Navigating ASU 2022-02: A guide for financial institutions
As we move beyond the initial adoption year for calendar year-end and fiscal year-end-to-date financial institutions, the implications of Accounting Standards Update (ASU) 2016-13 (Measurement of Credit Losses on Financial Instruments) and ASU 2022-02 (Troubled Debt Restructurings and Vintage Disclosures) are coming into sharper focus. These updates will impact financial institutions that will need to take steps to help ensure compliance.
The economic context
Given the current state of the economy and robust credit quality, the timing for implementing these changes has been favorable. Financial institutions have been able to familiarize themselves with the updated calculations and reporting requirements.
However, as we look ahead, several factors — such as the interest rate environment, inflation and rising costs — may impact consumers and necessitate vigilance in tracking loan modifications.
Troubled loan modifications: Understanding the basics
The first critical step is understanding what constitutes a troubled loan modification that requires additional disclosures. Central to this understanding is the definition of “experiencing financial difficulty.” Identifying modifications falling under this category is essential for meeting disclosure requirements.
Evaluating tracking capabilities
Next, financial institutions should assess their tracking abilities. When evaluating modifications, creditors must determine whether they represent a new loan or the continuation of an existing loan. The general guidance on loan refinancing and restructuring in ASC 310-20-35-9 through 35-11 provides the framework for this evaluation.
Specific types of modifications
ASU 2022-02 specifically identifies four types of modifications for borrowers experiencing financial difficulty, each requiring specific information disclosure:
- Principal forgiveness
- Interest rate reduction
- Other-than-insignificant payment delays
- Term extensions
Disclosure requirements
Financial institutions need to consider how they track modifications meeting these criteria. Reporting should summarize yearly activity by the type of modification and relevant segments. Remember that each modification has specific disclosure requirements based on the class of financing receivable and the type of modification applied.
How Wipfli can help
Our professional team at Wipfli is well-versed in the changes brought about by ASU 2022-02. We can guide your institution through the nuances of these updates, helping ensure that your disclosures and reporting align with the necessary requirements. Contact us to gain a deeper understanding of the implications for your institution and navigate the evolving landscape with confidence.
