Eliminating TDR Accounting: Finally a Carrot for Adopting CECL?

By Josh Stein

ABA’s position that troubled debt restructurings are outdated and unnecessary is gaining steam, demonstrated by the recent roundtable on current expected credit losses held by the Federal Accounting Standards Board last month. During the roundtable, FASB introduced an alternative to eliminate TDR accounting for banks that have adopted CECL. As expected, there was overwhelming support for the alternative. ABA spoke with FASB’s technical director and the CECL project manager in early June and anticipates that FASB will consider adding a project to eliminate TDR accounting in the near future.

That said, FASB does not typically move quickly on projects, and it would be particularly helpful to push this one across the finish line so that banks, currently exempt from TDR accounting, can either adopt a change before TDR accounting goes back into effect or, at a minimum, before the majority of banks adopt CECL in 2023. In addition, the project—while seeking to eliminate TDR accounting—will likely replace it with certain disclosure requirements so that the users of financial statements can get information regarding loan modifications.

ABA is working to get ahead of the curve. This week we’ll begin organizing meetings to identify issues and develop industry consensus on what a new reporting regime should look like. Specific areas of concern include:

  • Limiting disclosure requirements to efficient and meaningful disclosures that can be scaled to investor needs. For example, many banks included significant additional disclosure to help users understand modification programs resulting from the pandemic. That level of disclosure, while helpful to users, is probably not necessary in a benign environment and disclosure requirements should consider that.
  • Transitioning for loans currently in TDR status may be a particularly thorny issue. Specifically, when you consider the typical transition options at FASB’s disposal (retrospective, prospective, etc.) significant operational or mechanical issues may develop. Banks of all sizes may have challenges, those challenges will take different forms. That means it will be particularly important to inventory potential issues from the perspectives of a diversity of banks.
  • Working to alleviate bank regulator concerns. During the roundtable, bank regulator representative offered concerns about eliminating TDR accounting. Based on discussions with the banking chief accountants earlier this month, they do not strongly oppose the alternative but do have some concerns. It will be important to address those for the project to move quickly.

Please email with any thoughts or questions you have or if you have interest in participating in a meeting.

Josh Stein is VP of accounting and financial management at ABA.

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Josh Stein

Josh Stein is VP for accounting policy at ABA.