FASB Requires Lenders to Disclose More Details About Certain Debt Restructurings

Lenders will have to disclose more details about certain concessions they provide to financially struggling customers under a new rule by the Financial Accounting Standards Board. The U.S. accounting standard setter also eased the related accounting requirements for the lenders.

The changes, approved Wednesday, apply to so-called troubled debt restructurings—a type of loan modification in which banks and other creditors give concessions to struggling borrowers, for example additional time to repay a loan. The FASB said it wants lenders to provide more useful information to investors and to simplify the accounting for lenders.

The new rule addresses some questions raised after the adoption of another recent rule on credit losses. That rule, known as Current Expected Credit Losses, requires companies to forecast related losses as soon as a loan is issued. CECL went into effect for large public firms in January 2020, with some of them choosing to delay implementing it for a year because of the Covid-19 pandemic. Private and smaller public companies have until next year to adopt CECL.

Under current rules, lenders need to set up separate cash flow models to measure their expected losses from certain concessions that stem from troubled debt restructurings.

The new rule, which is set to take effect next year, no longer requires lenders to account for troubled debt restructurings, because most of them are already captured in companies’ estimate of expected credit losses under the CECL standard, the FASB said. Existing accounting rules will still apply for borrowers in these situations.

Many lenders have criticized the existing accounting rules as burdensome and said it is unnecessary to recognize and measure troubled debt restructurings separately.

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 significant modifications they make to receivables, such as mortgage loans, for struggling borrowers, which they don’t currently have to do, the FASB said. Loan modifications could include a lower interest rate, term extension or principal forgiveness.

Additionally, the new rule requires publicly traded firms to disclose amounts of gross write-offs for the current period based on the year they originate, which wasn’t required under CECL. This is an effort to aid investors when analyzing lenders’ underwriting performance, the FASB said.

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

Lenders have largely supported the accounting change because they say it would ease their compliance efforts. But many of them have 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, thus lengthening the amount of time needed to implement the rule,

Muneera Carr,

the bank’s chief accounting officer, wrote in a Dec. 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 on Wednesday said the bank overall supports the rule, as it will better reflect the financial impacts of the accommodations made 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 Motor Co.

said the enhanced disclosure requirements are unlikely to provide useful information to investors,

Julie Garity,

the company’s director of global accounting policy, wrote in a Dec. 22 letter to the FASB. The auto maker provides financial services through Ford Motor Credit Company LLC. “The accounting model for loan modifications suggests these modifications are insignificant…so expanding the disclosures around them does not seem aligned in thought,” Ms. Garity wrote at the time. Ford declined to comment on the changes approved Wednesday.

The FASB aims to issue a document detailing the standard by the end of next month, a spokeswoman said. The board also voted against delaying the implementation of CECL for private and smaller public companies.

Write to Mark Maurer at [email protected]

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