FASB Ends TDR Accounting for CECL Adopters

Since the issuance of the Financial Accounting Standards Board’s (FASB) Accounting Standard Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its introduction of the current expected credit loss (CECL) model, the FASB has been focused on the effective implementation of CECL. The FASB’s Post-Implementation Review (PIR) process began before the standard was even effective and included the creation of a Transition Resource Group and other efforts to solicit constituent feedback.

Not long after implementation, there was a growing consensus that the CECL model essentially rendered the existing accounting for troubled debt restructurings (TDRs) as redundant and no longer meaningful. While the historic TDR model in ASC 310-40, Receivables – Troubled Debt Restructurings, required a measurement of an expected loss in the accounting for a specific loan subject to a modification determined to be a TDR, the new CECL model reflects a measurement of expected losses for all loans in the allowance for credit losses. In addition, as part of the Coronavirus Aid, Relief, and Economic Security Act of 2020 and as extended by the Coronavirus Response and Consolidated Appropriations Act of 2021, temporary relief was provided for application of TDR accounting for certain loans through Jan. 1, 2022, without an outcry from investors or regulators.

As a result of that feedback, on March 31, 2022, following a relatively expedited exposure and comment period, with virtually no investor comment letters, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) – Troubled Debt Restructurings and Vintage Disclosures, to eliminate the TDR model in ASC 310-40. The ASU also clarified some confusion over certain disclosures and introduced a few new disclosures.

Elimination of the TDR Measurement Model

When adopted, application of the TDR measurement model will no longer be required for an entity that has adopted the CECL model in ASC 326-20. That is, when a loan is modified, the creditor will not need to determine if both a) the borrower is experiencing financial difficulty and b) the modification represented a concession to the borrower to determine the proper accounting for the modification. However, the creditor will still need to evaluate the first criterion (e.g., the borrower is experiencing financial difficulty) as those modifications will now require new disclosures. A modification to a loan with a troubled borrower will now be accounted for and measured as any other loan modification, following the current guidance in ASC 310-20-35 to determine if the loan is to be accounted for as a new loan or as the continuation of the old loan.

As there will no longer be any accounting measurement distinctions for modifications based on the old TDR guidance, a creditor is no longer permitted to consider reasonably expected extensions, renewals and modifications as it did when measuring the allowance for a TDR loan. However, the FASB clarified that a creditor need not reverse the effects of historical credit management strategies from its historic data used in its CECL model.

In addition, certain CECL modeling concessions that were allowed for TDR loans have been eliminated, again because there will be no measurement differences from other loan modifications. The TDR model effectively required the use of a discounted cash flow (DCF) model to measure the allowance for certain concessions (e.g., extending the timing of cash flows or reducing the interest rate). Now, consistent with all other loans, loans modified with troubled borrowers will have an allowance calculated under the same CECL methodology as unmodified loans, so all the various CECL methods are allowed (e.g., DCF, loss rate, probability of default).

However, if a DCF model is applied, then different from the DCF approach under the TDR model, the estimated cash flows will be based on the post-modification loan terms and the discount rate will be based on the effective interest rate post modification.


Greg Faucette
Professional Practice Partner


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