The Financial Accounting Standards Board has issued an update that aims to improve financial reporting through greater consistency in the way generally accepted accounted principals (GAAP) is applied to debt restructurings.

The accounting standards update (No. 2011-02) clarifies which loan modifications constitute troubled debt restructurings. The FASB says the update will assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings.

For public companies, the FASB says, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011. The update applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption.

For nonpublic entities, the amendments in the update are effective for annual periods ending on or after December 15, 2012, including interim periods within that annual period.

“The increase in loan modifications caused by the recent economic downturn led investors, regulators, and practitioners to ask the board to clarify what types of modifications should be considered troubled debt restructurings for accounting and disclosure purposes,” says FASB

Chairman Leslie Seidman. “This update provides that guidance, resulting in greater consistency and transparency in the reporting of these transactions.”

The update is available here.

–Warren S. Hersch