FASB Agrees on Guidance for Troubled Debt Restructurings

September 27, 2017

The Financial Accounting Standards Board (“FASB”) plans to clarify its guidance for troubled debt restructurings under Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. During its September 6 meeting, the FASB agreed that lenders should assess the impact of the restructuring when the individual troubled loan is known. In certain situations, banks are free to make estimates based on historic data, which the FASB refers to as a “portfolio-level” approach.

FASB member Christine Botosan remarked that the decision allows banks to estimate troubled debt restructurings earlier, wherein the estimation is reasonably expected. Botosan said this approach allows banks to estimate what they are anticipating, based on the information at that point. When the loan restructuring is executed, banks can make another adjustment if a difference between the expected loss and the actual loss exists. The FASB also agreed not to name a particular method for estimating the loss from a restructured loan.

Rather than issue a formal amendment, the FASB will publish a memo regarding the board’s discussion on its guidance for restructured loans.