Troubled Debt Restructuring (TDR) accounting has some of the most difficult accounting rules to interpret, primarily because they are subjective in nature. As a result, credit union management have to implement policies and procedures to properly identify, monitor, and report troubled debt restructurings to their supervisory committees, boards, regulators, and auditors.

Implementing these types of policies and procedures will require a well-trained professional who understands the nuances of accounting for TDRs, and is also knowledgeable about internal controls and how to analyze which controls to implement based on cost/benefit, risk, and impact on operations. With this in mind, here are some key points to consider when determining what policies and procedures should be implemented:

  1. Identifying a TDR
    • Training: the accounting rules for what constitutes a TDR are subjective, and not all loans that are modified will be TDRs. Properly training loan staff on how to identify a TDR is critical.
    • Checklist: Consider using a checklist with the TDR criteria (GAAP) and common examples for loan administrative staff to use in making changes to loans in the system.
    • Segregation of duties: All loan modifications should go through a formal process where more than one or two people are responsible for the modification.
    • Review process: Implement a review process to go back and ensure all modified loans for potential TDRs.
    • Reporting: Use information reports from the loan application system to report all loans modified during a specific time period (one or two quarters at most).
    • Define and Review: Then define a material dollar amount and review all modified loans over that amount to determine if it should be considered a TDR.Document everything: The general rule is if you didn’t document it, you didn’t do it. The burden of proof lies with the credit union. Regulators and auditors will require adequate reasoning for decisions in which a loan was modified and determined not to be a TDR.
      • The review should be done by a professional who is knowledgeable of TDR accounting and regulatory requirements (usually the Internal Auditor, Controller, or CFO).
      • It is imperative to have the reviewer and preparer sign and date when the review is performed.
  2. Monitoring and tracking
    • Use information reports from the loan application system. Most systems now have fields for notating if a loan is a TDR.
    • If your loan systems do not have a way to track TDRs, then track them using some other form, such as Excel.
    • Keep and maintain documentation of the reports that support amounts used to disclose and report TDRs for financial and regulatory purposes.
  3. Accounting
    • Regularly train key staff to stay current on accounting and regulatory changes.
    • Have a process in place to ensure TDRs are reviewed for impairment at the time of restructuring, and properly disclosed in financial statements and call reports. All TDRs inherently are impaired and will have a negative impact on the credit union, resulting in lower earnings and additional regulatory and financial reporting disclosure requirements.
    • Keep and maintain documentation of the reports that support amounts used to disclose and report TDRs for financial and regulatory purposes.
  4. Report to the board on a monthly or quarterly basis
    • Use reports to make educated decisions on credit availability to the individual member and membership, as well as to provide support for regulators and auditors.
    • Report to the board of directors and/or supervisory committee on a quarterly basis.
    • Disclose TDRs in quarterly call report filings with NCUA, and on annual audited financial statements.

In terms of accounting for troubled debt restructuring, identification is key. A credit union can have all other proper controls in place but if a TDR isn’t properly identified, it can’t be properly monitored, accounted for, and reported.