FASB requires lenders to disclose more details about certain debt restructurings

Lenders will have to disclose more details about certain concessions they give to customers in financial difficulty under a new rule from the Financial Accounting Standards Board. The US accounting standard setter has also relaxed related accounting requirements for lenders.

The changes, approved on Wednesday, apply to so-called distressed debt restructurings – a type of loan modification in which banks and other creditors give concessions to troubled borrowers, such as extra time to repay a loan. The FASB said it wants lenders to provide more useful information to investors and simplify accounting for lenders.

The new rule addresses some of the issues raised after the adoption of another recent credit loss rule. This rule, known as current expected credit losses, requires companies to forecast related losses as soon as a loan is issued. The CECL entered into force for large public companies in January 2020, with some of them choosing to delay its implementation for a year due to the Covid-19 pandemic. Private companies and small public companies have until next year to adopt the CECL.

Under current rules, lenders must implement separate cash flow models to measure their expected losses from certain concessions arising from distressed debt restructurings.

The new rule, which is expected to come into force next year, no longer requires lenders to report distressed debt restructurings, as most of them are already taken into account in the estimation of credit losses expected of companies under the CECL standard, the FASB said. Existing accounting rules will continue to apply to borrowers in these situations.

Many lenders have criticized existing accounting rules as burdensome and said there is no need to separately account and measure distressed debt restructurings.

Despite the accounting relief, these same lenders will also have to share more information with investors. Lenders will have to disclose the financial impact of material changes they make to receivables, such as mortgages, for distressed borrowers, something they do not currently have to do, the FASB said. Loan modifications may include a lower interest rate, term extension, or principal forgiveness.

Additionally, the new rule requires publicly traded companies to disclose gross write-off amounts for the current period based on the year in which they originated, which was not required by the CECL. This is an effort to help investors when analyzing lenders’ underwriting performance, the FASB said.

Removing separate accounting for distressed debt restructuring while improving disclosure of loan modifications is a “great compromise” for companies, investors and other stakeholders, board member Gary Buesser said Wednesday. FASB administration at the meeting.

Lenders have broadly backed the accounting change because they say it would make their compliance efforts easier. But many also said additional disclosures would be costly.

The disclosures will require updates to Wells Fargo & Co.’s systems, processes and controls to capture new data, extending the time needed to implement the rule, wrote Muneera Carr, the bank’s chief accounting officer, in a December 22. letter to the FASB. “We are concerned about some of the implications” of the then-proposed changes, Ms Carr said in the letter.

A Wells spokeswoman said Wednesday the bank generally supports the rule because it would better reflect the financial impacts of accommodations given to borrowers in unusual circumstances. “We will do the work to implement the new disclosure requirements in accordance with the rule,” the spokeswoman said.

Ford engine Co.

said the enhanced disclosure requirements are unlikely to provide useful information to investors, wrote Julie Garity, the company’s director of global accounting policy, in a Dec. 22 letter to the FASB. The automaker provides financial services through Ford Motor Credit Company LLC. “The accounting model for loan modifications suggests that these modifications are insignificant…so expanding the information around them does not seem aligned in thought,” Ms Garity wrote at the time. Ford declined to comment on the changes approved on Wednesday.

The FASB aims to publish a document detailing the standard by the end of next month, a spokeswoman said. The council also voted against postponing the implementation of the CECL for private companies and small public companies.

Write to Mark Maurer at [email protected]

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