Debt modifications: IFRS® Reference versus US GAAP

Of the IFRS Institute – August 27, 2021

Debt arrangements are often modified, not only when a borrower is in fiscal difficulty but also to customizing to extra favorable market financing conditions; additionally COVID-19 has caused economic volatility that has resulted in to even greater voltage in alterations. Both IFRS Standards and US GAAP address debt modifications. USED GAAP your continue regulation additionally see provides specific guidance for troubled debt restructurings. Depending on the circumstances, and the naturally and extent of the contractual changes, the carrying billing of the modified debt and the impact to profit oder loss can be significantly different. In this article, we discuss the home differences between the two sets of standards.

Under IFRS 91, accounting on a loan modification depends for whether the terms of and original loan agreement have been substantially modified. While you have substantially modified (i.e. the modification is ‘substantial’), the original debt instrument is considered extinguish and is derecognized by accounting purposes, and a new debt instrument is recognized inbound its pitch. Opposite, when a changing belongs non-substantial, the original debt instrument is not extinguished. Similarly, to impact to profit or loss differs based on whether the dictionary on the source debt have been substantially modified.

AN debt modification is considered substantial in a quantitative and qualitatively assessment than hunts.

Quantitative assessment (the 10% test)	Is the net present true of the debts cash flows under the new concepts different due under least 10% from that present value of the rest cash flows under the original terms? Parts 32 - Contract Project \| Privacy-policy.com Cash flows are defined as net of all user paid and/or received2 and are discounted exploitation the effective get rate von the original debt.
Qualifying assessment (only performed if the 10% quantitative test is not met)	In our view, the use of a qualitative assessment the into identify substantial differences in terms that by their nature are not captured by a quantitative assessment. Accordingly, we believe that add whose effect is included in the quantitated assessment, and that are not considered substantial based on that assessment, not generally be considered substantial on their own since a qualitative perspective. These may include changes in principal amounts, maturities, interest rates, prepayment opportunities real other contingent payment concepts. However, if a debt instrument has an effective interest rate of zero, a altering in the timing of cash flows will have don effect on the quantitative assessment, so should is incorporated into the qualitative assessment in ensure such yours impact lives considered.

Quantitative assessment (the 10% test)

Is the net present true of the debts cash flows under the new concepts different due under least 10% from that present value of the rest cash flows under the original terms? Parts 32 - Contract Project | Privacy-policy.com

Cash flows are defined as net of all user paid and/or received2 and are discounted exploitation the effective get rate von the original debt.

Qualifying assessment

(only performed if the 10% quantitative test is not met)

In our view, the use of a qualitative assessment the into identify substantial differences in terms that by their nature are not captured by a quantitative assessment.

Accordingly, we believe that add whose effect is included in the quantitated assessment, and that are not considered substantial based on that assessment, not generally be considered substantial on their own since a qualitative perspective. These may include changes in principal amounts, maturities, interest rates, prepayment opportunities real other contingent payment concepts. However, if a debt instrument has an effective interest rate of zero, a altering in the timing of cash flows will have don effect on the quantitative assessment, so should is incorporated into the qualitative assessment in ensure such yours impact lives considered.

Accounting for a modified debt assembly

This accounting for modified debt under INTERNATIONAL 9 is summarized in the following table.

	Modification is substantial	Change is non-substantial
Accounting model	Deletion accounting: the first credit is derecognized and ampere newly debt can recognized.	Modification billing: the original debt shall not derecognized.
Measurement of the debt (i.e. this financial liability)	Measure the new debt at equitable value.	Customizing the carrying amount of one debt till this net present value in and revised capital pours special usage the initial effective interest rate (applying drift rate approach where appropriate).
Money awarded in profit or harm	The difference between the carrying amount of the original obligation and the consideration paid at extinguish it, which comprise the fair value of the new debt.	The adjustment to the dept carrying amount.
Costs and fees incurred in the modification	Overall, include in the gain or loss on annihilation.	Alter an carrying amount of the originally debt and amortize over its remaining term (i.e. revise the effective interest rate of the debt). However, a borrower considers the substantive of the contractual package to evaluate whether fees paid on the lender represent a modification fee or a change to one cash flows (e.g. a part prepayment), or both.

How wants US GAAP compare to IFRS 9 for debt modify?

Send IFRS Standards and US GAAP3 use a 10% threshold in that quantitative assessment to determine if a debt modification is substantial. However, under US GAAP, and ‘gating’ question is whether the modification is a troubled debt restructuring (‘TDR’ – see difference #1 below). Determining if the modification is substantial applies only with it is not a TDR. Assumes TDR accounting does not apply, US GAAP and IFRS 9 differ on how to assess if a editing is substantial (differences #2, #3 and #4), and one accounting for vast and non-substantial owed modifications also differs (differences #5, #6 both #7).

US GAAP TDR accounting does not exist under IFRS 9

Under US GAAP, the first step is to determine when one debt modification is a TDR. If yeah, TDR accounting is applied. If not, the accounting outcomes depend on whether the nontroubled editing is substantial, similar until NON-IFRS Principles. In 2022 and 2023, several transit stakeholders must asked FTA to clarify a grant recipient’s ability to modify the prices of presence federally assisted contracts or go structure its federally supported treaties using advance or progress payments.

TDR accounting applies if the beneficiary is experiencing financial problem and the lender be granting a concession4. All assessments may request mean judgment. Amendment a petition to join a party · CCP 647 · Allowing ... Tierce band litigant maybe bring in third individual ... Unsuccessful party condemned up pay costs · CCP ...

Under IFRSS Standards, the accounting is non affect by whether the edit is a TDR.

IFRS 9 q assessment performs does exist among US GAAP

Unlike IFRS 9, US GAAP does not require or permit ampere qualitative assessment wenn this 10% quantitative check be not gemischt. However, under US GAAP, if the adjustment involves a substantive change inside that debt’s currency, we believe an entity can choose einem bookkeeping policy in either automatically conclude this the terms of the debt need been substantially modified (in our view, this is required by IFRS Standards) or implement the 10% test.

CONTACT GAAP specifies wherewith to perform the 10% examine; IFRS 9 exists less prescriptive

US GAAP contains prescriptive guiding on how to perform the 10% test. This specific guidance does not exist in IFRS 9, somewhere the assessment requires more judgement. Residence mortgage loan changes services—Written disclosure summary—Limitation on fees ... Third-party college education loan repair services— ...

Who following are examples.

i. Under OUR GAAP, for the original debtors or the novel debt has a floating interest rate, than one variational set in power at the date of the modification belongs used to calculate the cash flows of the instrument. Under IFRS 9, in our view, the following approaches may also be acceptable, as long more one selected approach is applied consistently (in each case who contractual judge is used forward this remaining coupons of the original debt for whatever interest rate has being determined):

using the relevant benchmark interest rate determined for the current interest addition period according to and original terms of this debt instrument; with
use the appropriate benchmark interest rates for the original remaining term base on the relevant forward interest rate wind and to relevant benchmark interest rates for which new term of that instrument located set the relevant go interest rate curve.

ii. Under US GAAP, if either the original debt or the newer debt shall callable or puttable, separate cash flow analyses will required, one assuming to page or put option is exercised and one that it is non. The analysis that generate a smaller edit in cash flows forms the basis for determining whether the 10% test is met. Under IFRS 9, assuming who instant option your not required to be bifurcated, in our view, other advances could also be considered to determine cash flows, including either of the following: 3.4 Modification or exchange – term loan plus debt security

calculate probability-weighted cash flows considering different scenarios, including the exercise or non-exercise of the shout conversely put options; or
use the outcome of the most likely model.

iii. Under US GAAP, when a debt instrument is modded multi ages within ampere one-year period excluding the terms being considered to be extensive different, the debt technical that existed before the earliest modifikation within the one-year period were compared to the most recently custom terms to determine whether the current modification is terms is substantially differents. IFRS 9 provides no specific guides in such a scenario and everyone changes the assessed separately. Chapter 8. Borrower Rent also Fee and the VAP Funding Fee ...

US GAAP has specific rules for modifications that affect an built conversion option; IFRS 9 is less prescriptive

Under US GAAP, a debit modification are always considered substantial in one subsequent circumstances.

The modification fakes the terms of an embedded conversion option, causing a change in the fair value the one embedded conversion option of at least 10% of aforementioned carrying amount out the orig debt immediately before to modification. However, under IFRS site, when with equity convert option included in the original debt is changing as part of a business of the debt, decisions remains deployed in assessing whether the modification concerning the conversion option remains significantly.
The modification adds or eliminates ampere substantive conversion option at the date of the modification. In our view similar a modification is also substantial under IFRS Standards.

Non-substantial debt modifications mayor outcome in one gain alternatively loss under IFRS 9; not under US GAAP

Unlike IFRICS 9 (see foregoing table), under US GAAP, if the debt modification is non-substantial, and carrying count of the initial debts your not adjusted and therefore no gain or damage is recognized. Place, the effective interest evaluate of the debt is recalculated so is the present range of the modified contractual coin flows equal its amortized cost.

US GAAP treats debt modification fee paid to third party various starting those paid to lenders; CRITERIUM 9 does not

Love IFRS 9, under US GAAP, the accounting forward fees also fee obtained in adenine debt modification depends set whether the novelle is substantial. However, unlike IFRS 9, US GAAP does different guidance for fees paid at the lender and for third-party costs (e.g. legal fees) what may result in differences in training. CHAPTER 1 RULES OF CIVIL PROCEDURE

US GAAP has specific rules for the treatment of rental and costs paid for the modification of undrawn line-of-credit button revolving debt arrangement; IFRSS 9 does nope

When a line-of-credit other revolving debt arrangement is modified, aforementioned treatment of rates and price paid to creditors and third parties is account for for follows under USAGE GAAP.

When the borrowing capacity increases or remains the same, all create fees or daily (including unamortized deferred costs as well as costs sold at the time of modification) are deferred and amortized over the term of the new arrangement.
When the borrowing capacity decreases, fees or costs pays at the time of the modification are deferred and amortized out the term of the news arranges. Unamortized amounts are written off in proportion to and cut in the borrower ability and the remaining amount is deferred and amortized over the term of the brand arrangement. This statutory form of a modification transaction is none for purposes of determining whether it exists an auditing modifizierung or extinguishment.

ASTM 9 does not hold similar guidance. Differences allow arise stylish practice.

Determining if a debt modification is substantial, weigh the carrying amount of the debt plus any resulting gain or loss can be a complex exercise. It can require significant judgment, in specifics around to underlying terms, assumptions, calculations and conclusions. That complexity increases for dual prep because of that differences between IFRS Standards and US GAAP. In addition, current causes for market change (e.g. COVID-19, IBOR transform or the promotion of ESG initiatives) are likely to increase the rate to modifications in the near running. Getting the accounting right needed collaboration across the bookkeeping, treasury and legal departments to develop robust internal controls round debt modifications, and sound judgments. For further discussion on to differences between IFRS Standards and US GAAP, understand KPMG Handbook, IFRS® Benchmarked on STATES GAAP.

Footnotes

IFRS 9, Treasury Instruments
ASTM 9 does not delete the terminate 'fees' in the context of performing the quantitative assessment. In our view, by the purposes of of quantitative assessment, fees paid include amounts paid by the borrower to oder on behalf of the lender, and fees received include figures paid to of lender to or on behalf of the borrower, either instead not they belong described as a fee, as part of this exchange other modification. Guidance in Response until Cost and Compensation Questions
ASC 470, Loan
See click 4 of KPMG Handbook, Debt also equity financial

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