This publication was updated on July 8, 2020, to (1) add Q&As 2A and 2B (on the application of CARES Act/interagency guidance to interest rate modifications to loans) and (2) amend Q&A 5 (on the recognition of interest income on modified loans if interest does not accrue on deferred payment obligations of the borrower). Text that has been added or amended since the publication’s initial issuance has been marked with a boldface italic date in brackets throughout the document. Note that additional updates to this publication may be issued in the future, as warranted.
FASB Accounting Standards Codification (ASC) Subtopic 310-40, Receivables: Troubled Debt Restructurings by Creditors.
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, and the State Banking Regulators.
FASB Accounting Standards Codification Subtopic 470-60, Debt: Troubled Debt Restructurings by Debtors, addresses the borrower’s determination of whether a modification represents a TDR. We generally believe that borrowers may reasonably conclude that modifications are not TDRs when they are made in accordance with a modification program established by lenders that broadly applies regardless of a specific evaluation of the borrower’s financial circumstances. [Footnote amended May 1, 2020]
FASB Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments.
FASB Accounting Standards Codification Subtopic 310-10, Receivables: Overall.
This question is intended to address situations in which a modification was made to the loan only in response to the COVID-19 pandemic (e.g., this question does not address modifications that include other revisions such as a change from a LIBOR rate to another variable interest).
FASB Accounting Standards Codification Subtopic 310-20, Receivables: Nonrefundable Fees and Other Costs.
FASB Accounting Standards Codification Topic 235, Notes to Financial Statements.
These events may also result in the need to write off a modified loan.
Note that the six-month limitation is applied on a cumulative basis. For example, an entity that modifies a loan to defer payments for three months could subsequently provide for another modification to defer payments for up to another three months.
Although the interagency guidance applies to financial institutions regulated by the Agencies, because the guidance was developed in consultation with the FASB staff, which concurred with the approach, we believe that nonfinancial institutions may also elect to apply the guidance.
Under the CARES Act, a modification may include a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest.
This would apply only if the lender had no option to avoid granting the modification.
We believe that two three-month consecutive delays, for example, could be acceptable.