Industry Insights

On July 21, 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310):  Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The ASU significantly expanded existing disclosures and introduced many new disclosures related to financing receivables and the allowance for credit losses.

Clarification Needed

As financial institutions evaluate troubled debt restructurings (TDRs) and prepare financial statements, additional questions related to disclosure requirements are being raised. The following guidance clarifies these questions:

• Once a TDR, always a TDR?
• What is the impact on disclosures required by U.S. Generally Accepted Accounting Principles (GAAP)?
• How does GAAP guidance compare to the call report instructions?

Guidance Under U.S. GAAP

Accounting Standards Codification (ASC) 310-40-50-2 provides the following guidance:

Information about an impaired loan that has been restructured in a TDR involving a modification of terms need not be included in certain disclosures in years after the restructuring if both of the following conditions exist:

• The restructuring agreement specifies an interest rate equal to or greater than the rate the creditor was willing to accept at the time of the restructuring for a new loan with comparable risk.
• The loan is not impaired based on the terms specified by the restructuring agreement.

Once a TDR, Always a TDR?

One of the qualifying conditions is whether the restructuring agreement specifies an interest rate equal to or greater than the market rate on the restructured loan. Restructuring a loan solely by reducing its stated interest rate to a market rate, i.e., with no other changes to terms, does not qualify the loan as a TDR. Therefore, to meet this criterion, the restructuring must involve terms other than the interest rate.

If a TDR meets the conditions mentioned above, it may be omitted from the financial statement disclosures in periods subsequent to the restructuring. Industry practice is for the TDR loan to perform for at least six months before it is removed from the disclosure. 

What Is the Impact on Disclosures Required by U.S. GAAP?

ASC 310-10-50-15 requires a bank to disclose, either in the body of the financial statements or in the accompanying notes, certain information about impaired loans. If the above conditions are satisfied, information about an impaired loan that has been restructured as a TDR involving a modification of terms does not need to be included in the following disclosures in years after the restructuring: 

• As of the balance sheet date, the recorded investment in the impaired loans split between the following (ASC 310-10-50-15(a)):


• Amount of the recorded investment for which there is a related allowance for credit losses and the amount of that allowance
• Amount of the recorded investment for which there is no related allowance for credit losses
• For each period for which results of operations are presented (ASC 310-10-50-15(c)):


• Average recorded investment in the impaired loans
• Related amount of interest income recognized during the time within the period the loans were impaired
• Amount of interest income recognized using a cash-basis method during the time within the period the loans were impaired, if practicable

How Does GAAP Guidance Compare to the Call Report Instructions?

The call report instructions for Schedule RC-C, Loans and Lease Financing Receivables, which was last updated in March 2011, states (emphasis added):

Once an obligation has been restructured in a troubled debt restructuring, it continues to be considered a troubled debt restructuring until paid in full or otherwise settled, sold or charged off. However, if a restructured obligation is in compliance with its modified terms and the restructuring agreement specifies an interest rate that at the time of the restructuring is greater than or equal to the rate that the bank was willing to accept for a new extension of credit with comparable risk, the loan need not continue to be reported as a troubled debt restructuring in this Memorandum item in calendar years after the year in which the restructuring took place. A loan extended or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not considered a troubled debt restructuring.

Consistent with GAAP guidance, if a creditor is in compliance with the terms of the restructuring agreement, and the restructuring agreement specifies an interest rate that at the time of the restructuring is at or greater than the market rate the bank was willing to accept for a new extension of credit with comparable risk, the loan need not continue to be reported as a TDR in the call report for calendar years after the year of the restructuring.

If you have questions about these or other related standards and their potential effect on your company, contact your BKD advisor.