FASB Proposes Expanded Disclosures and Improved Accounting for Credit Losses Standard
The FASB has issued the proposed Accounting Standards Update (ASU), Financial Instruments—Credit Losses (Topic 326)—Troubled Debt Restructurings and Vintage Disclosures. The FASB intends the revisions, if adopted as proposed, to improve the decision usefulness of information provided to investors about certain loan refinancings, restructurings, and write-offs. The comment deadline for the proposed ASU is December 23, 2021.
The proposed ASU addresses areas identified by the FASB as part of its Post-Implementation Review (PIR) process, which evaluates whether a standard is achieving its objective by providing investors with relevant information. Since issuing its credit losses standard, which introduced the current expected credit losses (CECL) model in 2016, the FASB has provided resources to monitor and assist stakeholders with its implementation. These activities include forming a Credit Losses Transition Resource Group (TRG), conducting outreach with stakeholders of all types, developing educational materials and staff question-and-answer guidance, conducting educational workshops, and performing archival review of financial reports.
Troubled Debt Restructurings by Creditors That Have Adopted CECL
During the PIR of the credit losses standard, including a May 2021 roundtable, investors and other stakeholders questioned the relevance of the troubled debt restructuring (TDR) designation and the decision usefulness of disclosures about those modifications. Some noted that measurement of expected losses under the CECL model already incorporates the forward-looking aspects of the TDR model and that relevant information for investors would be better conveyed through enhanced disclosures about certain modifications.
The proposed amendments would eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty.
Vintage Disclosures—Gross Write-offs
The FASB also received feedback that an illustrative example, which shows how a public business entity might meet the disclosure requirement to present financing receivable information by year of origination (commonly referred to as the “vintage disclosures”), includes a line item for gross write-offs and gross recoveries for each origination year. Some stakeholders indicated that it was unclear whether gross write-offs and recoveries are required to be presented in the vintage disclosures because that information is not listed as a specific disclosure requirement. Also, the disclosure of gross write-offs was cited by numerous investors as an essential input to their analysis.
To address this feedback, these proposed amendments would require that a public business entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases.