Receivables-Troubled Debt Restructuring

In August 2014, the Financial Accounting standards Board (FASB) issued its proposed accounting standard update, Receivables – Troubled Debt Restructuring by Creditors (Subtopic 310-40). It covers the classification of certain government-guaranteed mortgage loans upon foreclosure. Under the original guidance on troubled debt restructuring, the general accepted accounting principles (GAAP) only applied to situations in which a creditor obtained a debtor’s assets in satisfactions of the receivable through foreclosure, and did not provide specific guidance on how to classify or measure foreclosed mortgage loans that are government guaranteed.

Current GAAP provides no guidance on how to determine whether two separate assets should be recognized (real estate and guarantee receivable). In practice, most creditors recognize a nonfinancial asset (other real estate owned). Regardless of the classification of the asset (or assets), measurement of the asset (or total measurement of the assets) in practice generally represents the amount recovered under the guarantee. The amendments in this update should reduce diversity in practice by providing guidance on how to classify and measure certain government-guaranteed mortgage loans upon foreclosure.

This amendment will become effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For all other entities, the amendments in the update will be effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. When adopting the amendment the entity should use either a prospective transition method or a modified retrospective transition method.