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Notes Payable and Debt Restructuring

1. Debt restructuring occurs when a creditor grants a concession to a debtor due to the debtor's financial difficulties that the creditor would not otherwise consider. Common forms of debt restructuring include asset swaps, equity swaps, and modifications of terms. 2. For accounting purposes, asset and equity swaps are treated as extinguishments of the original debt, with any difference between the carrying amount of debt extinguished and the fair value of assets/equity given recognized in profit or loss. 3. A substantial modification of terms is also treated as an extinguishment, while an insignificant modification does not trigger extinguishment accounting and impacts the carrying amount of the liability.

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216 views

Notes Payable and Debt Restructuring

1. Debt restructuring occurs when a creditor grants a concession to a debtor due to the debtor's financial difficulties that the creditor would not otherwise consider. Common forms of debt restructuring include asset swaps, equity swaps, and modifications of terms. 2. For accounting purposes, asset and equity swaps are treated as extinguishments of the original debt, with any difference between the carrying amount of debt extinguished and the fair value of assets/equity given recognized in profit or loss. 3. A substantial modification of terms is also treated as an extinguishment, while an insignificant modification does not trigger extinguishment accounting and impacts the carrying amount of the liability.

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glrosaaa c
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Notes Payable and Debt A C C 2 11 ( I N T E R M E D I AT E

Restructuring ACCOUNTING II)


Notes Payable and Debt Restructuring
Notes payable
an unconditional promise in writing made by one person to

Definition another, signed by the maker, engaging to pay on demand,


or at a fixed or determinable future time, a sum certain in
money to order or to bearer.
Sample
Promissory
Note
Initial measurement of note payable
(IFRS 9)

AN ENTITY SHALL THE FAIR VALUE OF WHEN A NOTE IS TRANSACTION TRANSACTION


MEASURE A FINANCIAL THE NOTE PAYABLE ISSUED SOLELY COST IS DEDUCTED COST IS EXPENSED
LIABILITY AT ITS FAIR
VALUE MINUS, IN THE
IS EQUAL TO THE FOR CASH, FROM FAIR VALUE IMMEDIATELY IF
CASE OF FINANCIAL PRESENT VALUE PRESENT VALUE IS OF THE NOTE THE NOTE PAYABLE
LIABILITY NOT AT FAIR OF FUTURE CASH EQUAL TO THE PAYABLE IF IT IS IS CLASSIFIED AS
VALUE THROUGH PAYMENT TO CASH PROCEEDS. CLASSIFIED AS A FINANCIAL
PROFIT OR LOSS, SETTLE THE FINANCIAL LIABILITY AT FAIR
TRANSACTION COSTS LIABILITY. LIABILITY AT VALUE THROUGH
THAT ARE DIRECTLY AMORTIZED COST. PROFIT AND LOSS.
ATTRIBUTABLE TO
THE ACQUISITION OR
ISSUE FINANCIAL
LIABILITY.
Subsequent measurement of note payable (IFRS 9)
– Financial liabilities at amortized cost
Amortized cost of the note payable is the initial measurement minus principal
repayment, and minus discount amortization (if any) or plus premium amortization (if
any).

Difference between the face amount and the present value of the note payable is
treated as discount or premium.

Discount or premium on note payable is amortized to interest expense using effective


interest method.
An entity shall present a gain or loss on a note payable that is designated as
Subsequent at fair value through profit or loss as follows:
measurement ◦ The amount of change in the fair value that is attributable to changes in the credit
risk of the note payable shall be presented in other comprehensive income.
of note ◦ The remaining amount of change in the fair value of the note payable shall be
presented in profit or loss.
payable (IFRS
If presenting the change in fair value attributable to credit risk would create
9) - Financial or enlarge an accounting mismatch in profit or loss, an entity shall present
liabilities at all gains or losses on that liability (including the effects of changes in the

fair value credit risk of that liability) in profit or loss.

through profit Amount recognized in other comprehensive income shall not be


subsequently transferred to profit or loss.
or loss
Cumulative gain or loss in other comprehensive income may be transferred
(irrevocable within equity (retained earnings)
designation) Interest expense is measured using the stated or nominal rate.
Debt Restructuring
A restructuring of a debt constitutes a troubled debt restructuring if

Definition the creditor for economic or legal reasons related to the debtor's
financial difficulties grants a concession to the debtor that it would
(SFAS 15) not otherwise consider.
Asset swap – Transfer from the debtor to the creditor of receivables
from third parties, real estate, or other assets to satisfy fully or partially
a debt (including a transfer resulting from foreclosure or repossession).

Equity Swap – Issuance or granting of an equity interest to the creditor


by the debtor to satisfy fully or partially a debt unless the equity interest
Forms of debt is granted pursuant to existing terms for converting the debt into an
equity interest.
restructuring Modification of terms – Modification of terms of a debt, such as one or

(SFAS 15) a combination of:


◦ Reduction (absolute or contingent) of the stated interest rate for the
remaining original life of the debt.
◦ Extension of the maturity date or dates at a stated interest rate lower than the
current market rate for new debt with similar risk.
◦ Reduction (absolute or contingent) of the face amount or maturity amount of
the debt as stated in the instrument or other agreement.
◦ Reduction (absolute or contingent) of accrued interest.
Accounting for asset swap (IFRS 9)

The difference between the carrying


amount of a financial liability (or part of
Dation in payment/dacion en pago
a financial liability) extinguished or
(R.A. 386, Art. 1245), whereby
transferred to another party and the
property is alienated to the creditor in
consideration paid, including any non-
satisfaction of a debt in money is
cash assets transferred or liabilities
accounted as asset swap.
assumed, shall be recognized in profit or
loss.
When equity instruments issued to a creditor to extinguish all or part of a
financial liability are recognized initially, an entity shall measure them at the
fair value of the equity instruments issued, unless that fair value cannot be
reliably measured

If the fair value of the equity instruments issued cannot be reliably measured
then the equity instruments shall be measured to reflect the fair value of the
Accounting financial liability extinguished.

for equity Order of priority for measurement of equity instruments issued to extinguish
a financial liability:

swap (IFRIC
◦ Fair value of equity instruments issued
◦ Fair value of the financial liability extinguished
◦ Carrying amount of the financial liability extinguished – no gain or loss on

19) extinguishment of debt

If only part of the financial liability is extinguished, the entity shall assess
whether some of the consideration paid relates to a modification of the terms
of the liability that remains outstanding. If part of the consideration paid does
relate to a modification of the terms of the remaining part of the liability, the
entity shall allocate the consideration paid between the part of the liability
extinguished and the part of the liability that remains outstanding
A substantial modification of the terms of an existing financial liability or a part of it (whether or not
attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the
original financial liability and the recognition of a new financial liability.

The terms are substantially different if the discounted present value of the cash flows under the new
terms, including any fees paid net of any fees received and discounted using the original effective
interest rate, is at least 10 percent different from the discounted present value of the remaining cash

Accounting
flows of the original financial liability.

If there is substantial modification, gain or loss on extinguishment is equals to the carrying amount of
for the old liability minus the present value of the new liability, including net fees incurred.

modification If there is no substantial modification of terms, gain or loss on extinguishment of debt is not
recognized.

of terms If an exchange of debt instruments or modification of terms is accounted for as an extinguishment,

(IFRS 9)
any costs or fees incurred are recognized as part of the gain or loss on the extinguishment.

If 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 amortized over the remaining term of the modified
liability.

Interest expense under the new liability is computed using effective interest method.

The rate used to compute the present value of the new financial liability is the interest rate of the old
financial liability.

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