On October 28, 2020, the Financial Accounting Standards Board (FASB) issued an educational paper on accounting for the debt modifications of borrowers. As a result of the COVID-19 pandemic, many borrowers have found themselves with loan modifications and are unsure of how to deal with the accounting impacts.
The paper discusses the following topics:
- Guidance for determining whether a modification is accounted for as a troubled debt restructuring (TDR) or a modification or extinguishment.
- The paper provides a detailed analysis of determining if the borrower is experiencing financial difficulties and if the lender is granting a concession which are the prerequisites for TDR accounting.
- The paper then walkthroughs the accounting for TDR. The treatment will vary based on whether the undiscounted future cash flows under the new terms is greater than or less than the net carrying amount of the debt at the time of the restructuring.
- The paper also provides guidance for modifications that do not meet the requirements of TDR. The accounting varies based on whether the loan is a line of credit or another form of debt.
- Lastly, the paper provides eight examples of both TDR and nontroubled debt restructuring.
You can read the entire educational paper here.