F5-M6: Troubled Debt Restructuring and Extinguishment
the difference between the FV and CV of any assets transferred is recognized as
a gain or loss
what about if a bond is extinguished before maturity
a gain or loss is generally recorded
interest expense is computed by
a method that causes a constant effective rate (e.g., the effective interest method)
refundable bonds
allow an existing issue to be retired and replaced with a new issue at a lower interest rate
they are treated and classified how
among with other gains of the company, typically in the continuing operations section of the IS
what is an in substance defeasance
an arrangement in which a company places purchased securities into an irrevocable trust and pledges them for the future principal and interest payments on its LT debt
any gain or loss on extinguishment of debt is recognized where
as income from continuing operations in the IS
when there are indeterminate future payments, the debtor should
assume that the future contingent payments will have to be made at least to the extent necessary to obviate any gain
a loan is considered impaired when
if it is probable (likely to occur) that the creditor will be unable to collect all amounts due under the original contract when due
a liability is considered extinguished when
if the debtor pays or the debtor is legally released
the gain or loss on disposition of the asset (i.e., difference between book value and fair value) is reported where
in income of the period
any losses with troubled debt restructuring should be
incorporated into a creditor's estimate of its allowance for credit losses
a liability cannot be derecognized in the FS until what
it has been extinguished
troubled debt restructurings are often the result of
legal proceedings or of negotiation between parties
a liability is considered extinguished if the debtor is
legally released from being the primary obligor under the liability, either judicially or by the creditor
the objective of the creditor must be to
maximize recovery of the investment
a restructuring that does not involve the transfer of assets or equity will often involve teh
modification of the terms of the debt
all gains on debt restructuring are aggregated and included where
net income for the period
is a modification of terms an extinguishment
no
is any interest expense recognized after the date of restructure
no
is this considered an extinguishment
no because the company remains the primary obligor while there is OS debt
has the debt been extinguished under a modification of terms
no, the terms have been adjusted so that the debtor has a greater ability to fulfill its obligations
what should be used to judge whether a loan is impaired
normal loan procedures
does the debtor change the carrying amount
not unless the carrying amount exceeds the total future cash payments specified by the new terms
a troubled debt restructuring is
one in which the creditor allows the debtor certain concessions to improve the likelihood of collection that would not be considered under normal circumstances
impairment should be captured as
part of an entity's overall assessment of credit losses
in a modification, the debtor accounts for the effects of the restructuring how
prospectively
gain or loss on extinguishment of debt =
reacquisition price - net carrying amount
all cash payments after the restructuring do what
reduce the carrying amount
when the total (undiscounted) future cash payments are less than the carrying amount, what should the debtor do
reduce the carrying amount accordingly and recognize the difference as a gain restructuring of debt
concessions include items such as
reduced interest rates, extension of maturity dates, reduction of the face amount of the debt, and reduction of the amount of accrued interest
callable bonds can be
retired after a certain date at a stated price
when a restructuring involves a combination of asset or equity transfers and modification of terms, what happens first
the FV of any asset or equity is used first to reduce the carrying amount of the payable
in a partial payment, the creditors must use
the FV of the asset or equity received
what can be used if it is more clearly determinable than the FV of the asset or equity acquired
the FV of the receivable satisfied
calculation to recognize this gain
carrying amount of the payable - FV equity transferred
corporations issuing bonds may do what prior to maturity
call or retire them
in any bond reacquisition, what items must be accounted for and adjusted in the FS
- any unrelated unamortized bond issuance costs - any related unamortized discount or premium - the difference between the bond's face value and the reacquisition proceeds
first calculation for gain/loss
FV asset transferred - NBV asset transferred = gain/loss
JE to break out land
DR: NP (remove from books) DR: interest payable (remove from books) CR: land (for original price) CR: gain on disposal of land CR: gain on restructuring
how is the impairment recorded (JE)
DR: bad debt expense CR: allowance for credit losses
second calculation
carrying amount of the payable - FV asset transferred = gain
no gain on restructuring can be recognized unless what
the carrying amount of the payable exceeds the total future cash payments
net carrying amount of the bond is
the carrying value (i.e., face value of the bond plus unamortized premium or minus unamortized discount and minus unamortized bond issuance costs)
if a bond is paid at maturity,
the carrying value of the bond is equal to the face amount of the bond and no gain or loss is recognized
whether transfer of assets or transfer of equity interest, once the transfer has taken place
the debt has been extinguished
what about when there are indeterminate future payments, or any time the future payments might exceed the carrying amount
the debtor recognizes no gain and does not adjust the carrying value of the note
transfer of assets
the debtor will recognize a gain in the amount of the excess of the carrying amount of the payable (face amount of the payable plus accrued interest, premiums, etc.) over the FV of the assets given up
the concessions must be made in light of
the debtor's financial difficulty
transfer of equity interest
the difference between the carrying amount of the payable and the FV of the equity interest is recognized as a gain (gain on restructuring of debt) under U.S. GAAP
the gain or loss is
the difference between the carrying value of the bond (face value less unamortized discount or plus unamortized premium) and the cash paid to extinguish the bond
the new effective rate is
the discount rate at which the carrying amount of the debt is equal to the present value of the future cash pyaments
if a discounted cash flow approach is used, what interest rate should be used as the discount rate
the effective interest rate
the total future cash payments are
the principal and any accrued interest at the time of the restructuring that continues to be payable by the new terms
what about if there are several related accounts (discount, premium, etc.)
the reduction may need to be allocated among them
a debtor accounts for a troubled debt restructuring according to
the type
when the creditor receives either assets or equity as full settlement of a receivable, these are accounted for at
their FV at the time of restructuring
is a loan restructured in a troubled debt restructuring an impaired loan
yes
