Elimination of TDR Accounting Guidance on the Horizon
The Financial Accounting Standards Board (FASB) recently voted to draft a final update to eliminate troubled debt restructuring (TDR) accounting guidance for financial institutions who have already adopted the current expected credit loss (CECL) standard, Accounting Standards Codification 326, with an effective date of Dec. 15, 2022. However, those that have not yet implemented CECL will not be eligible for TDR elimination. In addition, the update requires enhanced disclosures for loan modifications. Current guidance requires an institution to determine whether a loan modification represents a TDR when a concession has been granted to a borrower who is experiencing financial difficulty. Any estimated loss must be recorded on the impaired loan in the allowance for loan losses, and disclosures are required for the remaining term of the loan. However, the “once a TDR, always a TDR” guidance is coming to an end. FASB determined once an institution implements CECL, the required accounting and disclosures for a loan modified in a TDR no longer provide valuable information, as CECL already requires the inclusion of the loans modified in a TDR as part of the recognition of lifetime expected losses for loans acquired or originated through the allowance for loan losses. For the modifications made for those borrowers experiencing financial difficulty, financial institutions will be required to include enhanced qualitative and quantitative disclosures reflecting the types of modifications provided, the expected financial effect of those modifications, and the performance of the loans after modification. In addition, institutions will need to ensure they have established adequate processes and controls to support the enhanced disclosure requirements. The amendments in this update should 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. Doeren Mayhew’s Financial Institutions Group is here to help address any questions regarding the proposed guidance. In addition, we provide a variety of advisory services to help support institutions throughout the CECL implementation. Contact us today to learn more.