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FASB’s tentative guidance on recording interest income for loan modifications due to COVID-19

Under the interagency guidance published in March 2020 in response to COVID-19 pandemic, financial institutions across the country will be performing various loan modifications and allowing borrowers to temporarily stop loan principal and interest payments (“payment holiday”) for business affected by COVID-19.   Under the loan modifications, many banks requested additional guidance on accounting implications of these loan modifications as interest income would not accrue while the loan payment holiday is in effect.  

FASB staff issued tentative guidance related to the topic noting that the loan modifications subject to COVID-19 did not represent a troubled debt restructuring in accordance with Subtopic 310-40, Receivables—Troubled Debt Restructuring by Creditors.  Additionally, in accordance with Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs, the loan modifications would be accounted for as the continuation of the original lending arrangement; that is, not as a new lending arrangement. 

The staff discussed its response to how the institution should recognize interest income when a payment holiday is given and interest is not accrued in this scenario. There were two views expressed in the technical inquiry:

View 1—Upon modification, a new effective interest rate in accordance with Subtopic 310-20 is determined that equates the revised remaining cash flows to the carrying amount of the original debt and is applied prospectively for the remaining term. That is, interest income is recognized during the payment holiday period.

View 2—Upon modification, the institution should recognize interest income on the loan in accordance with the contractual terms. Under this view, the institution would recognize no interest income during the payment holiday and would resume recognizing interest income when the payment holiday ends.

View the FASB language.

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