The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which makes adjustments with respect to the accounting for and disclosures of certain loan refinancings, restructurings and writeoffs. This ASU is a result of feedback received during the post-implementation review process for ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
ASU 2022-02 removes 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 enhances disclosures for loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Under the ASU, all loan modifications are 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, an entity evaluates 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 guidance in the ASU related to TDR recognition and measurement is required to be adopted on a prospective basis, with an option to apply a modified retrospective transition method, resulting in a cumulative effect adjustment to opening retained earnings in the period of adoption of the ASU. The disclosure-related amendments are required to be applied on a prospective basis.
Additionally, ASU 2022-02 clarifies the disclosure requirement for presenting financing receivable information by year of origination, or vintage, for public business entities. The amendments require disclosure of current-period gross writeoffs by year of origination on a prospective basis for financing receivables and net investments in leases within the scope of ASC 326-20. Gross writeoff information must be included in the vintage disclosures required for public business entities in accordance with ASC 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. Gross recoveries would not be required to be disclosed. The disclosure-related amendments are required to be applied prospectively.
For entities that have adopted ASU 2016-13, the amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for the amendments in ASU 2022-02 are the same as the effective dates in ASU 2016-13.
Early adoption of ASU 2022-02 is permitted if an entity has adopted ASU 2016-13, including adoption in an interim period. If an entity elects to early adopt the amendments in ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures.