FASB Provides Educational Paper on Borrower’s Accounting for Debt Modifications

On October 28, 2020, the Financial Accounting Standards Board (FASB) released a FASB Staff Educational Paper (the Paper) to help stakeholders apply borrower’s accounting for debt restructuring and modifications. The Paper was in direct response to the COVID-19 pandemic and the fact that many entities had to apply guidance on debt restructuring and modification for the first time or have had to do so more frequently.

The Paper provides an overview of accounting guidance for debt restructuring and modifications as well as examples of common modifications and restructures. At Anderson ZurMuehlen, we understand your company may have recently had a restructuring or modification and want to ensure you know how to account for that transaction. Below we have included an overview of the accounting topics addressed in the Paper.

Overview of Accounting Guidance for Debt Restructuring and Modifications

The guidance for debt restructuring and modification can be found under Topic 470 (Debt): Borrower’s Accounting for Debt Modifications in the FASB Accounting Standards Codification.

The nature and extent of the modification determine the accounting treatment, which could be materially different under the requirements in the following subtopics.

Subtopic 470-60, Debt—Troubled Debt Restructurings by Debtors

Provides guidance on whether a modification is accounted for as a troubled debt restructuring (TDR). A restructuring of a debt constitutes a TDR when a lender grants a concession it would not otherwise consider for economic or legal reasons related to the borrower’s financial difficulties.

Subtopic 470-50, Debt—Modifications and Extinguishments

Provides guidance on whether a nontroubled modification or an exchange of debt with the same creditor is accounted for as:

  • Extinguishment of the existing debt and issuance of new debt or
  • A modification and continuation of the existing debt

A modification to or an exchange of debt with the same lender that has substantially different terms is accounted for as a debt extinguishment.

If an entity determines that the debt is not substantially different from the original debt, then it is considered to be a modification. In the case of a modification, the new effective interest rate should be calculated based on the carrying amount of the original debt.

The following diagram provide by the FASB outlines the accounting treatment for debt modifications and exchanges:

Source:  FASB Staff Educational Paper dated October 28, 2020 – Topic 470 (Debt): Borrower’s Accounting for Debt Modifications 

Additionally, the Paper addresses how to:

  • Determine whether a borrower is experiencing financial difficulties
  • Determine whether a lender is granting a concession
  • Account for a TDR
  • Determine whether a substantial modification has occurred for both
    • Term Debt and
    • Line-of-Credit or Revolving Debt
  • Account for debt extinguishment for both
    • Term Debt and
    • Line-of-Credit or Revolving Debt

To access the full paper, please use the following link – FASB Staff Educational Paper. The FASB intends for the paper to be a valuable resource however, as with any transaction, entities should always consider the specific facts and circumstances of their debt arrangements to determine the appropriate accounting. If you have any questions as you navigate your debt restructuring or modification, please reach out to the Anderson ZurMuehlen team.

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