Troubled Debt Restructuring, Debt Modification, and Extinguishment
Accounting for troubled debt restructurings, debt modifications, and extinguishments can be complex. Make sure you get it right by using BDO's publication.
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Companies frequently fund their operations in part using debt and may renegotiate their debt for a variety of reasons from increasing borrowings to finance an expansion of their operations to managing cash flow difficulties. The debtor and creditor may agree to modify the current loan agreement (or debt instrument) or to exchange one loan agreement (or debt instrument) for another. The accounting guidance applicable to accounting for the restructuring of obligations does not distinguish between a loan agreement, a payable, and a debt instrument and we use the term “loan” and “debt’ interchangeably in this publication.
This publication provides interpretive guidance and flowcharts to describe the accounting for restructured debt from the perspective of the debtor. Appendix A provides complex examples designed for users who understand the basics of debt modification.
This publication provides the tests used to determine the applicable model for accounting for a loan that is restructured with the same lender. Depending on the results of the tests, the debtor may have to account for the restructured debt as a:
Troubled debt restructuring – Changing the amount of interest expense recognized in the statement of operations prospectively or recognizing a gain in the statement of operations.
Modification or extinguishment – Modifying the effective interest expense recognized in the statement of operations prospectively or derecognizing the carrying amount of the original loan using the basic extinguishment model.