LOANS
2A. Troubled Debt Restructurings
Bank Accounting Advisory Series
40
August 2018
thus, the 8 percent rate during the reset period is the
current LIBOR, 6 percent, plus 2 percent.
Facts
Bank X has a fixed-rate mortgage from Borrower A in its held-for-investment portfolio.
Borrower A’s mortgage is part of a portfolio of mortgages that are evaluated collectively for
impairment and for which an ALLL has been established, even though no specific loan has been
identified as impaired. Borrower A is having difficulty making payments. Bank X has
determined that it is in the bank’s best interest to modify Borrower A’s loan by lowering the
interest rate from 7 percent to 6 percent. The 6 percent rate is below the
market interest rate the
bank would typically charge a borrower with similar credit risk as Borrower A. The lower
interest rate results in contractual payments of $603.40 per month. Because of Borrower A’s
financial difficulties and the interest-rate concession granted by Bank X, the loan is a TDR and
subject to ASC 310-10-35 for impairment measurement. The terms of the original loan and the
modified loan are as follows:
Original loan terms
Modified loan terms
Payment: $665.12
Payment: $603.40
Interest rate: 7%
Interest rate: 6%
Remaining term: 27 years
Remaining term: 27 years
Loan balance: $96,700
Loan balance: $96,700
One approach to develop the best estimate of expected future cash flows would
be to incorporate
default and prepayment assumptions that would be relevant to an aggregated pool of loans with
risk characteristics similar to the restructured loan. In addition, the analysis may incorporate
uncertainty about the timing and amount of borrower payments. Bank X incorporates these
assumptions in its cash flow analysis and expects to receive approximately $580 per month for
the remaining term of the loan. Present value of the expected future cash flows discounted at the
original effective interest rate is approximately $84,300. For simplicity,
recorded investment in
the loan at the time of the TDR equals the loan balance of $96,700, and the treatment of any
accrued interest receivable is not considered in this example.
Question 34
How is the impairment calculated?
Staff Response
The present value of the modified loan’s expected cash flows discounted at the original effective
interest rate is approximately $84,300, which is less than the recorded investment in the loan of
$96,700. The difference of approximately $12,400 is the measurement of impairment at the time
of the restructuring as required by ASC 310-10-35.
LOANS
2A. Troubled Debt Restructurings
Bank Accounting Advisory Series
41
August 2018
Facts
A borrower has a first lien residential mortgage with Bank A and a second
lien residential
mortgage with Bank B. Bank A modified the borrower’s first lien mortgage through a TDR. At
the time the first lien mortgage is modified with Bank A, the borrower is current on his second
lien mortgage with Bank B. Bank B has not modified the borrower’s loan.
Question 35
How should Bank B account for the second lien mortgage under ASC 310-10 after the first lien
mortgage was modified?
Staff Response
ASC 310-10-35 scopes out large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment. Those loans may include but are not limited
to credit card,
residential mortgage, and consumer installment loans. As a result, residential mortgage loans are
generally evaluated for impairment as part of a group of homogenous loans under ASC 450-20.
Therefore, the only time a residential mortgage loan is required to be analyzed for impairment
under ASC 310-10-35 is when the residential mortgage loan is modified and classified as a TDR.
In the scenario described above, Bank B will include the second
lien mortgage loan in its
allowance methodology under ASC 450-20; the second lien loan has not been modified and is
therefore not a TDR subject to ASC 310-10-35.
In addition, while the borrower’s first lien mortgage has been modified by Bank A, Bank B may
not be aware of this action. When Bank B does become aware of a first lien modification,
however, Bank B should recognize that the second lien mortgage loan
borrower is facing
financial difficulties and that the second lien mortgage has different risk characteristics than
other second lien mortgage loans that have not had their first lien mortgage modified or are not
suffering financial difficulties. Following the modification of the first lien mortgage, Bank B
should consider segmenting the loan into a different ASC 450-20 group that reflects the
increased risk associated with this loan. Alternatively, the bank may consider applying additional
environmental or qualitative factors to this loan pool to reflect the different risk characteristics.
Facts
A bank’s short-term modification (i.e., 12 months or less) program delays payments for
troubled borrowers. Because the modifications are short term, the bank
concludes the delay in
payment is insignificant.
Question 36
Is the bank’s basis for concluding the delay in payments is insignificant appropriate?
Staff Response
No. It is not appropriate to conclude the delay in payments is insignificant simply because the