FASB Seeks Greater Transparency, Consistency for Troubled Debt Restructurings

FASB issued an exposure draft Tuesday that contains clarifying guidance intended to improve consistency and transparency in financial reporting about troubled debt restructurings.


“Investors, regulators and practitioners asked the board to clarify what types of loan modifications should be considered troubled debt restructurings for accounting and disclosure purposes,” FASB’s Acting Chairman Leslie Seidman said in a press release.


FASB said there is diversity in practice in identifying loan modifications that constitute troubled debt restructurings. The proposed Accounting Standards Update (ASU), Receivables (Topic 310)—Clarifications to Accounting for Troubled Debt Restructurings by Creditors, sets forth proposed guidance to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment and for disclosure of troubled debt restructurings.


The amendments would apply to all creditors, both public and nonpublic, that restructure receivables that fall within the scope of FASB Accounting Standards Codification (ASC) Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors.


The amendments would preclude a creditor from using the borrower’s effective rate test in ASC paragraph 470-60-55-10 in its evaluation of whether a restructuring constitutes a troubled debt restructuring. Guidance would be clarified to indicate the following:


  • If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the restructured debt, the restructuring would be considered to be below a market rate and, therefore, should be considered a troubled debt restructuring.
  • A restructuring that results in a temporary or permanent increase in the contractual interest rate cannot be presumed to be at a rate that is at or above market.
  • A borrower that is not currently in default may still be considered to be experiencing financial difficulty when payment default is considered “probable in the foreseeable future.”
  • A restructuring that results in an insignificant delay in contractual cash flows may still be considered a troubled debt restructuring. That is, that factor should be considered along with other terms of a restructuring to determine whether a troubled debt restructuring exists.


If approved, the proposed clarifications would be effective for interim and annual periods ending after June 15, 2011, and would be applied retrospectively to restructurings occurring on or after the beginning of the earliest period presented. Comments are due Dec. 13.


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