solution. If no underwriting decision was made by the entity, the loan would be classified by its origination year, whereas if an entity made an underwriting decision, the loan would be categorized in the column that represents the start date of the converted term loan.
32. Proponents of View E noted that including the converted revolvers in the vintage year corresponding with the most recent credit decision would provide important information to users of the financial statements about current period originations and new credit decisions on existing loans. The lender’s decision to convert a loan or demand repayment may provide financial statement users with a better understanding of an entity’s credit-risk appetite.
Staff Analysis
33. The staff dismissed View A because this View would not provide users with decision-useful information. Leaving term loans in the revolver column would be misleading and for entities to disclose information that would be useful, the entity would have to disclose the amount of the term loans in each of the rows disclosed in the vintage table.
34. The staff believes that the Board intended for the vintage disclosure to provide insight into “credit quality trends within the [entity’s] loan portfolio from period to period,” as noted in paragraph BC114. Because the economic conditions present at the time of a loan origination have a significant influence on a lender’s underwriting decisions, the vintage disclosure provides financial statement users with insights into groups of loans with similar characteristics.
35. The staff also notes that the Board intended to generally align the accounting guidance in Update 2016- 13 with lender’s underwriting decisions, as described in paragraph BC11. The staff recognizes that in some instances, like the presentation of revolving loans in the vintage disclosure, aligning the accounting guidance with underwriting decisions may be operationally difficult or result in information that may not be useful to financial statement users.
36. Mindful of the balance between operability and conceptual purity, the staff believes there are strong arguments for each of the remaining alternatives.
(a) View B – The staff acknowledges View B would be the easiest alternative for reporting entities to operationalize. In addition, the staff believes there is conceptual merit to reporting converted Page 8 of 8 revolvers as of the start date of the term loan. Adding term loans to the origination date most likely would not appear in the vintage disclosure table and an entity would have to explain that the increase in the prior period column balance is comprised of revolving loans that converted to term as well as any term loans that have been transferred to the prior period column due to the change in reporting period. In addition, the staff believes that this view would not be a significant departure from the disclosure requirements in the vintage table. The Board has already provided entities with an exemption to disclose revolving loans by aggregating totals across class of financing receivable. This alternative would continue to provide special treatment for revolving loans, that convert to term loans.
(b) View C – Clearly View C would require that entities follow the disclosure requirements as the Board intended. The staff understands that the loan systems and financial reporting systems for most entities are separated, but the staff still believes entities should be able to determine the origination date for each revolver loan. Therefore, the staff does not believe View C will be overly burdensome for entities required to prepare the vintage disclosure table.
(c) View D – Providing entities with an option to determine which approach (View B, C or E) is best for them would also be operationally straight forward and provide entities with more flexibility. Coupled with disclosures, the staff believes that users would still receive decision-useful information because entities would explain the amount of revolver loans that have gone to term and whether the entity transfers those loans to the start date or origination date column.
(d) View E – This View would represent a hybrid approach between View B and C. If an entity made an underwriting decision to convert a revolving loan to a term loan, the entity would present the term loan in the column that coincides with the timing of the underwriting decision, which would be the start date of the term loan. Conversely, if no underwriting decision is made by the entity, the converted loan would be reported in the column that represents the origination date.
37. Regardless of the alternative and consistent with outreach, the staff believes that the need for additional disclosure requirements should be considered.
Staff Recommendation
38. The staff does not have a recommendation. The staff asks TRG members which View, other than View A, would be the most beneficial for financial statement users, while balancing any operational concerns.
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