On March 27, the Coronavirus Aid, Relief, and Economic Security (CARES) Act
was signed into law providing relief from the economic impact of the COVID-19 pandemic to a variety of sectors of the U.S. economy, including businesses, individuals, health care, education, and state and local governments. The CARES Act also includes provisions that provide optional relief from certain accounting requirements related to
- Loan restructurings by creditors
- ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which introduced the current expected credit loss (CECL) model into U.S. GAAP
This optional relief is only available to entities that qualify under the provisions of each respective section of the CARES Act. Whether an entity qualifies is a legal determination.
Impact on U.S. GAAP
On April 3, 2020, the SEC’s Chief Accountant Sagar Teotia released a statement
in which he noted that the SEC staff will not object to the conclusion that an election to apply Sections 4013 and 4014 of the CARES Act by entities that are eligible for the narrow and temporary relief provided by those sections would be deemed to be in accordance with U.S. GAAP.
Section 4013, Temporary Relief from Troubled Debt Restructurings
, of the Act provides optional, temporary relief from certain accounting and financial reporting requirements that apply to a lender’s accounting for troubled debt restructurings (TDRs). Section 4013 states that a financial institution may elect to suspend either of the following requirements under U.S. GAAP:
- Guidance for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR
- Guidance regarding a determination that a loan modified as a result of the COVID-19 pandemic
is a TDR, including for impairment accounting purposes
This optional relief in Section 4013 is only available to financial institutions.
The provisions in Section 4013 of the Act apply to restructurings of loans that were not more than 30
days past due as of Dec. 31, 2019, and which occur between March 1, 2020, and the earlier of 60 days after the president terminates the COVID-19 national emergency and Dec. 31, 2020. The restructuring of a loan, including a forbearance arrangement, an interest-rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal and interest, should be related to the COVID 19 pandemic. The exception in Section 4013 does not apply to any adverse impact on a borrower’s credit that is not related to the COVID–19 pandemic.
Banking regulator guidance on TDRs
On March 22, 2020, various federal and state financial institution regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus
.” The Interagency Statement provides an interpretation of the guidance in ASC 310-40, Receivables: Troubled Debt Restructurings by Creditors
, and specifically the guidance on whether a restructuring constitutes a TDR. The FASB has concurred
with the accounting interpretation promulgated in the Interagency Statement.
However, the accounting interpretations in the Interagency Statement and in the provisions of Section 4013 of the Act are not consistent.
For instance, the Interagency Statement and Section 4013 differ with regard to when the past
due status of a borrower is assessed (Interagency Statement – at the inception of the modification or modification program; the Act – Dec. 31, 2019) for purposes of determining the applicability of the respective guidance. Additionally, the accounting interpretation in the Interagency Statement applies to any restructuring related to the pandemic, no matter when the restructuring takes place, whereas the relief provided by Section 4013 only applies to restructurings occurring between defined dates.
See “COVID-19-related loan restructuring by creditors
” for a summary of the Interagency Statement and the accounting for restructured loans that are not TDRs.
ASU 2016-13 and the CECL model
Section 4014, Optional Temporary Relief from Current Expected Credit Losses
, of the Act provides optional, temporary relief from applying the CECL model. Section 4014 states that no financial institution shall be required to comply with ASU 2016-13, including the CECL methodology for estimating allowances for credit losses.
The optional relief in Section 4014 is only available to
- Insured depository institutions (as defined in Section 3 of the Federal Deposit Insurance Act)
- Bank holding companies
- Affiliates of insured depository institutions or bank holding companies
- Credit unions regulated by the National Credit Union Administration
The provisions in Section 4014 apply during the period beginning March 27, 2020, to the earlier of the date when the president terminates the COVID-19 national emergency or Dec. 31, 2020.
Based on discussions with the SEC staff, we understand that eligible entities that elect to defer the adoption of ASU 2016-13 will need to apply the transition provisions of ASU 2016-13 when the deferral period under Section 2014 ends. That is, entities will need to retrospectively restate their year-to-date results when they adopt ASU 2016-13 to reflect its application as of the beginning of the entity’s fiscal year, which would be as of Jan. 1, 2020, for entities with calendar year-ends. Quarterly results during the deferral period will also need to be retrospectively restated in future quarters when presenting comparative results.
For more on the CECL model in ASU 2016-13, please see “Measuring credit losses on financial instruments
For in-depth coverage of the pandemic’s impact, visit Grant Thornton’s COVID-19 Resource Center
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