The FASB has issued an Accounting Standards Update to provide additional guidance about when a receivable restructure is considered a Troubled Debt Restructuring.
Who Does This Impact?
Any entity that acts as a creditor and has receivables that are restructured.
What Does It Do?
This Accounting Standards Update clarifies previous guidance issued by the FASB surrounding when a restructured receivable should be considered a TDR.
Many FASB constituents found that the TDR guidance was being applied inconsistently and this Update helps to minimize the confusion.
A TDR is a restructured receivable that involves the creditor granting a concession for legal or economic reasons due to the debtor’s financial difficulties. If a receivable is considered to be a TDR, it is considered impaired and the FASB requires the receivable to be subject to a specific impairment measurement model.
This required impairment model compares the current recovered investment in the receivable to the present value of the cash flows to be collected. This model is the only measurement model allowed when a receivable is considered to be a TDR. When defining what is meant by a concession, the ASU clarifies the FASB position and gives examples such as term extensions, principal or interest forgiveness and reductions in rate. However, the rate reduction definition is expanded to indicate that a rate reduced to or near a market rate is NOT considered a concession, it is merely an adjustment. A delay in payment by the debtor is not considered a concession either.
When is this Effective?
The guidance in this ASU is effective for annual periods ending after December 31, 2012. Early adoption is permitted – when adopted, the guidance should be applied to all restructurings occurring on or before the beginning of the fiscal year of adoption.
