On February 2, 2022, the Financial Accounting Standards Board (FASB or the Board) issued its tentative decisions on the proposed Accounting Standards Update (ASU), Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.
After voting on the amendments and determining the benefits justify the costs of providing enhanced disclosures, the Board moved to proceed with drafting a final ASU. Until the Board votes on the draft of the final ASU by written ballot, all of its related decisions are subject to change. The outcome of ASU 326 directly affects the Current Expected Credit Losses (CECL) methodology, which will become effective for federally insured credit unions on January 1, 2023. For credit unions, being prepared for the CECL transition is imperative, which means understanding these changes is an important part of the process. We will provide updates should the Board’s tentative decisions change, but here is what we know at this time.
Tentative Decisions on Recognition and Measurement
The Board affirmed its decision and/or clarified its intent with respect to loan modifications:
- require entities to review modifications in accordance with the guidance to determine if they represent a new loan or a continuation of the existing loan;
- remove the guidance which “allows entities to consider reasonably expected renewals, modifications, and extensions in determining the contractual life of an asset over which to estimate the allowance for credit losses”;
- for modifications of loans for borrowers experiencing financial difficulties, no longer require entities to use a discounted cash flow method for estimating the allowance; and
- no longer require entities to use the pre-modification effective interest rate if it continues to use the discounted cash flow method for calculating the allowance.
Tentative Decisions on Disclosure
The Board affirmed its decision and/or decided to require the following for modifications:
- insignificant delays in payment do not require disclosure;
- to require creditors to look back to modifications made only in the previous 12-month period;
- to require entities “to disclose modifications of receivables made to borrowers experiencing financial difficulty for all assets within the scope of Subtopic 310-10, Receivables—Overall”; and
- require entities to provide disclosures for modifications (change in timing of contractual cash flows) of loans only when the borrower is experiencing financial difficulty
Tentative Decisions on Transition and Effective Date
The Board affirmed its decision to:
- require a prospective transition for the disclosure enhancements
- require a prospective transition with an option for modified retrospective transition for the elimination of troubled debt restructuring (TDR) recognition and measurement guidance; and
- allow early adoption.
The Board also decided:
- the amendments are effective for fiscal years beginning after December 15, 2022, for creditors that have adopted the new CECL requirements; and
- entities must adopt CECL requirements first before applying the above guidance.
ARB’s Credit Union Advisory Services Team is here to help. We will continue to watch as related developments unfold. If you have any questions or want to learn more about how this ASU could affect your credit union, contact me today.
by Holly Ferguson, CPA
Holly Ferguson is a principal at ARB and the Practice Leader of the firm’s Credit Union, Accounting & Attest, and Manufacturing Advisory Services Teams. Throughout her career, Holly has provided businesses with financial reporting consulting services, assisted with transactional accounting and consulting related to business acquisitions/sales, and analyzed implications and strategic implementation of new accounting standards. Holly is actively involved in the credit union industry and specializes in helping credit unions with financial reporting, compliance, and mergers.