On March 31, 2022, the FASB issued Accounting Standards Update (ASU) 2022-02, Troubled Debt Restructurings and Vintage Disclosures, which eliminates troubled debt restructurings (TDR) reporting guidance under ASC 310-40 for institutions who have adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The new ASU also amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination.
Removal of TDR accounting and measurement requirements
During its post-implementation review of ASU 2016-13, the Board identified that under the current expected credit losses (CECL) methodology, credit losses from loans modified as TDRs were already incorporated into the allowance for loan losses, thereby reducing the usefulness of the recognition, measurement and some of the disclosure requirements related to TDRs.
Due to the removal of the TDR accounting model, all loan modifications must be accounted for and measured under the general loan modification guidance in ASC 310-20. In addition, on a prospective basis, entities will be subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty.
Financial institutions that are still accounting for the allowance for loan losses under the incurred loss methodology must continue to apply the TDR accounting model. There was a short hiatus for some of the requirements related to TDR reporting during 2020 and 2021 due to the CARES Act, and extended by the Consolidated Appropriations Act, which expired as of January 1, 2022.
With CECL effective for all entities beginning in 2023, there was an inquiry asking FASB to eliminate TDR reporting for 2022; however, during its April board meeting, the FASB made it very clear that they feel TDR reporting is integral to the incurred loss model. So, for those who have not yet adopted CECL, TDRs must be identified and disclosed as usual, under the requirements of ASC 310-40.
New disclosure requirements
ASU 2022-02 introduces new disclosure requirements for modifications of receivables to borrowers experiencing financial difficulty. The definition of “experiencing financial difficulty” was brought forward from the TDR guidance (ASC 310-40), so the same considerations can be applied to making that determination.
Creditors should evaluate all modifications as either a new loan or the continuation of an existing loan under the general guidance on loan refinancing and restructuring in ASC 310-20-35-9 through 35-11. The new ASU specifically identified four types of modifications to borrowers experiencing financial difficulty about which specific information must be disclosed:
- Principal forgiveness
- Interest rate reduction
- Other-than-insignificant payment delays
- Term extensions
Qualitative and quantitative information is required to be disclosed about each of the types of modifications utilized. The new disclosures aim to provide users with information regarding the types and magnitude of modifications and the creditor’s success in mitigating potential credit losses through the modification.
For each reporting period, creditors should disclose the following information for modifications to borrowers experiencing financial difficulty.
By class of financing receivable:
- The total period-end amortized cost basis and the percentage of modifications relative to the total in each class of receivable
- The financial effect of the modification by type, including information about the changes to the contractual terms because of the modification
- Receivable performance in the 12 months after modification
By portfolio segment, qualitative information should be included about how those modifications and the debtors’ subsequent performance are factored into determining the allowance for credit losses.
For each reporting period, creditors should also disclose modifications to borrowers experiencing financial difficulty with a payment default in the last 12 months. The institution should disclose:
- By class, the type of contractual change that the modification provided and amount that defaulted.
- By portfolio segment, qualitative information about how defaults are factored into determining the allowance.
The new disclosures do not require information about a delay in payment that is insignificant. If the receivable has been previously modified, the assessment of “significance” must consider the combined effect of all modifications occurring in the previous 12 months. Receivables that are modified in more than one manner should be disclosed as a combination of modifications in a separate category.
The ASU also provided updated guidance related to vintage disclosures, which applies to public business entities only. Public business entities who have adopted CECL will be required to prospectively disclose current-period gross write-off information by vintage (that is, year of origination). The purpose for this guidance was to clarify an inconsistency in the original disclosure requirements and illustration therein.
ASU 2022-02 effective dates
For CECL adopters, ASU 2022-02 takes effect in reporting periods beginning after December 15, 2022.
The guidance for both the TDR changes and vintage disclosures should be applied prospectively. There is an option to apply the elimination of the TDR accounting model on a modified retrospective basis, which would allow for comparative statements and results in a cumulative-effect adjustment to retained earnings in the period of adoption.
Early adoption is permitted and is allowed on a partial basis, that is, to early adopt the TDR changes and wait for the ASU’s effective date before adopting the new vintage disclosures or vice versa.
For all other entities, the provisions of this ASU takes effect when an entity adopts the CECL guidance in ASU 2016-13.
How Wipfli can help
Our professional team can guide you through the changes related to ASU 2022-02 and ensure your disclosures and reporting meet all necessary requirements. Contact Wipfli for help in understanding the implications for your institution. Learn more about extensive Wipfli’s accounting and audit services.
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