The Center for Audit Quality has released a paper to provide guidance on applying accounting standards to residential mortgage modifications.

The paper, "Application of Statement 114 to Modifications of Residential Mortgage Loans That Qualify as Troubled Debt Restructurings," aims to help preparers and auditors deal with applying FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan-an Amendment of FASB Statements No. 5 and 15."

It does not establish any new standards, but tries to spell out some of the existing requirements of the GAAP literature as well as common accounting practices, with the objective of helping preparers and auditors understand the application of existing GAAP to residential mortgage loans.

Much of the paper takes the form of questions and answers, such as , "How should an entity determine if a modification of the terms of a residential mortgage loan would be considered a troubled debt restructuring under Statement 15?" The paper notes that, in accordance with paragraph 2 of Statement 15, "a restructuring of a debt constitutes a troubled debt restructuring ... if the creditor for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider."

The paper also describes how an entity should determine the expected future cash flows of a residential mortgage loan, and discusses issues such as impairment and discount rate.

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