FASB tweaks CECL: TDR accounting and vintage disclosures 

ASU in a minute

• On March 31, 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-02, which eliminates the troubled debt restructuring (TDR) accounting model for creditors¹ that have adopted Topic 326, “Financial Instruments – Credit Losses.” All other creditors must continue to apply the TDR accounting model until they adopt Topic 326.
• Due to the removal of the TDR accounting model, all loan modifications now will be accounted for under the general loan modification guidance in Subtopic 310-20. In addition, on a prospective basis, entities will be subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty.
• Public business entities within the scope of the Topic 326 vintage disclosure requirements also will be required to prospectively disclose current-period gross write-off information by vintage (that is, year of origination).
• For entities that have adopted Topic 326, ASU 2022-02 takes effect in reporting periods beginning after Dec. 15, 2022. Early adoption is permitted. For all other entities, the provisions of ASU 2022-02 take effect when an entity adopts Topic 326. 

Elimination of TDR accounting model

On March 31, 2022, the FASB issued ASU 2022-02, "Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures," which eliminates the TDR accounting model for creditors that have already adopted Topic 326, which is commonly referred to as the current expected credit loss (CECL) model. The FASB’s decision to eliminate the TDR accounting model is in response to feedback that the allowance under CECL already incorporates credit losses from loans modified as TDRs and, consequently, the related accounting and disclosures – which preparers often find onerous to apply – no longer provide the same level of benefit to users.

In lieu of the TDR accounting model, creditors now will apply the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications made for borrowers experiencing financial difficulty. Under the general loan modification guidance, a modification is treated as a new loan only if the following two conditions are met:

• The terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks.
• Modifications to the terms of the original loan are more than minor. 

If either condition is not met, the modification is accounted for as the continuation of the old loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate.

Changes to the disclosures

ASU 2022-02 also introduces new disclosure requirements for modifications of receivables. The objective is to “provide financial statement users with information about the type and magnitude of modifications of receivables made to debtors experiencing financial difficulty, the financial effect of those modifications, and the degree of success of the modifications in mitigating potential credit losses.” To achieve that objective, entities must disclose the following information about modifications to borrowers experiencing financial difficulty.

^{Source: ASU 2022-02}

The new disclosures apply only to modifications within the scope of Subtopic 310-10. As a result, the new requirements do not apply to modifications of net investments in sales-type or direct finance leases. Additionally, the new disclosures are required only for modifications of receivables in the form of an interest-rate concession, principal forgiveness, or term extension to borrowers experiencing financial difficulty. Consequently, modifications in some other form (for example, a debt covenant violation waiver) are not required to be disclosed.  

The new disclosures also do not apply to modifications that represent a delay in payment that is insignificant. If the receivable has been previously modified, the assessment of “significance” must consider the combined effect of all modifications occurring in the previous 12 months.  

New vintage disclosure of gross write-off information 

ASU 2022-02 also requires entities within the scope of the Topic 326 vintage disclosure requirements – that is, public business entities – to prospectively begin disclosing current-period gross write-off information by vintage (year of origination). Specifically, entities must disclose: 

The gross writeoffs recorded in the current period, on a current year-to-date basis, for financing receivables and net investments in leases by origination year. For origination years before the fifth annual period, a public business entity may present the gross writeoffs in the current period for financing receivables and net investments in leases in the aggregate. 

ASU 2022-02 also affirms the FASB’s previous decision not to require entities to disclose gross recovery information by vintage. 

Effective date and transition provisions 

For entities that have adopted Topic 326, ASU 2022-02 takes effect in reporting periods beginning after Dec. 15, 2022. Entities may early adopt the ASU and are permitted to do so on a partial basis – that is, an entity may early adopt the TDR changes (removal of the TDR accounting model and adoption of new modification disclosures) but wait for the ASU’s effective date before adopting the new gross write-off disclosure requirement, or vice versa. 

Both parts of the ASU – the TDR changes and the new gross write-offs disclosure – apply prospectively. However, entities have the option to apply the elimination of the TDR accounting model on a modified retrospective basis. The following table explains how each transition method works. 

^{Source: Crowe analysis}

Under either transition method, an entity will apply the new modification disclosure requirements on a prospective basis. In addition, upon adoption of ASU 2022-02, an entity will no longer provide the TDR disclosures, even if the entity uses the prospective transition method and has TDR loans existing at the date of adoption.

Other CECL-related standard-setting activities: Acquired assets

The FASB also is moving to change how to account for acquired financial assets. Under Topic 326, an entity recognizes and measures acquired financial assets that, as of the acquisition date, have experienced a more-than-insignificant deterioration in credit quality since origination (referred to as purchased credit deteriorated, or PCD, assets) differently from non-PCD assets. Commonly referred to as “the double-count issue,” the accounting model for non-PCD assets results in recording a day-one loss through credit expense, which is subsequently accreted through interest income. This distinction, and the different accounting models for each, has caused difficulty for preparers to explain and for users to understand.

At its Feb. 2, 2022, meeting, the board tentatively decided to eliminate the distinction and apply the PCD model, with certain exceptions, to all acquired assets. The FASB will continue its deliberations at a future date.

¹ The TDR accounting model for creditors is codified in Subtopic 310-40.