FASB to Address Troubled Debt Restructurings for Credit Loss Standard

August 31, 2017

Happening early next month is a discussion on the Financial Accounting Standards Board’s (“FASB”) new banking requirements for calculating losses on bad loans. The discussion on Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, is expected to clarify how banks and auditors should account for troubled debt restructurings.

At the heart of ASU No. 2016-13, which is considered the FASB’s main response to the 2008 financial crisis, is estimating credit losses. One interpretation of the standard suggests troubled debt restructurings to be assessed on a portfolio basis, but another interpretation says they should be assessed individually.

The issue on troubled debt restructurings was previously discussed at a June 12 meeting of the FASB’s Transition Resource Group for ASU No. 2016-13. Instead of reaching a consensus on troubled debt restructurings, the June discussion revealed differing views among bankers and regulators. Bankers argued that troubled debts can be better identified individually, but regulators noted that banks must estimate the impact of restructurings on groups of loans.

ASU No. 2016-13 will be effective in 2020 or 2021. The effective date is dependent on the size of the financial institution.