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The Rundown: A Quick Update of Accounting Matters | 2022 Q1

April 28, 2022

This past quarter, the Financial Accounting Standards Board (FASB) has issued two new accounting standard updates (ASUs). The latest issue of the Rundown features a summary and important details pertaining to each and reminders of newly effective accounting pronouncements for both public and private companies and governmental entities. In addition, we’ve put together high-level New Lease Accounting Standard Readiness Checklist.

First Quarter 2022 Accounting Standard Updates

Newly Issued

During the first quarter 2022, the Financial Accounting Standards Board (FASB) issued two new accounting standard updates (ASUs).  The list of ASUs and brief summary of each follows:

Troubled Debt Restructurings and Vintage Disclosures ASU 2022-02

TDR Changes

The amendments in this Update eliminate the accounting guidance for Troubled Debt Restructurings (TDRs) for creditors in ASC 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements. Rather than applying the recognition and measurement guidance for TDRs in ASC 310-40, an entity must apply the loan refinancing and restructuring guidance in ASC 310-20 to determine whether a modification results in the creation of a new loan or the continuation of the existing loan.

Current GAAP provides an exception to the general recognition and measurement guidance for loan restructurings and refinancings that an entity determines meets specific criteria to be considered a TDR, namely if the borrower is experiencing financial difficulty and if the creditor has granted a concession. Often determining whether a concession has been granted and measuring the concession requires the creation of a discounted cash flow analysis. If a restructuring/refinancing is deemed a TDR, then any expected loss as a result of the concession is recorded in the allowance for credit losses. Additionally, specific disclosures are required for TDRs. The amendments in this Update eliminates the TDR recognition and measurement guidance and enhance existing disclosure requirements related to loan modifications made to borrowers experiencing financial difficulty.

Vintage Disclosure Changes

For public business entities, the amendments in this Update require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases that are within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost.

Prior to this Update, public business entities were required to disclose gross writeoffs by class of financing receivable and security type. Investors observed that disclosing gross writeoffs by year of origination provides more useful information than gross writeoffs by class and security type because disclosing by year of origination allows investors to better understand changes in the credit quality of an entity’s loan portfolio and underwriting performance.

Effective Date and Transition Requirements:

Entities that have adopted ASU 2016-13: Effective for fiscal years beginning after December 15, 2022

Entities that have not adopted ASU 2016-13: Effective upon adoption of ASU 2016-13

Note: ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and related amendments were effective for public business entities other than Smaller Reporting Companies for fiscal years beginning after December 15, 2019. However, for Smaller Reporting Companies and private entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2021.

Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures.

Adoption Method: The amendments in this Update should be applied prospectively, except for the recognition and measurement of TDRs may be applied using a modified retrospective approach with a cumulative-effect adjustment to retained earnings in the year of adoption.

Fair Value Hedging—Portfolio Layer Method ASU 2022-01

In 2017, the FASB issued ASU 2017- 12, Targeted Improvements to Accounting for Hedging Activities. Before the issuance of the amendments in ASU 2017-12, entities had difficulty achieving fair value hedge accounting for interest rate risk hedges of portfolios of prepayable financial assets. ASU 2017-12 added the “last-of-layer” method to make portfolio hedge accounting for portfolios of prepayable financial assets more accessible. The “last-of-layer” method allows an entity to hedge a stated amount of the closed portfolio that is anticipated to be outstanding for the designated hedge period. Following the issuance of ASU 2017-12, several questions arose.

  1. Whether only a single hedged layer could be designated or whether an entity could designate multiple hedged layers (that is, multiple hedging relationships associated with a single closed portfolio).
  2. Whether the scope of “last-of-layer” hedging could be expanded.
  3. To clarify what types of hedging instruments are permitted.
  4. To provide additional guidance on how to account for and disclose hedge basis adjustments to an existing “last-of-layer” hedge. Then current guidance did not explicitly address the accounting for basis adjustments other than when the hedge is partially or fully de-designated.
  5. How the accounting for “last-of-layer” hedge basis adjustments interacts with the guidance on credit losses.

The amendments in this Update address those questions by:

  1. Expanding the current “last-of-layer” method to allow multiple hedged layers of a single closed portfolio. To reflect this expansion, the “last-of-layer” method is renamed the “portfolio layer” method. If multiple hedged layers are designated, the Update require that an entity perform an analysis to support its expectation that the aggregate amount of the hedged layers is anticipated to be outstanding for the designated hedge periods.
  2. Expanding the scope of the “portfolio layer” method to include non-prepayable financial assets.
  3. Specifying that eligible hedging instruments in a single-layer hedge may include spot-starting or forward-starting constant-notional swaps, or spot- or forward-starting amortizing-notional swaps and that the number of hedged layers (that is, single or multiple) corresponds with the number of hedges designated. In addition, the amendments in this Update specify that an entity hedging multiple amounts in a closed portfolio with a single amortizing-notional swap is executing a single-layer hedge, not hedges of multiple layers. Furthermore, while only closed portfolios may be hedged under the “portfolio layer” method, an entity is permitted to designate new hedging relationships and de-designate existing hedging relationships associated with a closed portfolio any time after the closed portfolio is established.
  4. Providing additional guidance on the accounting for and disclosure of hedge basis adjustments. If the aggregate amount of the hedged layers currently exceeds the amount of the closed portfolio (i.e. current breach) or if the entity no longer anticipates the hedged layer will be outstanding in future hedged periods (i.e. anticipated breach), then an entity is required to partially or fully de-designate a hedged layer or layers until there is no longer a basis difference.
  5. Specifying how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. The Update clarifies that an entity is required to maintain basis adjustments in an existing hedge on a closed portfolio basis (that is, not allocated to individual assets) and immediately recognize the impact of the basis adjustment in interest income. In addition, an entity is required to disclose that amount and the circumstances that led to the breach and basis difference. Furthermore, an entity is required to disclose the total amount of the basis adjustments in existing hedges as a reconciling amount if other areas of GAAP require the disaggregated disclosure of the amortized cost basis of assets included in the closed portfolio. Lastly, an entity is prohibited from considering basis adjustments in an existing hedge when determining credit losses.

Effective Date and Transition Requirements:

Public business entities: For fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

All other entities: For fiscal years beginning after December 15, 2023.

Early application is permitted. An entity that early adopts in an interim period should apply the amendments retrospectively to the beginning of the fiscal year of adoption.

The amendments in this Update related to multiple hedge layers should be applied prospectively and amendments related to hedge basis differences on a modified retrospective basis through a cumulative-effect adjustment to retained earnings. Entities have the option to apply amendments related to disclosures on a prospective basis or on a retrospective basis to each prior period presented.

Newly Effective

Calendar Year-end Public Companies

As a reminder, the following ASUs are effective for public companies for calendar year 2022:

  • ASU  2020-06: Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
  • ASU  2020-07: Not-for-Profit Entities (Topic 958)-Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets
  • ASU 2021-01: Reference Rate Reform (Topic 848): Scope
  • ASU 2021-04: Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force)
  • ASU 2021-05: Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments
  • ASU 2021-10: Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance

Calendar Year-end Private Companies

As a reminder, the following ASUs are effective for private companies for calendar year 2022:

Governmental Entities

As a reminder, the following GASB is effective for governmental entities for 2022:

Now is the time to plan and adequately prepare for the new lease standard. Cherry Bekaert’s dedicated team of professionals can help you navigate these changes and assist with your approach to implementing the new standard.

Additional Resources:

New FASB Lease Accounting Standard Readiness Checklist

New GASB Lease Accounting Standard Decision Tree