Is the Bank Properly Identifying Loans Classified as Troubled Debt Restructure?

Accounting guidance for Troubled Debt Restructurings (TDRs) is included in Accounting Standards Codification (ASC) 310-40.  According to the guidance, a modification of a loan’s terms 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 the creditor would not otherwise consider.  The concession could either stem from an agreement between the creditor and debtor or could be imposed by a court. 

A financial institution has granted a concession when as a result of the loan restructure, the institution does not expect to collect all amounts due, including interest accrued at the original contract rate.  A debtor is considered to be experiencing financial difficulties if they are in payment default on any debt or it is probable the debtor will be in payment default on any debt  in foreseeable future without modification; the debtor has or is declaring bankruptcy; the business is a going concern; cash flows are insufficient to service any of their debt without modification; or the debtor cannot obtain funds from sources other than the existing creditor at an effective interest rate equal to the current market interest rate for similar debt.

The list that follows includes some, but not all, examples of modifications that could represent TDRs:  payment deferral, extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risks, reduction or forgiveness of accrued interest, reduction of the stated interest rate for the remaining original life of the debt, or reduction of the face amount or maturity amount of debt as stated in the note or other agreement.  A concession must be granted based on the borrower’s financial difficulty.  However, not all modifications of terms result in a TDR.  If the modified terms are consistent with market conditions and are representative of terms the borrower could obtain from other sources, the restructured loan is not classified as a TDR. 

If the loan meets the definition of a TDR in accordance with ASC 310-40, the TDR loan must be measured for impairment under ASC 310-10-35.  Financial institutions should review their policies and procedures in place to ensure they have procedures in place to properly identify and evaluate loan modifications for the TDR designations.