Financial Liabilities - Debt Restructuring

1. Asset Swap
Carrying amount of assets x
Carrying amount of liability (x)
Gain/Loss on Extinguishment x

CA, Assets > CA, Liab = Loss

CA, Assets < CA, Liab = Gain

US GAAP - 1. Remeasure assets@FV; 2. FV of Assets - CA, Liab = G/L on Extinguishment

2. Equity Swap (IFRIC 19)

Valuation of Equity Instruments (OS/PS)* x
Carrying amount of liability (x)
Gain/Loss on Extinguishment x

* Equity Instruments are valued:

1. FV of shares
2. FV of liability
3. CA of liability

3. Modification of Terms (IFRS 9)

10% Test - to determine whether substantial or not
Carrying amount, old liabillty + AI (if recorded) x
Recoverable amount (PV of all future CF using OEIF + Fee/Modificat (x)
Gain/Loss on Modification x

Gain/Loss on Modification / Carrying amount, old liability + AI(if recor x% apply 10% Test

Fee/Modification Cost
1. substantial (10% and above) - part of the Gain/Loss on Extinguishment (if Gain - deduct, if Loss - add)*
2. not substantial (below 10%) - part of the carrying amount of the new financial liability (deduction)

Substantial Modification
- Old FL derecognized, then recognized the New FL@FV

FL@FV x
CA, Old FL (x)
Gain or Loss on Extinguishment (x)/x
Modification Cost* x
Gain or Loss on Extinguishment (x)/x

Not substantial Modification

- Old FV continued to be recognized
- Old FV deducted Fee/Modification Cost (not substantial)
- recalculate of the new EIR (due to fee/modication cost)

Carrying amount, old liabillty + AI (if recorded) x

Recoverable amount (PV of all future CF using OEIF) (x)
Gain/Loss on Modification x
ply 10% Test

duct, if Loss - add)*

y (deduction)
Multiple Choice Questions

1A
Carrying amount, NP, 12/31/2014 5000000
Accrued Interest Payable 600000
Total CA, Liabilty 5600000

Carrying Amount, Land 3600000

CA, Liability -5600000
Gain on Extinguishment -2000000

DR: Notes Payable 5000000

DR: Interest Expense 600000
CR: Land 3600000
CR: Gain on Extinguishment 2000000

US GAAP:
FV of Land 4500000
CA, Liability -5600000
Gain on Extinguishment -1100000

2B
CA, real estate 1000000
CA, Liability -1500000
Gain on extinguishment -500000

3C
FV of shares (12*200000sh) 2400000
PV of shares -2000000
APIC 400000

FV of shares (12*200000sh) 2400000

CA, NP -2500000
Gain on Extinguishmnet -100000

DR: Notes Payable 2500000

CR: OSC 2000000
CR: SP 400000
CR: Gain on Extinguishment 100000

What if no FV of Shares and FV of Liability is P 2,300,000?

 Valuation of the shares (FV of Liabilty) 2300000
PV of shares -2000000
APIC 300000

Valuation of the shares (FV of Liabilty) 2300000

CA, NP -2500000
Gain on Extinguishmnet -200000

What if no FV of Shares and FV of Liability?

Valuation of the shares (CA of Liabilty) 2500000
PV of shares -2000000
APIC 500000

Valuation of the shares (CA of Liabilty) 2500000

CA, NP -2500000
Gain on Extinguishmnet 0

4
10% Test
CA, old Liability + AI (if recorded) 5500000
Recoverable amount (PV@10%+MC)
Principal 4000000 0.75 3000000
Interest 320000 2.49 796800
3796800

Gain on Modification 1703200

10% Test 1703200/5500000 0.309672727

*Substantial

Assuming the prevailing market interest rate is 10%?

Principal 4000000 0.75 3000000
Interest 320000 2.49 796800
FV of NP 3796800
CA, old FL -5500000
Gain on Extinguishment -1703200
Modification Cost 0
Gain on Extinguishment -1703200

5
6
7A
CA, Cash 4100000
CA, Liability -5750000
Gain on Extinguishment -1650000

8D
CA, Asset (530000 - 130000) 400000
CA, Liability -660000
Gain on Extinguishment -260000
Problem 1
1/1/2023 - Date of Restructuring

10% Test - Substantial/Not

Carrying Amount, old Liability + AI (if recorded) 660000

Recoverable Amount (PV@OEIR + Modification Cost)
Principal 400000 0.7513 300520
Interest 24000 2.4869 59685.6
Modification Cost 35000 -395206
Gain on Modification/Extinguishment 264794

10% Test 264794 / 6600 40.12% Substantial

Modification Cost - part of Gain / Loss on Modification

1/1/2023
DR: Notes Payable - old 600000
DR: AIP 60000
DR: Discount on NP 74282
CR: Notes Payable - new 400000
CR: Gain on Extinguishment 299282
CR: Cash 35000

@14%
Principal 400000 0.675 270000
Interest 24000 2.3216 55718
FV of new NP, 1/1/2023 325718 Q2
Face Value 400000
Discount on NP 74282

FV of new NP, 1/1/2023 325718

Carrying amount, old NP (600000+60000) -660000
Gain on exitingushment -334282
Modification Cost - substantial 35000
Gain on exitingushment -299282 Q1

New EIR@14%
Carrying amount, 1/1/2023 325718
EIR 14%
Interest Expense - 2023 45600.52 Q3
Carrying amount, NP, 12/31/2023 347318.52 Q4

Problem 2
1/1/2023 - Date of Restructuring

10% Test - Substantial/Not

Carrying amount, old Liability + AI (if recorded) 550000

Recoverable Amount(PV@10%+Modification Cost)
Principal 500000 0.683 341500
Interest 70000 3.1699 221893
Modification Cost 29000 -592393
Loss on Modification -42393

10% Test 42393 / 55000 7.71% Not substantial

Modification Cost - part of carrying amount of the new FL (deduction)

@10%
Principal 500000 0.683 341500
Interest 70000 3.1699 221893
PV of NP 563393
Modification cost -29000
Adjusted NP, 1/1/2023 534393 11.75%
*recalculate the new EIR

@11%
Principal 500000 0.6587 329350
Interest 70000 3.1024 217168
PV of NP 546518

@12%
Principal 500000 0.6355 317750
Interest 70000 3.0373 212611
PV of NP 530361

Rate 11% ? 12%

PV 546518 534393 530361

Rate 1%
PV 16157
11% + 1%(12125/16157) 0.117504487 11.75%
12% - 1%(4032/16157) 0.117504487 11.75%

Carrying amount, old Liability + AI (if recorded) 550000

Recoverable Amount(PV@10%)
Principal 500000 0.683 341500
Interest 70000 3.1699 221893 -563393
Loss on Modification -13393 Q1

1/1/2023
DR: AIP 50000
DR: Loss on Modification 13393
CR: Premium on NP 34393
CR: Cash 29000

CA, NP, 1/1/2023 534393

EIR 11.75%
Interest Expense - 2023 62791 Q2

CA, NP, 12/31/2023 527184 Q3