Federal Banking Agencies Release Guidance about Subsequent Restructurings of TDRs, and Other Matters
Oct 20, 2014
From the Financial Reporting View
The Federal Financial Institutions Examination Council (FFIEC or federal banking agencies) recently issued Supplemental Instructions for September 2014 Call Reports that address (1) accounting for subsequent restructurings of troubled debt restructurings (TDRs), (2) use of private company accounting alternatives when preparing Call Reports, and (3) application of the definitions of private company and public business entity to banks and savings associations.
Subsequent Restructurings of TDRs
The federal banking agencies will not object if, following a subsequent restructuring of a TDR, a financial institution no longer treats the loan as a TDR provided that (1) the borrower is not experiencing financial difficulties at the time of the subsequent restructuring and (2) a concession is not granted to the borrower as part of that restructuring. The subsequent restructuring agreement must specify market terms, including a contractual interest rate that is not less than a market interest rate for new debt with similar credit risk characteristics and other terms that are no less favorable than those the institution would offer for that new debt. When assessing whether a financial institution granted a concession, the agencies consider any principal forgiveness on a cumulative basis to be a continuing concession and, therefore, the financial institution would continue to treat the loan as a TDR. KPMG understands that principal forgiveness for this purpose means a release of the borrower’s legal obligation to repay some or all contractual principal amounts; therefore, a charge-off that was not accompanied by principal forgiveness would not be a continuing concession.
If a subsequent restructuring meets all of the necessary conditions, the loan no longer would be measured for impairment as a TDR under FASB ASC Subtopic 310-10, Receivables – Overall, but instead would be measured for impairment under FASB ASC Subtopic 450-20, Contingencies – Loss Contingences. In addition, the lender no longer would disclose the loan as a TDR in the Call Report. The recorded investment in the loan at the time of the subsequent restructuring would change only to the extent that cash is advanced or received in the restructuring. Therefore, a previously recorded charge-off should not be reversed and recoveries should be recognized only on collection of previously charged-off amounts.
If the financial institution forgave principal before the subsequent restructuring, the loan would continue to be measured for impairment as a TDR under ASC Subtopic 310-10. However, the loan would not be reported as a TDR in Call Reports in calendar years after the subsequent restructuring provided that (1) the subsequent restructuring agreement specified a contractual interest rate that, at the time of the subsequent restructuring, was not less than a market interest rate for new debt with similar credit risk characteristics and (2) the loan is performing in compliance with its modified terms after the subsequent restructuring.
Financial institutions may apply the guidance (1) prospectively to subsequent restructurings completed after issuance of the guidance or (2) to TDRs outstanding at September 30, 2014 that were subsequently restructured before that date and that met all of the necessary conditions at the time of the subsequent restructuring. In the latter situation, the lender should not amend Call Reports for prior periods.
Private Company Accounting Alternatives
The agencies concluded that a bank or savings association that meets the private company definition in U.S. GAAP is permitted to use private company accounting alternatives issued by the FASB when preparing Call Reports, unless the agencies determine that a particular alternative is inconsistent with supervisory objectives. In connection with that conclusion, the agencies determined that financial institutions that meet the private company definition may elect to adopt FASB ASU No. 2014-02, Accounting for Goodwill, for Call Report purposes.
Definition of a Public Business Entity
The agencies provided guidance about applying FASB ASU No. 2013-12, Definition of a Public Business Entity, to banks and savings associations for purposes of adopting private company accounting alternatives when preparing Call Reports. The guidance addresses the applicability of the public business entity definition to mutual institutions, stock institutions that have issued securities with non-substantive transfer restrictions, and insured depository institutions and their parent holding companies that are subject to the financial statement filing requirements of Part 363 of the FDIC regulations.