M id A tlantic Real Estate Journal — Owners, Developers & Managers — August 20 - September 16, 2021 — 3C
O wners , D evelopers & M anagers By Kristin Fee, CPA, Withum How will a debt modification affect your financial statement?
s a result of the Coro- navi rus pandemi c , lenders may have had
debt. The borrower recognizes a gain from the restructured debt equal to the difference between the carrying amount of the old debt and the total future undiscounted cash pay- ments specified in the terms of the new debt. No interest expense should be recognized on the debt for any period be- tween the restructuring and maturity of the debt. Cash payments are accounted for as reductions of the carrying amount of the debt. If the un- discounted cash flows of the new debt are greater than or equal to the net carrying value of the original debt, no gain or
loss is recognized. The carry- ing amount of the debt at the time of the modification does not change. The new effective interest rate equates to the present value of the future cash payments specified in the new debt agreement. Interest expense is prospectively rec- ognized at a constant effective rate. The interest rate is ap- plied to the carrying amount of the debt at the beginning of each period, consistent with the interest method. When the TDR involves transferring assets or issuing equity interest to a creditor to satisfy the borrower’s obliga-
tion, an entity should consider relevant guidance in FASB Subtopic 470-60. What if the Debt Modifica - tion is Not a TDR? When the debt modification does not qualify as a TDR, the borrower accounts for the exchange as either a modifica - tion or an extinguishment, in accordance with FASB Sub - topic 470-50. When the bor- rower has arranged for a debt agreement with a different lender and the original debt arrangement is concurrently satisfied, the transaction is ac - counted for as an extinguish- ment of debt and an issuance
of new debt. If the modification is not considered substantial, there is no recognized gain or loss on the extinguishment. When the modification is con - sidered substantial, a gain or loss on extinguishment is recognized by comparing the fair value of the new debt plus fees paid to the lender to the carrying value of the old debt. If the modification is not significant, a new effective interest rate is calculated, and interest expenses are ac- counted for under the interest method using the new effective interest rate. continued on page 9C
to restruc- t u r e a n d modify debt agreements with borrow- ers. T h e a c - c o u n t i n g g u i d a n c e provides two
possible methods to treat these debt modifications. The Fi- nancial Accounting Standards Board (FASB) provides guid - ance on determining whether the modification or exchange is treated as a troubled debt restructure (TDR), FASB Sub - topic 470-60, or a non-troubled modification or exchange, FASB Subtopic 470-50. Some factors to consider to deter- mine if accounting application for a debt modification exists includes but are not limited to: • Extending maturity date at a stated interest rate lower than current rate • Reduction of stated inter - est rate for the remaining term • Reduction of the face amount or maturity amount of debt • Amending debt covenants A TDR exists when the bor - rower is experiencing financial difficulties and the lender has granted a concession to the borrower. Such factors that may be evidence of financial difficulty include but are not limited to: • Borrower has filed bank - ruptcy, • Borrower has not remitted timely payments to the credi- tor or is in default of a loan. • Future cash flows are in - sufficient to cover debt • Securities are delisted on an exchange A concession has been grant- ed when the borrower’s ef- fective borrowing rate on the restricted debt is less than the effective borrowing rate on the original debt. Why Does This Matter? The effect on the entity’s statement of operations and statement of financial condi - tion depends on the nature and extent of a debt modification. The accounting treatment will depend on if the TDR involves modification of terms of the debt arrangement and if the undiscounted future cash payments under the terms of the new arrangement are greater or less than the total carrying amount of the old
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