Final FASB Guidance on Troubled Debt Restructurings Due Out by March 31, 2011

Mar 01, 2011   

At its board meeting on February 23, 2011, the Financial Accounting Standards Board (FASB) stated that it plans to issue its final guidance on Troubled Debt Restructurings (TDRs) by March 31, 2011.

At the present time there are no clear guidelines to assist creditors in determining whether a loan or other debt modification meets the criteria to be considered a TDR, both for debt recording and TDR disclosure purposes.  In announcing the guidance initiative last year, FASB Acting Chairman Leslie Seidman stated that the guidance should “result in more consistent application of GAAP for debt restructurings.”

On the basis of public comments and Board deliberations to the guidance initiative, FASB recommended earlier this year that the final guidance will feature:

  • a specification that the absence of a market rate for a loan with risks similar to the restructured loan is an indicator of a troubled debt restructuring, but not a determinative factor
  • >assessment of whether a restructuring reaches the level of a TDR should consider all of the modified terms of the restructuring, including any additional collateral or guarantees
  • >insignificant delays in cash flows are a factor to consider when determining whether a concession has been granted
  • >for purposes of determining whether a borrower is experiencing financial difficulty, creditors should consider whether default is “probable in the foreseeable future.”

At the February 23rd Board meeting, the FASB discussed many facets of TDRs including a lengthy analysis of the concept of “insignificant delays in cash flows,” in the context of restructurings.  The Board also discussed the transition provisions and effective date for the new guidance.

With respect to the latter issue, the FASB affirmed that the final guidance on TDRs will be prepared by March 31 of this year.  The Board also stated that the interim guidance proposed in the October 13, 2010 Exposure Draft would be effective on a prospective basis for interim and annual periods ending after June 15, 2011, with retrospective application permitted.