Financial Reporting


Responding to the recent rise in loan modifications, FASB updated standards related to troubled-debt restructuring.

 

Amendments in the update are aimed at increasing comparability regarding modifications of loans accounted for within pools under ASC Subtopic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality.

 

FASB said differences in practice had developed over whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool after a modification that would constitute a troubled-debt restructuring. The objective of the amendments is to address the diversity in practice regarding such transactions.

 

“In the view of certain entities, accounting for troubled debt restructuring does not apply to individual loans within a pool, and modified loans should remain within the pool,” according to the update. “In the view of other entities, each modified loan should be evaluated against the troubled debt restructuring criteria, and if the loan modification is a troubled debt restructuring, the modified loan should be removed from the pool and accounted for as a separate asset.”

 

The amendments also clarify guidance about maintaining the integrity of a pool as the unit of accounting for acquired loans with credit deterioration.

 

Accounting Standards Update no. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset (a consensus of the FASB Emerging Issues Task Force), is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early application is permitted. The guidance is available at tinyurl.com/23e9ks4.

 

“Upon initial adoption of the guidance … an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30,” according to the update. “This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.”

 

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