Topic 326 requires entities to recognize an allowance for expected credit losses based on an entity’s current estimate of future cash flows to be collected from the financial instrument upon acquisition or origination.  In addition, entities are subject to certain disclosure and reporting requirements if an acquired or originated loan is classified as a troubled debt restructuring (TDR) under Subtopic 310-40, Receivables – Troubled Debt Restructuring by Creditors. Investors and stakeholders have noted that the credit losses from loans modified as TDRs are already incorporated into the allowance for future expected credit losses under Topic 326, and the designation of these instruments as TDRs has led to disclosures and accounting that no longer provide useful information to users of the financial statements.  The proposed amendment eliminates the recognition and measurement guidance under Subtopic 310-40, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty.

Furthermore, stakeholders noted inconsistencies in the disclosure guidance and disclosure examples under Topic 326 regarding whether public entities are required to disclose gross write-offs and recoveries by class of financing receivable and major security types.  Investors and other financial statement users have communicated that these disclosures provide important decision-useful information, and therefore this proposed amendment would require a public entity to disclose these amounts.

The full text of the Exposure Draft is available here.

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