At a glance
On March 31, the FASB issued guidance that amends the credit loss model frequently referred to as CECL. The amendments:
eliminate the accounting guidance for troubled debt restructurings (TDRs) for creditors,
require new disclosures for creditors for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty, and
require public business entities to include current-period gross writeoffs in the vintage disclosure tables.
For entities that have adopted ASU 2016-13
, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments
, the guidance is effective for periods beginning after December 15, 2022, but can be adopted early. For other entities, the guidance is effective upon adoption of ASU 2016-13
This guidance does not impact the accounting guidance for borrowers; the TDR accounting model for borrowers was not amended or eliminated.
The FASB has been conducting a post-implementation review (PIR) of the credit loss guidance introduced by ASU 2016-13
. ASU 2016-13
created ASC 326 and a credit loss model known as CECL (the current expected credit loss model). As part of the PIR, the FASB received feedback from preparers and users that since CECL is an expected credit loss model, the recognition and measurement guidance applicable to creditors for TDRs was no longer needed and created unnecessary complexity in the accounting model. They also received feedback that the disclosures about modifications with troubled borrowers and the subsequent performance of those loans that many financial institutions were providing during the pandemic provided decision-useful information. In addition, the FASB received feedback from users that providing writeoff information as part of the vintage disclosures is important.
On March 31, 2022, the FASB issued ASU 2022-02
, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures
. ASU 2022-02
eliminates the accounting guidance for TDRs in ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors
. The elimination of TDRs can only be applied by entities that have adopted the CECL model introduced by ASU 2016-13
. For entities that have not adopted ASU 2016-13
, the TDR guidance remains applicable until they adopt ASU 2016-13
. In addition, ASU 2022-02
does not impact the accounting guidance for borrowers; the TDR accounting model for borrowers was not amended or eliminated.
also requires that public business entities disclose current-period gross writeoffs 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
The amendments related to TDRs, including the new disclosures related to modifications with borrowers that are experiencing financial difficulties, affect all entities after they have adopted ASU 2016-13
. The amendments related to vintage disclosures affect public business entities with investments in financing receivables and net investments in leases that have adopted ASU 2016-13
Accounting for restructurings by creditors
Current guidance (CECL pre ASU 2022-02)
For a modification to be considered a TDR, the borrower must be experiencing financial difficulty and the creditor must give a concession. If a loan modification or restructuring is deemed to be a TDR under current guidance, the loan modification guidance in ASC 310-20 is not applied and the modified loan is deemed to be a continuation of the original loan (i.e., it was a modification and did not create a new loan).
ASC 326-20 requires an allowance for credit loss to be based on an estimate of “lifetime” expected credit losses for assets within its scope. TDRs and loans reasonably expected to be modified in a TDR impact the allowance for credit losses in a couple of ways. Concessions associated with TDRs relating to timing of cash flows and interest rates are generally required to be captured as a credit loss. The impact of the concession is included in the estimate for credit losses throughout the remaining life of the loan (sometimes referred to as “once a TDR, always a TDR”). This is frequently accomplished through the use of a discounted cash flow (DCF) model to measure credit losses and the use of the loan’s pre-restructuring effective yield as a discount rate. In addition, reasonably expected renewals, modifications, and extensions associated with reasonably expected TDRs are also considered in determining the life of an asset over which to estimate expected credit losses.
eliminates the TDR recognition and measurement guidance for creditors that have adopted CECL. Following the adoption of ASU 2022-02
, the guidance for modifications to loans with troubled and non-troubled borrowers will be the same.
With the elimination of TDRs, ASU 2022-02
requires that all modifications and refinancings (including those with borrowers that are experiencing financial difficulty) are subject to the modification guidance in ASC 310-20. ASU 2022-02
does not amend the current modification guidance other than to eliminate TDRs. As such, an entity will evaluate whether the modification represents a new loan or a continuation of an existing loan, consistent with the accounting for other loan modifications.
Under the guidance in ASC 310-20, a loan modification or refinancing results in a new loan if:
- the terms of the new loan (including its interest rate) are at least as favorable to the lender as the terms with customers with similar collection risks that are not refinancing or restructuring their loans, and
- the modification to the terms of the loan are more than minor.
Many modifications of loans with borrowers experiencing financial difficulty will not meet the first criterion and as a result, will not result in the modified loan being treated as a new loan. However, if both criteria are met, a modification that is considered a TDR under current guidance will be treated as a new loan after the adoption of ASU 2022-02
If the refinancing or restructuring is deemed to be a modification:
- The investment in the new loan should comprise the remaining net investment in the original loan, any additional funds advanced to the borrower, any fees received, and direct loan origination costs associated with the refinancing or restructuring.
- The effective interest rate of the loan should be recalculated based upon the amortized cost basis of the new loan and its revised contractual cash flows.
If the refinancing or restructuring is deemed to be a new loan, unamortized net fees or costs from the original loan and any prepayment penalties are recognized in interest income when the new loan is granted. In addition, a new effective interest rate will be determined.
Removal of modeling concessions
As a result of ASU 2022-02
, the accounting for all modified loans will follow the same model. Entities will no longer measure certain concessions related to the present value impact of extending the timing of cash flows and reductions of future interest payments. Thus, for loans with borrowers experiencing financial difficulty that are modified, there is no requirement to use a DCF approach to estimate credit losses. An entity can apply the same credit loss methodology it uses for similar loans that were not modified.
If an entity uses a DCF approach:
- 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 2022-02.
Removal of reasonably expected renewals, modifications, and extensions
In order to achieve having no differences for modifications of receivables made to borrowers experiencing financial difficulty and those who are not, ASU 2022-02
removes the guidance in ASC 326-20 that requires entities to consider reasonably expected renewals, modifications, and extensions associated with reasonably expected TDRs. We understand that the removal of this guidance is 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.
New disclosure requirements
Modifications with borrowers experiencing financial difficulty
In addition to eliminating the TDR recognition and measurement guidance, ASU 2022-02
changes existing disclosure requirements and introduces new disclosures related to certain modifications of instruments with borrowers experiencing financial difficulty.
Scope of disclosures
The new disclosures apply to assets whose modification is within the scope of ASC 310-20. This would include loans, but would not include leases.
The new disclosures apply to modifications of instruments with borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows. As a result, the disclosures are applicable to situations where there is:
- principal forgiveness,
- interest rate reductions,
- other-than-insignificant payment delays,
- term extensions, and
- combinations of the above.
Under current GAAP, for a restructuring to be considered a TDR, the borrower must be experiencing financial difficulty and the creditor must have granted a concession. With the elimination of TDRs for creditors from the accounting guidance, the concept of a concession has also been eliminated. This may result in modified loans being subject to the new disclosures with modifications that would have not been considered concessions and not treated as TDRs. For example, if a creditor lowers the interest rate on a loan, but the borrower provides additional collateral, the modification may not be considered a concession; however, it would be in the scope of the new disclosures if the borrower is experiencing financial difficulty at the time of the modification.
Other situations, such as covenant waivers and modifications of contingent acceleration clauses, may only have indirect changes to the timing of cash flows. For example, as a result of a covenant waiver, a loan’s principal amount may no longer be subject to potential acceleration. Since this is not a direct change to the timing or amount of contractual cash flows, if no other modifications are made, the loan would not be required to be included in the disclosures.
With respect to delays in payments, the guidance retains (with modifications) the concept of insignificant payment delays in current GAAP. If a modification of a loan with a borrower experiencing financial difficulty only involves an insignificant delay in payment, it is not required to be included in the new disclosures. The current guidance requires a cumulative lookback at all previous payment delays provided to a borrower to determine whether a delay in payment resulting from the most recent restructuring is insignificant. ASU 2022-02
amends the insignificant delay in payment guidance (for those that have adopted CECL) to limit the consideration of previous modifications to those within the 12-month period before the current restructuring.
As a result of the above changes to the scope of these disclosures, the population of loans subject to the new disclosures may be different than the current population of loans disclosed as TDRs. This may be due to a number of factors including:
- The removal of the concept of a concession may cause more modifications to be included in the disclosures as modifications that were not considered concessions may be in scope under the new guidance.
- The change to limit the period in which an entity “looks back” in determining whether a delay in payment is insignificant may result in more modifications assessed as an insignificant payment delay and thus, not required to be included in the disclosures.
- The limitation of the disclosures to modifications that have a direct impact on cash flows may decrease the amount of modifications included in the disclosures. For example, changes to contingent acceleration clauses that were considered TDRs in the past may not be included in the new disclosures.
Companies will have to develop new and adapt existing policies, procedures, processes, systems, and controls to capture the appropriate population of loans in these new disclosures.
Summary of the disclosures
The objective of the new disclosures is to provide users information about the types of modifications made to loans with troubled borrowers, the magnitude of those modifications, and the degree of success of the modifications in mitigating potential credit losses.
retains (with modifications) the current guidance on determining when a borrower is experiencing financial difficulties and certain disclosures. For example, it retains the requirement for creditors to disclose the amount of any commitments to lend additional funds to debtors experiencing financial difficulty for which the creditor has modified the terms of the receivables in the form of principal forgiveness, an interest rate reduction, other-than-insignificant payment delay, or a term extension in the current reporting period. It also retains the guidance that certain financing receivables (such those that are measured at fair value with changes in fair value reported in current earnings) are not subject to the disclosures. The disclosures required in the amended guidance are applicable regardless of whether a modification to a receivable from a debtor experiencing financial difficulty results in a new loan or a modified loan.
For all income statement periods presented, reporting entities must disclose the following for modifications of receivables made to debtors experiencing financial difficulty during the reporting period that are in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension:
- Qualitative and quantitative information, by class of financing receivable, including:
- By type of modification, the total period-end amortized cost basis and the percentage relative to the total period-end amortized cost basis of receivables in the class of financing receivable.
- The financial effect of the modification providing information about the changes to the contractual terms as a result of the modification, including:
- the incremental effect of principal forgiveness on the amortized cost basis, and/or
- the reduction in the weighted-average interest rate (versus a range) for interest rate reductions.
- The performance of the asset in the 12 months following the modification.
- Qualitative information, by portfolio segment, discussing how such modifications factored into the determination of the allowance for credit losses.
If the same receivable is modified in more than one manner (e.g., an interest rate reduction and principal forgiveness), this modification would be shown in a separate category of modification type.
For all income statement periods presented, if there was a payment default during the period and the loan had been modified in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension within the previous 12 months preceding the payment default when the debtor was experiencing financial difficulty, the reporting entity should also disclose the following:
- Qualitative and quantitative information, by class of financing receivable, about:
- The types of contractual change that the modification provided.
- The amount of financing receivables that defaulted including the period-end amortized cost basis for financing receivables that defaulted.
- Qualitative information, by portfolio segment, discussing how such defaults factored into the determination of the allowance for credit losses.
For an illustration of the disclosures noted above, refer to Example 3 within ASC 310-10-55-12A. These disclosures are required to be included in annual and interim periods in accordance with ASC 270-10-50-1.
Vintage disclosures - Gross writeoffs
ASC 326-20 requires public business entities to disclose the amortized cost basis of financing receivables and net investments in leases within each credit quality indicator by year of origination. These are commonly referred to as the vintage disclosures. It is important to note that the scope of these disclosures (financing receivables subject to ASC 326-20) is different than the disclosures discussed above relating to modifications of instruments with borrowers experiencing financial difficulty (instruments subject to the modification guidance in ASC 310-20). For example, net investments in leases are required to be included in the vintage disclosures.
requires public business entities to add current-period gross writeoffs by year of origination to these vintage tables. Entities are not required to disclose gross recoveries in the vintage disclosures.
Effective dates and transition
For entities that have adopted ASU 2016-13
, the amendments in ASU 2022-02
are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
The amendments should be applied prospectively, with one possible exception. For the changes to the recognition and measurement of TDRs (i.e., the elimination of TDRs), an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings. If an entity elects a prospective approach for the elimination of recognition and measurement guidance on TDRs, the guidance is applied to modifications occurring after the date of adoption of ASU 2022-02
For entities that have adopted ASU 2016-13
, early adoption of the ASU is permitted, including adoption in an interim period. If an entity elects to early adopt the ASU in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. For example, if a calendar year-end entity adopts this guidance in the second quarter of 2022, it will adopt the guidance as of January 1, 2022.
An entity may elect to early adopt the amendments related to TDRs separately from the amendments related to vintage disclosures. If an entity elects to early adopt amendments to TDRs, it is required to adopt both the accounting and disclosure amendments relating to modifications of loans with borrowers experiencing financial difficulties concurrently.
If a calendar year-end public entity adopts the new guidance in an interim period, it will reflect the change as of January 1, 2022. This is required even if it is not adopted in the first quarter. Companies should consult with their auditors and SEC counsel to determine whether previously issued Form 10-Qs may be required to be recasted (e.g., via a Form 8-K) in connection with capital markets transactions and/or registration statements if the guidance is not adopted in the first quarter. Otherwise, the entity will include the revised prior quarter information in year-to-date disclosures and comparative information in future filings (e.g., in the 2022 information presented for comparative purposes in 2023 quarterly filings).
Entities may also need to disclose revised quarterly supplementary financial information in the Form 10-K if the recasted data is materially different from the amounts previously disclosed in the Form 10-Qs (as per Regulation S-K Item 302). The selected financial data table in the Form 10-K (if presented on a voluntary basis) is not impacted because the prior year amounts are not affected by the adoption of the new guidance.
Entities also need to consider if there were any significant changes in internal controls over financial reporting in the period of adoption that may need to be disclosed in Item 4 of the Form 10-Q or Item 9A of the Form 10-K if ASU 2022-02
is adopted in the fourth quarter.