The primary decision points considered by the . Crowe accounting professionals have deep expertise in the accounting for debt modifications, including those that represent troubled debt restructurings. However, reporting entities should consider whether any fees paid in the restructuring should be allocated to the delayed draw commitment. In other words, they believe it is not possible to separately identify the prepayment amount. Under U.S. GAAP, a TDR represents a scenario in which, for legal or economic reasons, a lender agrees to grant to a borrower who is experiencing financial difficulties a concession that it would not otherwise consider for example, full (or partial) forgiveness of certain principal or interest payments or a reduction of the stated interest rate. See, When a loan modification or exchange transaction involves the addition of a delayed draw loan commitment with the same lender, we believe it would not be appropriate to include the unfunded commitment amount of delayed draw term loan in the 10% test since the commitment is not funded on the modification date. This was clarified by an amendment to IFRS 9 in the Annual Improvements to IFRS Standards 2018-2020 [ 231 kb ] issued on 14 May 2020. If the intermediary derives gains based on the value of the security issued by the debtor, that would indicate that the intermediary is a principal. |!uoSC$|{e In response, some lenders have agreed to changing the borrowing terms or providing waivers or modifications to debt covenant arrangements. However, for the purposes of the accounting entries, our view is the fees to the lender should be expensed while the legal fees should be amortised as explained above. Whereas above, in the final step, the fees included as an adjustment to the EIR are all fees, including external fees (such as lawyer fees). Reg. Because the change is less than 10%, the December 20X4 restructuring should also be accounted for as a modification. FG Corp restructures its term loan again in December 20X4. Examples of this type of modification include issuing new debt in different currency from old debt, or equity instrument embedded in the new debt. If this present value A debt modification may be effected by: Amending the terms or cash flows of an existing debt instrument. TFCD reporting requirements are becoming mandatory. That is, when a loan is modified, unamortized fees should continue to be deferred, new creditor fees should be capitalized and amortized as part of the effective yield and new fees paid to third parties should be expensed. Are you ready for IFRS 16? Welcome to Viewpoint, the new platform that replaces Inform. IFRS 9 contains guidance on non-substantial modifications and the accounting in such cases. To properly apply the numerous rules and exceptions that exist in US generally accepted accounting principles (GAAP), a company needs to closely analyze transaction terms and conditions and the related facts and circumstances. This article will explore the federal income tax consequences of common transactions that can create CODI, including: Debt modifications. To perform the 10% test, FG Corp should assume that the prepayment option in both the original and new debt is exercised on the modification date. While not all-encompassing, the document provides an overview of the accounting guidance for common modifications to and exchanges of debt arrangements and illustrative examples of common debt modifications and exchanges.. The PSR aims to reduce barriers to digital payments but many remain hesitant. For the purposes of the 10% test this is compared to CU 1,000,000 giving only a 1.4% difference. Given the differences in the accounting requirements applicable to TDRs versus other types of modifications, failure to properly classify a debt modification as a TDR could result in: The proper accounting treatment for a TDR is driven by the form of the modification. For example, in addition to performing the 10% test, the borrower would be required to compare the change in the fair value of the conversion option to the carrying amount of the premodified debt. Investopedia. After that, hit Enter to see the monthly debt service. The first indicator in, If the third-party intermediary acts as an agent, the reporting entity has refinanced the original debt with new debt to other third-party investors and the reporting entity should consider the guidance in. In this example, we use the XNPV function in excel because that's the most accurate present value calculation. 3. Maturity date is 31 Dec 2022. Some companies might need to modify existing loan terms to alleviate financial distress, while other companies that are on solid footing might modify their debt arrangements to procure additional financing for acquisitions or other . It cannot be assumed that the fair value equals the book value of the existing liability. If a restructuring is considered a modification based on the 10% test, then any non-cash consideration should be capitalized similarly to a cash fee paid to a lender. There are some narrow exceptions to this, but generally this is only where the fees do not clearly relate to the modification, but are incremental to issuing the new debt that is payable to a party other than the lender, eg stamp duty paid on new financial instrument that is put in place. 4 To modify an existing debt instrument: If the warrant is held by a creditor, any change in fair value is (1) included in the 10% cash flow test in ASC 470-50. In a loan syndication, each lender loans the borrower a specific amount and has the right to repayment from the borrower. One effect of extinguishment accounting is the accelerated expensing of transaction costs. The power of diversity: can life sciences maintain their lead? Assume, you have $1,000 in your bank account. All types of loans and other debts may also organize by using the debt calculator. Demographic, organisational and resourcing issues are radically changing the global healthcare industry. As this evolves, it is unclear what recovery looks like. If a debt instrument is modified such that the currency in which it is denominated changes, the change in currency should be included in the cash flows as part of the 10% test. All fees incurred (CU 200,000) are immediately expensed, thus reducing the amount of the net gain upon extinguishment to CU 1,677,006. If the costs associated with each transaction are not separately identifiable, the reporting entity should allocate the total costs incurred between the issuance of the new debt and the reacquisition of the existing debt, on a rational basis. lab. By contrast, for a loan syndication, the debt modification guidance should be applied on a lender-by-lender basis, even if a lead lender has been identified. All rights reserved. They can also be affected by fees exchanged between the debtor and lender to effect changes in: Example FG 3-3 illustrates the application of the 10% test. the '10 per cent' test for the purpose of derecognition. In a public debt issuance, for purposes of applying the guidance in this Subtopic, the debt instrument is the individual security held by an investor, and the creditor is the security holder. As this test is comparing the extent of the change between borrower and lender, the reference to fees in this context should refer to the fees between borrower and lender (eg would not normally include fees paid a lawyer). Because the prepayment scenario resulted in modification accounting, it is not necessary to prepare a cash flow scenario that does not assume prepayment. As a result the calculation will be $28,546.45 / 77 = $370.73. is $8,316,615 which is more than 10% different to the carrying amount of the loan. Debt restructuring can take various legal forms including: There are two tests to check whether the modification is substantial, and these are as follows: The following flowchart sets out how to assess whether or not a debt modification is substantial: As mentioned above, if the 10% test is exceeded in the quantitative test, this results in a substantial modification. 36\+E,NGDud^{@Nt yYZV8Tt41YuD**?7^yYE[z j?- Vym"rZCy)3{3G9H&fkCL B{m )! A thinly capitalised entity is one whose assets are funded by a high level of debt and relatively little equity. In June 20X4, FG Corp modified its debt to lower its borrowing costs. Description. Credit arrangements can include both term loans and revolving credit arrangements. This is also known as 'gearing'. 0. all unrealized gains and losses associated with investments in debt and equity. In terms of the 10% test, CU 976,000 is less than 10% different to the previous carrying amount, therefore this is treated as a non-substantial modification. 1 This became effective in the third quarter of 2011 for public banks and in the first quarter of 2012 for calendar year-end nonpublic banks. . Reg. As organisations become increasingly dependent on digital technology, the opportunities for cyber criminals continue to grow. Mid-market recovery spreads to more industries. Energy markets worldwide are undergoing major changes. b. reduces additional paid-in capital under ASC 340-10-S99-1. One form of modification that has become commonplace during the pandemic is modifications to debt agreements. Ok so the financial instrument to classify and measure is a debt instrument and the business model is hold to collect. GTIL does not provide services to clients. 1.1001-3. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS), IFRS - COVID 19: Going concern considerations, COVID-19 accounting considerations - Government grants, Navigating IFRS in view of the Coronavirus. The following table summarizes the terms of the original debt and new debt on the modification date. Several complexities that might arise when performing this 10% test include: Two common scenarios in which a debt modification might involve multiple lenders are loan syndications and loan participations. Spectrophotometry Lab Report Example 2. Entity X has a non-amortising loan of CU 10,000,000 from the bank. A borrower should account for unamortized fees, new creditor fees, and third-party costs in the same manner it would had there not been a change in principal. Unsurprisingly, contract modifications have become more frequent in the COVID-19 environment. We explore how the banking sector can continue to attract, retain and nurture women to build a more diverse and inclusive future. 58 0 obj <>/Encrypt 39 0 R/Filter/FlateDecode/ID[<166C957FB5B7BD93921AD7FDCBCC65C8><1A4BAA685CBF584280F6006AFDBD199C>]/Index[38 43]/Info 37 0 R/Length 104/Prev 120827/Root 40 0 R/Size 81/Type/XRef/W[1 3 1]>>stream GTIL and each member firm is a separate legal entity. Select a section below and enter your search term, or to search all click 1. FG Corp calculates the change in cash flows as follows: Cash flows on new debt December 20X4 restructuring. And it is even more so today. For full functionality of this site it is necessary to enable JavaScript. When discounting the cash flows of the restructured Tranche A, we believe a weighted average effective interest rate based on the original Tranche A and Tranche B interest rates should be used. Should FG Corp account for the change to the provisions of its debt as a modification or an extinguishment? b. Where the counterparty bank is paid an amount which is described as a fee, it would appear contradictory to IFRS 9 to amortise this. Example 3 - a substantial loan modification example Entity X has a non-amortising loan of CU 10,000,000 from the bank. Grant Thorntons Mathew Tierney, global head of Insurance, and Andre Bourgon, principal for Insurance Strategy and Transactions, recently talked with John Weber of A.M. Best Co. for that companys Bests Review video series. Some factors to consider may include significant change in the collateral or a significant change in covenants. Time to review funding and financing arrangements? Application of the guidance to a term loan debt restructuring is more complicated when the principal balance changes as a result of the restructuring. To convert the cash flows on the new debt into the currency of the original debt, we believe there are two acceptable methods, use (1) the spot rate in effect at the debt modification or exchange date, or (2) the forward rates corresponding to each cash flow (i.e., interest payment and principal) payment date. 5. Oftentimes, debt agreements allow a borrower to prepay the debt prior to maturity; this is especially common in variable rate debt instruments and bank loan syndications. Under ASC 470-50, modifications and exchanges not considered TDRs are accounted for as either: Thin capitalisation. Because all cash flows occur on day one, the cash flows are not discounted. In many instances, a gain or a loss might need to be recorded in profit or loss and depending on facts and circumstances, derecognition of the financial arrangement might be required as a result of modifying the financial instrument arrangement that existed. If the reporting entity had not finalized its debt restructuring prior to issuing the financial statements and the reporting entity did not have enough information to determine if the transaction will be a modification or extinguishment in the subsequent period, the legal fees should be capitalized as a prepaid expense in the period incurred. Stay informed with our latest quarterly review. Grant Thornton can help you capitalise on opportunities to unlock your potential for growth. Employers must work harder than ever to grow workforce loyalty and meet the increasing demands for a purpose-led organisation. But, to turn the headwinds to your advantage, you need to find your unique opportunities and risks. Once you have finished answering the questions, open the Excel Test Questions and Answers page to see the full answers. Examples of financial assets are investments in equity instruments, investments in debt instruments, trade receivables, cash and cash equivalents, derivative financial assets. Given that lack of guidance, here are some items borrowers should consider when analyzing the modification of a credit facility that involves both term debt and a revolving line of credit: In October 2020, the FASB issued a Staff Educational Paper that provides a summary of a borrowers accounting for debt modifications. Workable solutions to maximise your value and deliver sustainable recovery. The confirmation also applies to other "interbank offered rates" (IBORs), such as the Euro Interbank Offered Rate (EURIBOR). Examples of this type of modification include issuing new debt in different currency from old debt, or equity instrument embedded in the new debt. 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