Troubled Debt Restructurings Update
On March 31, 2022, the FASB issued Accounting Standards Update (ASU) 2022-02, Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates troubled debt restructurings (TDR) reporting guidance under ASC 310-40 for institutions who have adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The update also amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination and adds new disclosure requirements for loan modifications made to a borrower experiencing financial difficulty.
TDR Accounting and Measurement Requirement Removal
During the post-implementation review of ASU 2016-13, the Board found that under the current expected credit losses (CECL) methodology, credit losses from loans modified as TDRs were already included in the allowance for loan losses, thus reducing the usefulness of the recognition, measurement, and some of the disclosure requirements related to TDRs.
Due to the removal of the TDR accounting model, all loan modifications must be accounted for and measured under the general loan modification guidance in ASC 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.
Requirements of the New Disclosures
ASU 2022-02 introduces new disclosure requirements for modifications of receivables to borrowers experiencing financial difficulty. The definition of “experiencing financial difficulty” was brought forward from the TDR guidance (ASC 310-40), so the same considerations can be applied to making that determination.
Creditors should evaluate all modifications as either a new loan or the continuation of an existing loan under the general guidance on loan refinancing and restructuring in ASC 310-20-35-9 through 35-11. The new ASU specifically identifies four types of modifications to borrowers experiencing financial difficulty about which specific information must be disclosed:
- Principal forgiveness
- Interest rate reduction
- Other-than-insignificant payment delays
- Term extensions
Qualitative and quantitative information is required to be disclosed about each of the types of modifications utilized. The new disclosures aim to provide users with information regarding the types and magnitude of modifications and the creditor’s success in mitigating potential credit losses through the modification.
What to Disclose Each Reporting Period
For each reporting period, a creditor should disclose the following information as it relates to its modification made to a borrower experiencing financial difficulty during the reporting period.
By class of financing receivable (qualitative and quantitative information):
- Modification type
- Financial effect of the modification by type
- Borrower performance in the 12-month period following the modification
By portfolio segment:
- Qualitative information about how modifications and borrower subsequent performance factor into determining the allowance for credit losses
For each reporting period, a creditor should disclose the following information about financing receivables that had a payment default during the period and had been modified due to the borrower experiencing financial difficulty within the previous 12 months preceding the default.
By class of financing receivable, qualitative and quantitative information about defaulted receivables, including the following:
- Type of contractual change the modification provided
- Amount of receivable that defaulted, including period-end amortized cost basis for receivables defaulted
By portfolio segment:
- Qualitative information about how defaults are factored into the allowance for credit losses
Receivables may be modified in more than one manner. However, an entity that modifies the same receivable in more than one manner will need to provide disclosures sufficient for users to understand the different types of combinations of modification provided to borrowers.
In the new disclosure requirements, a restructuring that only results in a delayed payment evaluated to be insignificant, the entity isn’t required to disclose the modification made to the borrower. However, 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. Receivables that are modified in more than one manner should be disclosed as a combination of modifications in a separate category.
The ASU also provided updated guidance related to vintage disclosures, which applies to public business entities only. Public business entities who have adopted CECL will be required to prospectively disclose current-period gross write-off information by vintage (that is, year of origination). The purpose for this guidance is to clarify an inconsistency in the original disclosure requirements and illustration therein.
For CECL adopters, ASU 2022-02 takes effect in reporting periods beginning after December 15, 2022.
The guidance for both the TDR changes and vintage disclosures should be applied prospectively. There is an option to apply the elimination of the TDR accounting model on a modified retrospective basis, which would allow for comparative statements and results in a cumulative-effect adjustment to retained earnings in the period of adoption.
Early adoption is permitted and is allowed on a partial basis, that is, to early adopt the TDR changes and wait for the ASU’s effective date before adopting the new vintage disclosures or vice versa. For all other entities, the provisions of this ASU takes effect when an entity adopts the CECL guidance in ASU 2016-13.
NCUA Releases Simplified Excel CECL Calculator
On Wednesday, the National Credit Union Administration (NCUA) released a tool designed to help credit unions comply with the complexity of new accounting standards to estimate future credit losses.
he Financial Accounting Standards Board changed its standard for current expected credit losses (CECL) in 2016 in response to shortcomings exposed in the 2007 financial crisis. Its adoption has been postponed a few times, most recently in March 2020 because of the financial chaos and uncertainty with the COVID-19 pandemic. The FASB staff believes that the Weighted Average Remaining Maturity (WARM) method is one of many methods that could be used to estimate an allowance for credit losses for less complex financial asset pools.
The NCUA’s new Simplified CECL Tool is intended for use by credit unions with less than $100 million in assets, although it could be used by larger credit unions based on the discretion of their management and auditors.
The Simplified CECL Tool uses the (WARM) methodology to determine the average remaining term of any loan pool, which in turn is part of the process to estimate the allowance for credit loss. FASB supports the WARM methodology, in which the percentage of each loan’s value to the total value of the pool is weighted by each loan’s remaining years to maturity.
An NCUA news release said the tool requires a credit union to enter its charter number, total assets and loan portfolio balances. The loan portfolio categories in the tool mirror the categories in the NCUA’s Call Report.
For each loan portfolio category, the tool calculates the credit union’s net charge-off rate from its call report data and provides the industry-based WARM factor. The tool also allows the credit union to make qualitative adjustments for current conditions and reasonable and supportable forecasts, as required by CECL.
As credit unions evaluate their options, NCUA said the Simplified CECL Tool will be updated for use with this year’s quarters ending Sept. 30th and Dec. 31st to allow credit unions to test and calibrate the tool which will be updated each quarter.
We applaud the NCUA for providing this tool. This tool will help many credit unions comply with the new standard and at no cost. The WARM method for calculating CECL is appropriate for not only smaller asset-based credit unions, but for any credit union that has a simplified loan portfolio.
UPDATE TO NCUA’s MARCH 9, 2022 ACCOUNTING ALERT
In our last Technical Release from June 2022, we recommended the National Credit Union Administration (NCUA) to issue a new Accounting Alert. We are pleased to see they did just that on July 20, 2022. This Alert correctly states when all federally chartered (and state chartered) credit unions should adopt the Current Expected Credit Loss (CECL) standard. Below is the exact revised alert from NCUA regarding the CECL effective date.
Current Expected Credit Loss (CECL) Effective Date for Credit Unions (Revised)
This Accounting Alert supersedes the alert issued March 9, 2022.
After issuing the March 9, 2022 Accounting Alert, the NCUA determined that the term “fiscal year” - as used in the Current Expected Credit Loss (CECL) Transition Rule - should not be interpreted to mean “calendar year.” While the Federal Credit Union Act (12 U.S.C. § 1760) requires all federal credit unions to have a fiscal year ending on [the calendar year-end] December 31, the Financial Accounting Standards Board (FASB) enables an audit to be conducted on a different financial reporting year-end, such as September 30, 2023. This Accounting Alert provides notice that a federal credit union may implement CECL based on its audited financial reporting year if different than its fiscal year.
As a reminder, on February 2, 2022, FASB decided not to defer the implementation date for nonpublic entities of the Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326), commonly known as CECL. Federal credit unions and federally insured state-chartered credit unions are nonpublic entities; thus, CECL becomes effective for credit unions for fiscal years beginning after December 15, 2022.
In practice, a credit union with a financial statement reporting year ending on September 30, 2023, will implement CECL on October 1, 2023. Under the NCUA’s CECL Transition Rule, the phase-in of the day-one effects on a credit union’s net worth ratio would also start on October 1, 2023.
Federally insured state-chartered credit unions may contact their accountant or state regulator with questions on the implementation of CECL.
For additional information on CECL, please visit our CECL Resources Page.
Contact EIMail@ncua.gov with questions not answered in the CECL Resources
FASB ASC 326 IMPLEMENTATION GUIDANCE
As the implementation date for the Financial Accounting Standard Board’s (FASB) Accounting Standard Codification (ASC) 326 “Financial Instruments - Credit Losses” draws near it has become clear there is trouble even with its implementation date.
For non-public business entities ASC 326 is effective for fiscal years beginning after December 15, 2022. Early application of the amendments is permitted at the beginning of a fiscal year. The implementation of FASB ASC 326 does not permit adoption at an interim period. It must be adopted as of the first day of the fiscal year beginning after December 15, 2022, which may or may not be January 1, 2023, depending upon the audit period. So, the effective date for ASC 326 will be different for each credit union depending on when the credit union has its audit performed.
For years many have considered all federal credit unions, and many state chartered credit unions, to have a fiscal year as a calendar year. This is based on wording in the Federal Credit Union Act, and many state statutes, which requires a credit union to maintain a calendar-year for purposes of books and records. However, for decades, many credit unions have engaged an auditor to perform an audit of a fiscal period other than a calendar year-end. The National Credit Union Administration (NCUA) has allowed credit unions to have any month-end as the end of their audit year and because of that the credit union industry has benefited with lower audit fees and the ability of audit firms to focus on servicing credit unions audit needs year-round. Of the 5,000 credit unions, approximately 40% have an audit period ending December 31st and 60% have an audit period other than December 31st, typically as of 12 months ending as of March 31st, June 30th or September 30th.
On March 9, 2022, the NCUA issued an “Accounting Alert.” This alert stated that all federally chartered credit unions must adopt ASC 326 on January 1, 2023, to be included in the NCUA’s Phase in Regulatory Relief Rule. That rule allows for the initial reduction of a credit union’s net worth due to CECL to be phased in over a three-year period. This puts those credit unions that are federally chartered and do not have a calendar year end audit period in a bad position. If a credit union follows the NCUA ‘s definition of a fiscal year as a calendar year, regardless of their audit date, and adopts ASC 326 on January 1, 2023, the credit union may be in a position that they would not receive a “clean” unmodified opinion on their financial statement audit without significant audit adjustments over a two-year period. Also, that credit union would have to run side by side allowance for loans losses analyses over that period of time.
We urge the NCUA to reconsider their definition of a credit union’s fiscal year end to be based on their audit period. If you are uncertain of what effective date your credit union should implement ASC 326 contact your auditor.
Agencies Issue Revised Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus
On April 7, 2020, federal financial institution regulatory agencies, in conjunction with state financial regulators, issued a revised interagency statement encouraging financial institutions to work with borrowers affected by COVID-19. This revised statement provides additional information regarding loan modifications and also provides the agencies' views on consumer protection considerations.
The revised statement explains the relationship between the interagency statement issued on March 22, 2020, and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief, and economic Security Act which was signed into law on March 27, 2020. To learn more, click the link below to download the entire statement from the FDIC.
Norwalk, CT, November 15, 2019 — Financial Accounting Standards Board (FASB) issued two Accounting Standards Updates (ASUs) that finalize various effective date delays for standards on current expected credit losses (CECL), leases, hedging, and long-duration insurance contracts.
- ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, finalizes various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies applying the credit losses (CECL), leases, and hedging standards.
- ASU No. 2019-09, Financial Services—Insurance (Topic 944): Effective Date, finalizes insurance standard effective date delays for all insurance companies that issue long-duration contracts, such as life insurance and annuities.
For more information on this FASB release and others go to FASB.org