Debt restructuring is one way that banks assist borrowers who are experiencing financial difficulty. Troubled debt restructurings (or TDRs) are traditionally subject to a complicated set of accounting rules.

Recently, however, the Financial Accounting Standards Board (or FASB) confirmed that short-term modifications to a loan that result from a borrower experiencing COVID-19 related financial difficulties do not necessarily qualify as a TDR, and are therefore not subject to the same regulations. 

Reporting troubled debt restructuring 

Under Accounting Standards Codification (ASC) Topic 310-40, Receivables — Troubled Debt Restructurings by Creditors, a debt restructuring is considered a TDR if:

• The borrower is troubled AND
• The creditor, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession it wouldn’t otherwise consider.

TDRs are generally considered impaired loans and reported accordingly. Loan impairment is measured by calculating the decline in the value of the loan resulting from the modification, taking into account the original loan’s interest rate. 

Loan modifications that may be classified as a TDR under U.S. Generally Accepted Accounting Principles (GAAP) include:

• A reduction of the stated interest rate for the remaining original life of the debt,
• An extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk,
• A reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, and
• A reduction of accrued interest.

Restructuring typically tries to reduce or defer near-term cash payments to grant the borrower time and resources to navigate short-term financial difficulty. 

COVID-19 restructuring or TDRs

In early 2020, the FASB confirmed that as long as a borrower is up-to-date on their payments when they make modifications, short-term modifications for short-term operational or financial problems resulting from COVID-19 won’t automatically be considered TDRs. As such, a borrower is defined as “current” if they are less than 30 days past due on loan payments. 

These modifications may include:

• Payment deferrals,
• Extensions of repayment terms,
• Fee waivers, and
• Other minor payment delays.

Federally or state-mandated deferral programs responding to COVID-19 (such as the suspension of mortgage payments) are also not subject to ASC Topic 310-40.

Learn more

The COVID-19 pandemic presents challenges for both borrowers and lenders. Contact your trusted Smolin advisor with questions or for help accounting for loan modifications and measuring impairment.