OUR THOUGHTS ON:

FASB Releases Troubled Debt Restructuring by Creditors ASU

Real Estate

By Scott Seapker

In late January, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure."

The purpose of the update was to clarify the EITF Issue 13-E and to define "in-substance repossession or foreclosure" because of the diversity in practice regarding when entities were reclassifying loans receivable to other real estate owned assets, instead of classifying them as a loan receivable. The timing of loan reclassifications to other real estate owned assets can be qualitatively significant to regulators and other financial statement users.  The ASU defines the in-substance repossession or foreclosure.

There are two circumstances where a creditor is deemed to have received physical possession of a real estate property:

1.  The creditor obtains legal title to the residential real estate property upon completion of a foreclosure. A creditor may obtain legal title to the residential real estate property even if the borrower has redemption rights that provide the borrower with a legal right for a period of time after a foreclosure to reclaim the real estate property by paying certain amounts specified by law.

2. The borrower conveys all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The deed in lieu of foreclosure or similar legal agreement is completed when agreed-upon terms and conditions have been satisfied by both the borrower and the creditor.

The ASU is effective for public entities for fiscal years beginning after December 15, 2014, and interim periods therein. For nonpublic entities, the ASU is effective for annual periods beginning after December 15, 2014, and interim and annual periods thereafter. Early adoption is permitted.

Please contact Schneider Downs & Co., Inc. if you have any questions about how the ASU might affect your organization accounting treatment of troubled debt restructuring.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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