As private companies, including not-for-profit organizations, continue implementing the Financial Accounting Standards Board’s Accounting Standards Codification Topic 326, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASC 326) (commonly referred to as “CECL”), it is important that those organizations be mindful of the various FASB Accounting Standards Updates (ASUs) that amended ASU 2016-13, which codified CECL. 

Often when it comes to the implementation of new accounting pronouncements, it is easy to focus on the original amendment to a section of the FASB’s Codification by way of its ASUs but it’s equally important to be mindful of subsequent amendments as they can also have a significant impact on an organization’s ability to completely and correctly implement the applicable provisions of changes to the Codification in order to ensure compliance with generally accepted accounting principles.One such amendment to ASU 2016-13 is ASU 2022-02, which changes the accounting guidance for troubled debt restructurings (TDRs) for creditors. 

As part of the FASB’s Post-Implementation Review activities, a common theme of feedback was that ASU 326 included credit losses from loans modified as TDRs in the allowance for credit losses. This rendered the legacy accounting guidance of separately designating a loan modification as a TDR unnecessarily complex and no longer providing decision-useful information.

Accordingly, as noted in the ASU, ASU 2022-02 eliminates the TDR recognition and measurement guidance for creditors and, instead, requires that an organization evaluate whether a loan modification represents a new loan or a continuation of an existing loan (consistent with the previous accounting guidance related to other loan modifications). However, it also enhances existing disclosure requirements and, most significantly, introduces new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. 

Amendments to ASC 310-10-50-45

As it relates to determining whether a debtor is experiencing financial difficulty, ASU 2022-02 moves ASC 310-40-15-20 to  ASC 310-10-50-45 and amends it by clarifying that that creditors should consider the following criteria (noting that it’s not all inclusive) when making the assessment: 

1. The debtor is currently in payment default on any of its debt. In addition, a creditor shall 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. That is, a creditor may conclude that a debtor is experiencing financial difficulties, even though the debtor is not currently in payment default. 

2. The debtor has declared or is in the process of declaring bankruptcy.

3. There is substantial doubt as to whether the debtor will continue to be a going concern.

4. The debtor has securities that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange.

5. On the basis of estimates and projections that only encompass the debtor’s current capabilities, the creditor forecasts that the debtor’s entity-specific cash flows will be insufficient to service any of its debt (both interest and principal) in accordance with the contractual terms of the existing agreement for the foreseeable future. 

6. Without the current modification, the debtor cannot obtain funds from sources other than existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a nontroubled debtor.

Amendments to ASC 310-10-50-46

When it comes to assessing a restructuring, and if a debtor is experiencing financial difficulties, ASU 2022-02 also amends ASC 310-10-50-46 to clarify disclosure requirements when there is simply a delay in payment that is “insignificant”. ASC 310-10-50-46, as amended, notes the following factors to consider together when determining if a restructuring results in a delay in payment that is insignificant:

1. The amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value of the debt and will result in an insignificant shortfall in the contractual amount due.

2. The delay in timing of the restructured payment period is insignificant relative to any of the following:

a. The frequency of payments due under the debt

b. The debt’s original contractual maturity

c. The debt’s original expected duration.

Amendments to ASC 310-10-50-47

Additionally, by way of amending ASC 310-10-50-47, when assessing if a delay in payment is insignificant, a creditor is to assess the cumulative effect of past restructurings made within a 12-month period before the current restructuring.

Once the assessment of whether a debtor is experiencing financial difficulties is complete, to the extent such a situation is identified, the guidance requires certain disclosures of any such modifications that are made in the form of principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, or any such combination. The guidance provides several illustrations of the new disclosure requirements.

What does CohnReznick think?

As not-for-profit organizations and other private companies finalize their implementation of ASC 326, they should ensure that their internal controls are updated accordingly to implement the guidance related to debtors experiencing financial difficulties both in their policies and procedures as well as their financial statements.