Under the CECL model in ASC 326-20, there is no separate impairment model for loans with troubled borrowers that have been restructured. Expected credit losses under CECL may be measured either on a pool or individual asset basis, depending on the asset’s facts and circumstances, including whether it shares risk characteristics with other assets. Loans with borrowers that are experiencing financial difficulty that have been restructured may be pooled with loans that have not been restructured when they share similar risk characteristics.
CECL does not require the use of a discounted cash flow (DCF) model. When a reporting entity uses a DCF model to estimate expected credit losses on loans with borrowers experiencing financial difficulty that have been restructured:
  • the estimated cash flows should be based on the post-modification contractual terms, and
  • the discount rate shall be based on the post-modification effective interest rate.
An entity is prohibited from using the pre-modification effective interest rate as a discount rate as this would be applying a TDR measurement principle that was superseded by ASU 2022-02.
ASU 2022-02 removed the guidance in ASC 326-20 that required entities to consider reasonably expected renewals, modifications, and extensions associated with reasonably expected TDRs. We understand that the removal of this guidance was not designed to require entities to ignore their expected credit loss management strategy in estimating credit losses and record an estimate of credit loss they do not expect to occur. The basis for conclusions of ASU 2022-02 notes that entities are not required to remove from or adjust historical loss data for the impact of expected renewals, modifications, or extensions undertaken as part of restructuring loans with borrowers experiencing financial difficulty.
If an entity expects that its future loss mitigation efforts will be different than those in the past, it should consider making appropriate adjustments to its loss estimates. For example, if an entity discontinued certain loan modification programs offered to troubled borrowers in the past, this would need to be considered.
Entities with collateralized loans with borrowers experiencing financial difficulty that have been restructured are required to estimate expected credit losses based on the fair value of the collateral when the entity determines foreclosure is probable. Entities also have the ability to elect the collateral-dependent practical expedient on these assets if the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. In both cases (foreclosure is probable or when using the collateral-dependent practical expedient), the estimate of expected credit losses is based on the difference between the fair value of the collateral as of the balance sheet date and the amortized cost basis of the asset. See LI and LI 7.4.1 for further information.

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