Dive Brief:

• Creditors will no longer have to provide separate accounting for troubled debt restructurings (TDRs) but in their financial reports they’ll have to disclose the impact of loan modifications they make to help troubled borrowers, the Financial Accounting Standards Board (FASB) is allowing in an accounting standards update (ASU) released on Thursday. 
• The update formalizes action FASB took at its February 2 board meeting.
• Under FASB’s current expected credit loss (CECL) standards, which took effect last year for public companies and takes effect for other organizations next year, lenders must calculate the impact of TDRs on their contractual cash flows, a process lenders consider burdensome and redundant, since the impact is already part of their expected credit loss calculation. 

Dive Insight:

Under CECL, lenders are to calculate, and set aside reserves based on, expected credit losses at the time a loan is made rather than, as they did traditionally, on an incurred basis, generally after the loan has been on the books for a year. 

Lenders have argued the expected credit loss calculation captures any impact on loan receivables, making the models they developed to measure the impact on their cash flows in their TDR reporting unnecessary. 

In passing the update, FASB is doing away with the TDR calculations but, in their place, requiring lenders to disclose the impact of loan modifications they enter into with borrowers, both consumer and business, on their cash flows. 

“The expected benefits of removing TDR and … enhancing loan modification disclosures is a great compromise,” FASB Board Member Gary Buesser said in the standard-setter’s meeting in early February. 

The loan modification disclosures are to include the impact from reducing the interest rate, extending the term and forgiving some of the principal of the loan. For business loans, any changes in covenants or the amount of collateral that lead to an impact on cash flow might have to be disclosed, too. 

Meeting the enhanced disclosure standard is expected to impose an upfront operational cost but many lenders have demonstrated they are capable of collecting and providing that kind of information, said Board Member Sue Cosper. “There were a lot of great disclosures during the pandemic and this helps to have consistency across the industry,” she said.    

Gross write-offs

To help investors and other users of financial statements get a better sense of lenders’ loan underwriting performance, FASB also passed an update requiring lenders to include in their financial reports the amount of gross write-offs they make in the current period by year of origination. 

“It’s critical we get these gross write-offs … otherwise you can’t really understand the progression of credit,” said Board Member Fred Cannon. “You don’t know if the denominator in your ratio of credit is getting better because of payoffs or it's getting worse because of charge-offs.”