The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-02, Troubled Debt Restructurings and Vintage Disclosures, on March 31, 2022, which eliminates troubled debt restructurings (TDR) reporting guidance under ASC 310-40 for institutions that 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.
Here are some key practical considerations in applying the standard:
Under the new standard, the term “troubled debt restructurings” will no longer exist. However, loan modifications to borrowers experiencing financial difficulty will still need to be tracked and disclosed in the financial statements. 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. You can see additional information regarding the new disclosure requirements here.
Prior to the adoption of the current expected credit losses (CECL) methodology, TDRs were considered impaired loans for purposes of estimating an allowance for credit losses (ACL); however, with the adoption of CECL, the concept of an impaired loan has been eliminated.
The ACL should be measured on a collective basis when similar risk characteristics exist, and loans that do not share similar risk characteristics should be individually evaluated. While the need to modify a loan to a borrower experiencing financial difficulty may suggest the loan has different risk characteristics from others in the portfolio, there is no requirement to individually evaluate these loans for purposes of the ACL under CECL.
Management should consider the appropriateness of including loan modifications to borrowers experiencing financial difficulty in collectively evaluated pools based on similar risk characteristics.
Disclosures of loan modifications to borrowers experiencing financial difficulty are required for the loan modified. However, the full relationship should be considered to determine how a modification impacts the larger loan relationship. Tracking of modifications is only relevant during the year the loan was modified and the 12 months subsequent to the modification, eliminating the concept of “once a TDR, always a TDR.”
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 Wipfli’s extensive accounting and audit services.
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