FASB Clarifies TDRs

CPA Daren B. Tanner clarifies recent changes to Troubled Debt Restructuring after FASB released a new update.

Increased loan delinquency rates and concerns about mounting provision for loan losses expense has prompted many collection managers to look at restructuring a loan as a way to minimize loss to the credit union and provide some relief to the member. Currently, there is no clear way to identify loan modifications that constitute troubled debt restructurings (TDRs) for a creditor.

In response to these concerns, the Financial Accounting Standards Board (FASB) issued an update, ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. According to it, in evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that the restructuring constitutes a concession, and the debtor is experiencing financial difficulties. The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether it has granted a concession as follows:

  1. If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the restructured debt, the restructuring would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession. If a creditor determines that it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a troubled debt restructuring;
  2. A temporary or permanent increase in the contractual interest rate as a result of a restructuring does not preclude the restructuring from being considered a concession because the new contractual interest rate on the restructured debt could still be below the market interest rate for new debt with similar risk characteristics. If a creditor determines that It has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a troubled debt restructuring; and
  3. A restructuring that results in a delay in payment that is insignificant is not a concession. However, an entity should consider various factors in assessing whether a restructuring resulting in a delay in payment that is insignificant is not a concession. The amendments include examples illustrating the assessment of whether a restructuring results in a delay in payment that is insignificant.

The amendments to Topic 310 clarify that a debtor is experiencing financial difficulties even though the debtor is not currently in payment default. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without the modification.

For non-public entities, the amendments of this update are effective for annual periods ending on or after December 15, 2012, including interim periods within those annual periods.

Contact Daren B. Tanner, CPA, MBA, for more information, including how the update addresses public entities: 503.352.3255, [email protected].

 

Questions? Contact Sales & Marketing Associate Craig Reed: 206.340.4789, [email protected].