UPDATE 3-FASB proposes debt restructuring reporting change

* FASB to change debt restructuring reporting

* Change would apply to loan modifications

* Change may include amend-and-extend deals
(Adds analyst’s comment)

By Dena Aubin

NEW YORK, Oct 12 (BestGrowthStock) – The Financial Accounting
Standards Board, which sets U.S. accounting rules, proposed on
Tuesday a change in standards to improve how companies report
troubled debt restructurings.

The revisions are meant to address divergent practices in
accounting for loan modifications of mortgages or corporate
debt, FASB said in a statement.

Troubled debt restructurings became a bigger issue as
politicians and regulators put pressure on banks to modify
mortgage loans to struggling homeowners during the housing
crisis. Banks also restructured massive amounts of corporate
debt to help companies avoid bankruptcy.

The FASB rule will clarify when those modifications should
be classified as troubled debt restructurings, which have their
own accounting treatment.

The change would also apply to banks granting corporate
loan extensions, or so-called “amend and extend” deals.

In amend-and-extend deals, banks ease terms on loans from
troubled borrowers, giving them more time to pay to forestall
defaults. Such deals were one of the main tools companies used
to avoid bankruptcy in recent years, but the deals have drawn
criticism for simply pushing problems into the future or
allowing banks to avoid taking write-downs on bad loans.

U.S. securities regulators have been looking into whether
financial firms played down exposure to troubled loans by using
overly optimistic accounting assumptions when they did
amend-and-extend deals. For details click on [ID:nN29256920].

The new guidance will make clear that a modification may be
considered a troubled debt restructuring even if the loan rate
is not lowered.

Banks will have to take into account circumstances of the
modification, such as whether the borrower could have
refinanced with another institution at a rate it could afford.

If they do fall under the definition of trouble debt
restructurings, loans will have to be identified as impaired
and losses measured individually for each loan using specific

The change could also prompt banks to record losses sooner,
said Robert Willens, an accounting expert and president of
Robert Willens LLC.

“Outside of a troubled debt restructuring, you have much
more flexibility and you have an opportunity to even perhaps
delay having to report a loss,” Willens said.

In addition, as of the end of this year, banks will have to
report their volume of troubled debt restructurings in a given
period and how many of those loans went into default despite
the modifications.
(Reporting by Dena Aubin; editing by Ted Kerr, Robert
MacMillan, Richard Chang editing by Andre Grenon)

UPDATE 3-FASB proposes debt restructuring reporting change