April 6, 2011
Yesterday, the FASB issued a final standard to assist creditors in determining whether a modification of the terms of a receivable meets definition of a troubled debt restructuring (TDR). The final standard, Accounting Standards Update (ASU) No. 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” was issued as a result of stakeholders questioning whether additional guidance or clarification was needed to assist creditors with determining whether a modification is a TDR. The final standard does not change the long-standing guidance that a restructuring of a debt constitutes a TDR “if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.” In other words, the creditor must conclude that both the restructuring constitutes a concession, and the debtor is experiencing financial difficulties. For the purposes of those two tests, the final ASU provides clarifications.
For evaluating whether a concession has been granted, the ASU clarifies the guidance as follows:
- If a debtor does not otherwise have access to funds at a market rate for debt with risk characteristics similar to those of the restructured debt, the restructuring would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession.
- A temporary or permanent increase in the contractual interest rate as a result of a restructuring does not preclude the restructuring from being considered a concession because the new contractual interest rate on the restructured debt could still be below the market interest rate for new debt with similar risk characteristics.
- A restructuring that results in a delay in payment that is insignificant is not a concession. However, a credit should consider various factors, which are provided in the ASU, when assessing whether a restructuring resulting in a delay in payment is insignificant.
For evaluating whether a debtor is experiencing financial difficulties, the ASU clarifies the guidance as follows:
- Even though the debtor is not currently in payment default, a creditor may conclude that a debtor is experiencing financial difficulties. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without the modification.
- A creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (ASC 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring.
The ASU includes implementation guidance and illustrations.
For public entities, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and should be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. For nonpublic entities, the ASU is effective for annual periods ending on or after Dec. 15, 2012, including interim periods within that annual period. Earlier adoption is permitted. The ASU can be viewed here on the FASB’s website (acceptance of terms required).
The FASB has also issued a “FASB in Focus,” a short recap of the highlights of the final ASU.