Proposed ASU: ASC 326, Financial Instruments – Credit Losses

Dec 01, 2021
Audit Financial reporting CECL Financial institutions

The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which, if finalized, would make adjustments with respect to the accounting for and disclosures of certain loan refinancings, restructurings and writeoffs. This proposed ASU is a result of the post-implementation review process for ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments    

The proposal would remove the existing troubled debt restructuring (TDR) recognition and measurement guidance from U.S. generally accepted accounting principles for entities that have adopted ASU 2016-13, and also would enhance disclosures for loan refinancings and restructurings by creditors  for borrowers experiencing financial difficulty. If adopted as proposed, all loan modifications would be accounted for based on the loan refinancing and restructuring guidance in FASB Accounting Standards Codification (ASC) paragraphs 310-20-35-9 through 35-11. This means that, upon modification, a company would determine whether the modification represents a new loan or the continuation of an existing loan that affects that loan’s discount rate and the accounting for unamortized net fees and costs. The proposed updates related to TDR recognition and measurement would be required to be adopted on a prospective basis, with an option to elect a modified retrospective transition approach through a cumulative effect adjustment to opening retained earnings in the period of adoption of the proposed ASU. The proposed disclosure-related amendments would be applied on a prospective basis. 

Additionally, the proposed ASU would clarify the disclosure requirement for presenting financing receivable information by year of origination, or vintage, for public business entities. As proposed, the amendment would require disclosure of current-period gross charge-offs by year of origination on a prospective basis for financing receivables and net investments in leases within the scope of ASC 326-20. Gross recoveries would not be required to be disclosed. The proposed disclosure-related amendments would be applied on a prospective basis. 

Stakeholders are encouraged to review and provide feedback on the proposed ASU by December 23, 2021.

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