COVID-19 loan modifications and troubled debt restructurings (TDRs)
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law in March 2020 in response to the COVID-19 pandemic, contained certain provisions offering relief from the requirements of certain generally accepted accounting principles in the United States (GAAP) for troubled debt restructurings (TDRs). Additionally, a group of banking agencies, in collaboration with the Financial Accounting Standards Board (FASB), issued an Interagency Statement in March 2020 (revised in April 2020) with practical expedients for evaluating whether loan modifications in response to COVID-19 are TDRs. The Interagency Statement, as revised, is important for lenders to understand because, under certain circumstances, it alleviates the burden of accounting for TDRs.
Under FASB Accounting Standards Codification (ASC) Subtopic 310-40 (ASC 310-40), a debt restructuring qualifies as a TDR if the creditor grants a concession as a result of the debtor experiencing financial difficulties. TDRs are considered impaired loans, and lenders must disclose specific information related to TDRs on an annual basis.
The relief included in Section 4013 of the CARES Act is applicable to financial institutions and insurance companies. It allows the companies to suspend application of TDR guidance to loan modifications if (1) the modification is related to COVID-19; (2) the borrower was not more than 30 days past due as of Dec. 31, 2019; and (3) the modifications are related to arrangements that defer or delay payment of principal and interest, or modify the interest rate on the loan. The applicable period for this relief was originally for modifications entered into from March 1, 2020, through Dec. 31, 2020, and was recently extended until the earlier of (1) 60 days after the national emergency termination or (2) Jan. 1, 2022, by way of the 2021 Consolidated Appropriations Act. While the guidance under the CARES Act is intended to provide relief to lenders, election to apply the guidance has been and continues to be voluntary.
The Interagency Statement provides interpretations on application of TDR requirements under ASC 310-40 to loan modifications related to COVID-19, including guidance for modifications that may not qualify for the CARES Act relief. It states that financial institutions may presume that borrowers are not experiencing financial difficulties and, therefore, the associated modification would not be a TDR, if (1) the modification is in response to the national emergency, (2) the borrower was current on payments at the time the modification program was implemented, and (3) the modification is short-term (i.e., six months or less). While the Interagency Statement is an interpretation of GAAP and does not have an application ending date, it is associated with COVID-19-related modifications and expected to be temporary.
Evaluating TDRs requires significant time, effort, and judgment in assessing whether the modification is a TDR and applying the accounting guidance. Both the CARES Act and the Interagency Statement provide ongoing relief throughout the COVID-19 pandemic. Companies should review their accounting policies for TDR evaluation and reporting and determine whether they can benefit from this relief.
CohnReznick will continue to monitor developments related to relief provisions in response to COVID-19 and communicate them as they become available. In the meantime, if you have any questions, don’t hesitate to reach out to your CohnReznick contact and visit CohnReznick’s Coronavirus Resource Center.
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