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Journal entry — FASB addresses troubled debt restructurings

Published on: Sep 07, 2017

At its September 6, 2017, meeting, the FASB addressed issues related to troubled debt restructurings (TDRs). Specifically, the Board discussed when a creditor would recognize a TDR and how it would measure the effects of the restructuring. These clarifications were made as a result of the FASB’s credit losses transition resource group (TRG) discussion held on June 12, 2017.1

ASU 2016-132 requires that the allowance for expected credit losses must incorporate the effects of reasonably expected TDRs. Given this guidance, stakeholders have asked questions regarding the nature of TDRs that must be considered in the estimate (e.g., contractual term extensions, interest rate concessions), when and how to consider TDRs in the estimate, and whether to consider reasonably expected TDRs on a portfolio basis or at an individual-financial-asset level.

Identification of Reasonably Expected TDRs

The FASB indicated that the ASU’s new guidance related to TDRs was intended to accelerate the recognition of an economic concession granted in a TDR from when the TDR is executed (as required under existing U.S. GAAP) to when the TDR is reasonably expected. As a result, the Board clarified that the allowance for expected credit losses should include all effects of a TDR when an individual asset can be specifically identified as a reasonably expected TDR.

Measurement of Reasonably Expected TDRs

The FASB acknowledged that depending on the nature of the economic concession granted in a TDR, the allowance for expected credit losses may not include the effects of the concession. For example, an entity’s allowance for expected credit losses may not include the effects of the interest rate concession if the entity measures its allowance using a principal-only loss rate approach. Because ASU 2016-13 requires an entity to include all effects of TDRs in its allowance for expected credit losses, the FASB indicated that an entity must use a discounted cash flow (DCF) method if the TDR involves a concession that can only be measured using a DCF method (e.g., an interest rate or term concession).

Next Steps

The FASB announced that the clarifications above would be included as an addendum to the June 12 meeting summary (TRG Memo 6) published on August 25, 2017. In addition, the Board announced that in early October 2017 it plans to revisit the TRG’s previously discussed unresolved issues related to determining the estimated life of a credit card receivable. Finally, the Board stated that no additional inquiries have been submitted to the TRG for consideration.


1 See Deloitte’s June 2017 TRG Snapshot for more information.

2 FASB Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments.

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