The Center for Audit Quality issued a year-end white paper to fortify rules calling for a full accounting of troubled mortgages that have been restructured.

The paper’s intent is to address questions regarding how to apply FAS 114, Accounting by Creditors for Impairment of a Loan, to restructured mortgages, especially given the sheer volume of activity as homeowners default in record numbers. The CAQ said it is not endeavoring to write or interpret Generally Accepted Accounting Principles, but instead “to articulate certain existing requirements of GAAP literature as well as common accounting practices.”

FAS 114 provides the accounting for loans that have been modified in some fashion as part of a troubled debt restructuring. Bankers face an unprecedented number of such workouts as troubled loans, particularly sub-prime and adjustable-rate mortgages, have defaulted in record numbers. The standard excludes “large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment,” such as residential mortgages, points out the CAQ. However, the standard sweeps those loans back into the accounting if they’ve been restructured, said the CAQ.

The Mortgage Bankers Association appealed to the Financial Accounting Standards Board in late 2007 to change the requirements of FAS 114 and hearken back to an older approach found in FAS 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. The MBA said its members didn’t have the systems capability to remeasure the sudden large number of loans that required workouts under FAS 114, which generally requires a fair-value approach for measuring loan losses. FAS 5, on the other hand, gives more flexibility for how to measure the expected loss, including use of historical data. The banker group even provided a detailed response to FASB’s questions, but FASB ultimately declined to act.

Jay Hanson, national director of accounting for McGladrey & Pullen, said the paper will be helpful in applying FAS 114 in an unusual market environment. He said CAQ took great care to avoid establishing any kind of interpretations that could be used as leverage either by preparers or auditors. “It’s bullet proof,” he said. “There’s no leap of faith in there about what it means. It just says here’s what you do. It’s a roadmap of what to do based on the accounting rules.”