Small Group Discussing Paperwork

Troubled debt restructurings (TDRs) for financial institutions require careful accounting treatment.

Financial Institutions Get Clarification on Treatment of Troubled Debt Restructurings

  • 11/15/2013

Financial Institutions Get Clarification on Treatment of Troubled Debt Restructurings

by Laura Espeseth

Financial institutions can mitigate risk with prudent troubled debt restructurings (TDRs). On October 24, 2013, the federal financial institution regulatory agencies jointly issued guidance (FIL 50-2013) stating that the agencies generally will not challenge financial institutions for modifying problem loans if doing so is in the best interest of both the institution and the borrower. Carefully considered workout arrangements can lead to improved loan performance and reduced credit risk. Unfortunately, these benefits are accompanied by regulatory reporting and accounting treatment that can make TDRs challenging.

A TDR designation

A TDR designation means the loan is impaired for accounting purposes but does not automatically result in an adverse classification for regulatory reporting purposes. Under Generally Accepted Accounting Principles (GAAP) (ASC 310-10-35 Impairment Measurement), a TDR is always an impaired loan and should be evaluated for impairment using one of three methods; cash flow, collateral less costs to sell, or observable market value. GAAP broadly defines when to use each of the impairment methods. The interagency letter provides financial institutions with additional guidance on how TDR impairment should be evaluated from a regulatory reporting standpoint. Institutions will need to evaluate their current GAAP-based policies, procedures, and financial statement disclosures to make sure they are consistent with the regulatory accounting principles recently issued.

The new guidance also provides further clarification surrounding the definitions, measurement, and charge-off treatment of TDRs.

Collateral-dependent TDRs


TDRs are “collateral dependent” when repayment is expected to be provided solely by the underlying collateral. This includes repayment from the proceeds from a sale, cash flow from the continued operations of the collateral, or both. For instance, a non-owner occupied loan, where the cash flow is expected to come solely from the rental income and there are no other available and reliable repayment sources, would be considered a collateral dependent loan.


Impairment is measured by determining the fair value of the collateral less costs to sell. If the repayment is dependent only on the operation of the collateral, the fair value would not be adjusted for estimated costs to sell.

Charge-off treatment

The portion of the loan balance that exceeds the fair value (less costs to sell, when applicable) of the collateral should be charged-off when it is deemed to be uncollectible. However, when the potential for loss may be mitigated by the outcomes of certain pending events (like a sale), or when the amount of loss cannot be reasonably determined, the institution may record a specific allowance against the loan.

TDRs that are not collateral dependent


If repayment is expected to be provided from anticipated cash flows from the borrower’s ongoing business operations, the impairment should be measured using the present value of future cash flows.


Expected cash flows should be based on a best estimate of reasonable and supportable assumptions. Contractual payments required under the terms of the loan may not be the best estimate of future cash flows. Be sure to take into account other considerations such as payment default, prepayment assumptions, and other environmental factors that may impact the borrowers’ ability to repay. You may also use the loan’s observable market price; however this information is not readily available to financial institutions.

In situations where a contractual balloon payment is required, uncertainty may exist about the borrower’s ability to make the payment. When there are no sources of cash flow available to make the payment at maturity, an acceptable approach is to consider the fair value of the collateral at the time of maturity. If the fair value of the collateral is greater than the balloon payment, the balloon payment should be used in the impairment calculation. If the fair value of the collateral is less than the balloon payment, use that collateral value less the costs to sell.

Charge-off treatment

Amounts should be charged-off when available information about future cash flow confirms that all or a portion of the loan is uncollectible.

The good news is that TDRs can help financial institutions reduce risk, but they still require a fair amount of work. CliftonLarsonAllen can review your current accounting policies and procedures surrounding TDRs, and help you outline the changes your organization may need to make to ensure you are properly accounting for TDRs.

Laura Espeseth, Manager, Financial Institutions or 612-397-3241