This document has been reviewed by the Professional Practice group of Wolf & Company and is intended to be used by employees to discern the technical aspects of accounting pronouncements issued by regulatory bodies.
Overview
On March 31, 2022, FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. There are two discrete, unrelated items that this ASU addresses – the accounting, measurement and disclosure of TDRs, and enhancement of the vintage disclosures for public business entities. It is important to note that an entity must have adopted ASC 326 (CECL) to adopt this guidance. A non-public entity that hasn’t adopted CECL cannot adopt this guidance for calendar year 2022. The ABA was advocating for the adoption of this standard in 2022 for all banks, however the FASB denied this request at their April 6 meeting.
Key Guidance
Troubled Debt Restructurings
The TDR recognition and measurement guidance contained in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors has been eliminated. Instead, modified loans that would have previously been considered a TDR are recognized and measured in the allowance for loan loss calculation in accordance with ASC 326. These modifications will be evaluated under ASC 310-20-35-9 through 35-11 to determine whether the modification represents a new loan or a continuation of an existing loan.
In addition, the amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications made to debtors experiencing financial difficulty, as follows:
a. principal forgiveness
b. interest rate reduction
c. other-than-insignificant payment delay
d. term extension (or a combination thereof)
Wolf Analysis
For each of the modifications noted above, to determine whether the modification is disclosable, an entity must evaluate whether the borrower is experiencing financial difficulty in accordance with ASC 310-10-50-45 and whether the modification is an insignificant delay in payment in accordance with ASC 310-10-50-46. Therefore, an entity should continue to have processes and controls in place to identify which loans are TDRs. One change to note is that only modifications made in the previous 12-month period need to be included in the evaluation of insignificant delay in payment.
Vintage Disclosures (public companies only)
For public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.
Effective Date
For entities that have adopted CECL, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted CECL, the effective dates will align with the CECL adoption date. The amendments should be applied prospectively, except 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 between the CECL reserve and the prior reserve on the TDRs. In the year of adoption, modification disclosures and the vintage disclosures do not need to be comparable. However, it is expected that the prior year TDR disclosures will remain.
Early adoption of the amendments in this Update is permitted if an entity has adopted CECL. For an entity that has already adopted CECL, the entity has the choice to early adopt both the changes to TDR accounting and the vintage disclosures, or only one of them. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period.
Wolf Analysis
We expect that most entities will elect the modified retrospective transition method when adopting the TDR guidance. If this is not elected, an entity would need to continue to account for TDRs prior to the adoption of this guidance under the old rules. This could create operational complexities due to the longer duration on residential real estate loans that may have been TDRs.
For the vintage disclosures, systems may not be capable of capturing the data needed for gross write-downs and recoveries by vintage. Our clients should begin thinking about this disclosure requirement well in advance of adoption.
