For example: To determine the appropriate accounting treatment for a modification or exchange transaction arranged by a third-party intermediary, a reporting entity should determine whether the intermediary is a principal to the transaction (i.e., the investor in the bonds whose terms were modified) or the reporting entitys agent (i.e., facilitating a refunding of the old bonds on behalf of the reporting entity through issuance of new debt). See. impairment: illustrative calculation of lifetime expected credit losses and 12-month expected credit losses for a loan. Menu. Should FG Corp account for the change to the provisions of its debt as a modification or an extinguishment? Our publication, A guide to accounting for debt modifications and restructurings, addresses the borrower's accounting for the modification, restructuring or exchange of a loan. 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. The borrower will usually incur costs in a debt restructuring, and other fees might also be paid or received. Maturity date is 31 December 2025. Welcome to Viewpoint, the new platform that replaces Inform. The ratio states net . *. As part of the modification, the entity pays a CU 150,000 arrangement fee to the bank and a CU 50,000 professional service fee to its lawyers. For example, that may be the case if the intermediarys own funds are committed and those funds are not truly at risk because the intermediary is made whole by the debtor (and therefore is indemnified against loss by the debtor). 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. It cannot be assumed that the fair value equals the book value of the existing liability. All fees incurred (CU 200,000) are immediately expensed, thus reducing the amount of the net gain upon extinguishment to CU 1,677,006. Heres how retailers can get ready for reporting on climate change. In an arrangement where an intermediary places notes issued by the debtor, if the placement is done under a best-efforts agreement, that would indicate that the intermediary is acting as agent. Mid-market recovery spreads to more industries. Sections 1.988-5 or 1.1275-6). "Net present value" (NPV) is an indicator of how much an investment is worth. Start by entering your creditors, current balance, interest rates, and monthly payments to see your current total debt, average interest rate, and average monthly interest . off course? 2019 - 2023 PwC. Both IAS 39 and IFRS 9 refer to the so called "10% test". Because the prepayment scenario resulted in modification accounting, it is not necessary to prepare a cash flow scenario that does not assume prepayment. 0 Determining if the modification is substantial applies . On adoption of IFRS 9 on January 1, 2018, a transitional ad . Under a best-efforts agreement, an agent agrees to buy only those securities that it is able to sell to others; if the agent is unable to remarket the debt, the issuer is obligated to pay off the debt. c. If the debtor directs the intermediary and the intermediary cannot independently initiate an exchange or modification of the debt instrument, that would indicate that the intermediary is an agent. Modification accounting under FASB Subtopic 470-50 is applied when the modification is deemed significant, and if not significant, the borrower . When determining present value for this calculation, the discount rate is the effective interest rate used for the original debt . In some cases, a borrower might need to apply judgment to determine if its debt arrangement is more akin to a loan participation or a loan syndication. Under ASC 470-50, modifications and exchanges not considered TDRs are accounted for as either: On 1 July 2020, the bank agrees to waive interest for a six month period from 1 July 2020 to 31 December 2020. The rise of the Special Purpose Acquisition Company (SPAC). Our tax services help you gain trust and stay ahead, enabling you to manage your tax transparently and ethically. Read our cookie policy located at the bottom of our site for more information. In the following step, select Cell 11 and type the formula below: =12*C10. However, we typically would not expect a long time lag between incurring such costs and the finalization of the debt restructuring since the costs must be directly related to the restructuring. 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. This is also known as 'gearing'. Therefore, the following journal entries should be recorded: The fair value of the modified liability will usually need to be estimated. endstream endobj 39 0 obj <> endobj 40 0 obj <> endobj 41 0 obj <>/Rotate 0/Type/Page>> endobj 42 0 obj <>stream While the accounting guidance outlines separate models for modifications to term loans and revolving credit loans, it does not explain how a borrower would apply the two accounting models when a modification is made to a credit facility that contains both. In the case of a significant modification, the materiality of the changes from the modification results in a deemed retirement of the existing . Investopedia. calculating a new EIR for the modified liability, that is then used in future periods. Our teams have in-depth knowledge of the relationship between domestic and international tax laws. Quantitative test - The net present value of the cash flows under the new terms discounted at the original effective interest rate (EIR) is at least 10% different from the carrying amount of the original debt. The value of the non-discounted cash flows before the waiver, discounted at the original EIR is CU 1,000,000 (ie the amortised cost before the waiver). We work with entrepreneurial businesses in the mid-market to help them assess the true commercial potential of their planned acquisition and understand how the purchase might serve their longer- term strategic goals. If an exchange or modification offer is made to all investors and only some agree to the exchange or modification, then the guidance in this Subtopic shall be applied to debt instruments held by those investors that agree to the exchange or modification. What is the keyboard shortcut key to lock cell references in a formula? In our view, fees to third parties such as lawyers fees should be amortised (and the EIR adjusted). 1. Transactions between a debtor and a third-party creditor should be analyzed based on the guidance in paragraph. Step 1: Use Financial Model to Forecast Revenue Growth. 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. Example FG 3-4 illustrates the application of the 10% test to a debt instrument with a prepayment option. Grant Thornton can help you capitalise on opportunities to unlock your potential for growth. Under Treas. After both modifications, the debt remained prepayable at any time, but a prepayment penalty was added. In addition, these amendments also clarify that when the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. . The old debt would not be derecognized. 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. ASC 470-50 provides guidance for each type. incurs a CU 10,000 arrangement fee from the bank, recognition of the new or modified liability at its fair value, recognition of a gain or loss equal to the difference between the carrying value of the old liability and the fair value of the new one. If either the new debt instrument or the original debt instrument is callable or puttable, then separate cash flow analyses shall be performed assuming exercise and nonexercise of the call or put. If a restructuring is accounted for as a debt extinguishment, then the fair value of any non-cash consideration is associated with the extinguishment of the original debt instrument (i.e., treated as an amount paid to extinguish the debt) and included in determining the extinguishment gain or loss. BIO 123. lab. The COVID-19 global pandemic has resulted in economic consequences that many reporting entities may not have had to previously consider. FG Corp has a term loan that is not prepayable. At Grant Thornton, our IFRS advisers can help you navigate the complexity of financial reporting from IFRS 1 to IFRS 17 and IAS 1 to IAS 41. 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. Quantitative test - The net present value of the cash flows under the new terms discounted at the original effective interest rate (EIR) is at least 10% different from the carrying amount of the . Illustrative example This example illustrates the application of the derecognition requirements of IAS 39 and IFRS 9 to a modified bond liability measured at amortised cost. One form of modification that has become commonplace during the pandemic is modifications to debt agreements. 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. See, If the lender also holds equity securities, consider whether the gain should be recorded in equity. Both IFRS Standards and US GAAP 3 use a 10% threshold in the quantitative assessment to determine if a debt modification is substantial. What are the shortcut keys for AutoSum? interest (fair value at initial recognition). The cash flows of the new debt instrument include all cash flows specified by the terms of the new debt instrument plus any amounts paid by the debtor to the creditor less any amounts received by the debtor from the creditor as part of the exchange or modification. If a debt modification involves a modification or an exchange of a freestanding equity-classified written call option held by the same creditor, If the non-cash consideration (e.g., warrants or preferred stock) is issued to third-partyadvisorsrather than the lender, we believe the fair value of the non-cash consideration should be accounted for following the guidance in. Step 2: Calculate Costs and Forecast Cash Flow. When this occurs, the requirements for extinguishment accounting in the subsidiarys standalone financial statements are generally not met; however, on a consolidated basis, the consolidated entity has reacquired its own debt so extinguishment accounting is appropriate. IFRS 9 prescribes a quantitative test to assess whether the modification is substantial. IFRS 9 excel examples: illustration of application of amortised cost and effective interest method. Organisations must understand and manage risk and seek an appropriate balance between risk and opportunities. 4j9xn=H~KNY[diOe:iI#tWG7;;B{O@fKlxi-GXy+IfnMqz\(LHoa~=mH5k JnB!2Gj[QnyOQvSY6;4: Ve/_iM,JlV0p,H.o&R`$^\vj(J=1'!s K\R>aS?xy; Lpq$u#]zDr7JDv5e{ 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. Home; About; Maps; FAQ; debt modification 10% test example excel endstream endobj startxref Application of the guidance to a term loan debt restructuring is more complicated when the principal balance changes as a result of the restructuring. As a result the calculation will be $28,546.45 / 77 = $370.73. debt for assessing whether a concession has been granted under the TDR guidance and in applying the 10% cash flow test under the debt modification guidance: Other modifications (unrelated to . a. Present value of $5,000,000 at the stated interest rate of 5.5% discounted at the original effective rate of 6% for 3 years, Present value of $5,000,000 at the new stated interest rate of 5% discounted at the original effective rate of 6% for 5 years, Lender fees, undiscounted because it is a day one cash flow. Example 3 - a substantial loan modification example Entity X has a non-amortising loan of CU 10,000,000 from the bank. Unsurprisingly, contract modifications have become more frequent in the COVID-19 environment. If so, the fees should be accounted for based on the guidance in, Company name must be at least two characters long. The author of the spreadsheet and the Squawkfox blog, Kerry Taylor, paid off $17,000 in student loans over six months using this downloadable Debt Reduction Spreadsheet. This is the consequence of applying IFRS 9, according to which the liability should be restated to its revised future cash flows discounted by the original EIR. Step 3: Calculate Required Cash Flow Funding. 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. Should FG Corp account for the restructuring of its debt as a modification or an extinguishment? Below are sample excel test questions and answers to give you a sense of what you will face on your test. Can be prepaid at any time without penalty, Can be prepaid at any time with a 1% penalty. lab. 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. 3. For example, a significant change in terms and conditions such as maturity date or covenants, change in the currency in which the financial liability is denominated or equity instrument embedded in new debt. the '10 per cent' test for the purpose of derecognition. Having a robust process of quality control is one of the most effective ways to guarantee we deliver high-quality services to our clients. As an example, let's say Company A has a net operating income of $2,000,000 for one year and the total debt servicing . Given the market rate of interest is 12% for a comparable liability, the fair value of the liability amounts to CU 8,122,994. 5 Example FG 3-5 illustrates the application of the 10% test when debt has been restructured multiple times within a twelve-month period and the debt was prepayable at any time both prior to and after any modification. Having access to experts, insights and accurate information as quickly as possible is critical but your resources may be stretched at this time. Interest is set at a fixed rate of 5%, which is payable quarterly. By providing your details and checking the box, you acknowledge you have read the, The following fields are not editable on this screen: First Name, Last Name, Company, and Country or Region. Because the change in cash flows in the immediate prepayment scenario is less than 10%, FG Corp should account for the changes to its debt as a modification. Excel will provide the beginning liability balance and your amortization schedule will be completed automatically as a result of the formulas you input. Should FG Corp account for the changes to its debt as a modification or an extinguishment? In a matter of seconds, receive an electronic document with a legally-binding signature. Argument name. However, IFRS 9 clarifies in the Basis for Conclusions the IASB intends that adjustments to amortised cost in such cases should be recognised in profit or loss. Calculate Accumulated Savings After a Certain Period. We provide a wide range of services to recovery and reorganisation professionals, companies and their stakeholders. Changing the interest rate. However, if you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact oryour local member firm. More Examples to Calculate Payments & Savings in Excel. However, in some circumstances, the nature of the modification can give rise to several complexities when applying the TDR guidance. There is no guidance on how to account for a refinancing of publicly traded debt securities that does not involve an exchange or modification offer (i.e., when a reporting entity issues new debt securities to investors, which potentially may include holders of the issuers existing debt securities, and uses the proceeds to pay off existing publicly-traded debt securities potentially held by the same investors). For example, one entity may recognize an expense, while another may record a dividend for an economically similar warrant modification. Get modification 10 signed right from your smartphone using these six tips: 3. Time to review funding and financing arrangements? Inappropriate recognition or measurement of a gain or loss upon modification of the debt arrangement, Inappropriate recognition of future interest expense on the modified debt arrangement, Inappropriate accounting of legal fees and other direct costs incurred in connection with the modification. See, The effective interest rate of the original debt instrument should be used to calculate the present value of the cash flows on both the new and original debt instruments, A reporting entity has multiple bonds issued under a single bond offering outstanding; the bonds are held by a number of third-party investors, An investment bank and reporting entity negotiate a modification to the terms of the bonds, The investment bank buys the bonds from the third-party investors, The terms are then modified pursuant to the modification agreement, The investment bank sells the new bonds under the modified terms to third-party investors (who may, or may not, be the same as the investors in the original bonds), 3.4 Modification or exchange term loan and debt security. The relationship between a company and its auditor has changed. For example, cookies allow us to manage registrations, meaning you can watch meetings and submit comment letters. This content is copyright protected. "Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. A modification or an exchange of debt instruments adds a substantive conversion option or eliminates a conversion option that was substantive at the date of the modification or exchange. FG Corp calculates the change in cash flows as follows: Cash flows on new debt December 20X4 restructuring. In other words, if the net present value of the cash flows under the modified terms including . Changes to the Outsourcing legislation, specifically when offshoring. We use cookies to personalize content and to provide you with an improved user experience. 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. 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