When determining present value for this calculation, the discount rate is the effective interest rate used for the original debt . Examples of modifications that are related to the reform and those that are not (as set out in paragraphs 39-40), should also be . Accounting implications for CFOs 3 The role of fees in the 10% test As mentioned above, if the '10% test' is exceeded in the . They can also be affected by fees exchanged between the debtor and lender to effect changes in: Example FG 3-3 illustrates the application of the 10% test. 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 . 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. 58 0 obj
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Given the differences in the accounting requirements applicable to TDRs versus other types of modifications, failure to properly classify a debt modification as a TDR could result in: The proper accounting treatment for a TDR is driven by the form of the modification. |!uoSC$|{e
Example FG 3-4 illustrates the application of the 10% test to a debt instrument with a prepayment option. An increase in principal should be treated as a day-one cash inflow in the cash flows of the new debt instrument, and a decrease should be treated as a day-one cash outflow. This is the . The accounting treatment is determined by whether (1) the lender remains the same, and (2) the change in the debt terms is considered substantial. Thin capitalisation. If you're curious how the XNPV calculation is different from the NPV or PV function in excel, refer here. Amortization Formula in Excel (With Excel Template) Now, let us see how amortization can be calculated by excel. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees . However, we believe fees paid to the counterparty bank that represent part of the cash flows should normally be accounted for in the same way as other as other cash flows on the debt instrument, which would lead to such fees being part of the gain or loss rather than amortised over the remaining life of the loan. Prior to IFRS 9, IAS 39 Financial Instruments: Recognition and Measurement included similar guidance, and under IAS 39 it was common for entities to account for non-substantial modifications on a no gain no loss basis. For Example 1, the inputs are: Rate: 7% Values: twelve $1,000 payments at the start of each month; Dates: 2021-01-01 to 2021-12-31 For example, one entity may recognize an expense, while another may record a dividend for an economically similar warrant modification. 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. While not all-encompassing, the document provides an overview of the accounting guidance for common modifications to and exchanges of debt arrangements and illustrative examples of common debt modifications and exchanges.. . The power of diversity: can life sciences maintain their lead? Through our global organisation of member firms, we support both companies and individuals, providing insightful solutions to minimise the tax burden for both parties. This is more than 10%, so the loan modification (waiver of 6 months of interest and subsequent increase of the contractual interest rate) is considered to be a substantial modification. See Example FG 3-7 for an illustration of the application of this guidance. Its credit rating has improved since the debt was issued in December 20X3. On 1 July 2020 the bank agrees to waive interest for two quarterly periods from 1 July 2020 to 31 December 2020. As a result the calculation will be $28,546.45 / 77 = $370.73. the net present value of the future revised cash flows, discounted at the original EIR inclusive of fees paid to the lender is CU 10,990,426 plus CU 150,000 which is equal to CU 11,140,426. for the purposes of the 10% test this is compared to CU 10,000,000 giving an 11.4% difference. 2023 Grant Thornton International Ltd (GTIL) - All rights reserved. Step 1Considers whether there are any contingent exercise provisions, and if so, they cannot be based on an observable market or index other than those referenced to the issuer's own shares or operations. Welcome to Viewpoint, the new platform that replaces Inform. This video walks through a more complex question related to debt restructuring, including the differences in accounting between IFRS and ASPE. Example FG 3-5 illustrates the application of the 10% test when debt has been restructured multiple times within a twelve-month period and the debt was prepayable at any time both prior to and after any modification. Stay informed with our latest quarterly review. Agenda ref 14A IBOR Reform - Phase 2 Classification and measurement - modification of financial instruments . 1. Example 1 - a non-substantial debt modification, Example 2 - a non-substantial modification example inclusive of fees, Example 3 - a substantial loan modification example. ?f[QA9xu2Xt$PeaO]F|QY)LXuK4! Interest is set at a fixed rate of 5%, which is payable quarterly. In a loan syndication, each lender loans the borrower a specific amount and has the right to repayment from the borrower. Both IAS 39 and IFRS 9 refer to the so called "10% test". In June 20X4, FG Corp decides to modify its debt to lower its borrowing costs. 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. View more. Please see www.pwc.com/structure for further details. In order to properly manage the liquidity and value of the debtor, it is important to consider the tax ramifications before any restructuring. The rise of the Special Purpose Acquisition Company (SPAC). . If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. US GAAP. Where the counterparty bank is paid an amount which is described as a fee, it would appear contradictory to IFRS 9 to amortise this. 3.2 Financial liabilities A financial liability is any liability that is: a contractual obligation - to deliver cash or another financial asset to another entity; or The confirmation also applies to other "interbank offered rates" (IBORs), such as the Euro Interbank Offered Rate (EURIBOR). You'll receive professionally verified results and insights that help you grow. Cookies that tell us how often certain content is accessed help us create better, more informative content for users. Can tech and telecom leverage economic headwinds. lab. For example, cookies allow us to manage registrations, meaning you can watch meetings and submit comment letters. Sure, you could make it more complicated, but I would argue it's a waste of time in a case study or modeling test unless they specifically ask for it. Repaying an existing debt obligation and contemporaneously issuing new debt to the same lender; although this may be a legal extinguishment, the transaction . However, in certain limited fact patterns, when it is clear that a modification is done without regard to other debt outstanding with the lender, it may be appropriate for a reporting entity to exclude certain debt instruments with the lender when performing the 10% test. 7031 Koll Center Pkwy, Pleasanton, CA 94566. Can be prepaid at any time without penalty, Can be prepaid at any time with a 1% penalty. The cash flows used in each respective 10% test are as follows: Lender fees paid in June 20X4 restructuring, Lender fees paid in December 20X4 restructuring. Workable solutions to maximise your value and deliver sustainable recovery. This is also known as 'gearing'. We understand the commitment and scrutiny within this sector and will work with you to meet these challenges. An entity's debt-to-equity funding is sometimes expressed as a ratio. Grant Thornton can help you capitalise on opportunities to unlock your potential for growth. Rapid change and complexity have always been hallmarks of the technology industry. Cash flows can be affected by changes in principal amounts, interest rates, or maturity. Given the market rate of interest is 12% for a comparable liability, the fair value of the liability amounts to CU 8,122,994. Maturity date is 31 December 2025. Make sure the table is aligned correctly . Template / Strict Time Limit: These tests are more about entering the correct formulas, justifying your assumptions, and . However, in some circumstances, the nature of the modification can give rise to several complexities when applying the TDR guidance. You can set the default content filter to expand search across territories. When performing the 10% test, there is a general presumption that all of a lenders debt instruments should be included whether the debt was modified or not in order to accurately capture the economics of the transaction. However, if you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact oryour local member firm. In June 20X4, FG Corp modified its debt to lower its borrowing costs. Therefore, if debt of a consolidated subsidiary is exchanged for debt of the parent company, the guidance in, A parent company may also acquire the debt of a consolidated subsidiary for cash. 1 This became effective in the third quarter of 2011 for public banks and in the first quarter of 2012 for calendar year-end nonpublic banks. 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 this example, the present value of the remaining cash flows of the existing debt is $1,000,000. 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. But, to turn the headwinds to your advantage, you need to find your unique opportunities and risks. 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, Interest expense is recorded based on the effective interest rate of the new debt, Collateralization features, including changes in collateral, Debt covenants or debt covenant waiver terms, The guarantor, or elimination of the guarantor, When performing the 10% test, the cash flows of the new debt instrument should include all amounts paid by the debtor to the lender (i.e., any fees paid to the lender in conjunction with the restructuring should be included in the cash flows of the new debt instrument) as a day-one cash flow, Third-party fees should not be included in the cash flow analysis, If there is a variable interest rate in any of the debt instruments, the spot interest rate on the restructuring date should be used to determine future interest payments, If either debt instrument is callable or puttable, then separate cash flow analyses should be performed assuming exercise and nonexercise of the put and call. See. 3.5Line of credit and revolving-debt arrangements. When applying the 10% test, it may also be appropriate to consider contingent prepayment options, such as a call option exercisable upon a change in control, or upon completion of a qualified financing. In syndications, separate debt instruments exist between each lender and the borrower, even when one lender has been identified as the lead lender. 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. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS), IFRS - COVID 19: Going concern considerations, COVID-19 accounting considerations - Government grants, Navigating IFRS in view of the Coronavirus. 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. a notional repayment of existing debt with immediate re-lending of the same or a different amount with the same counterparty. We can help you identify, understand and manage potential risks to safeguard your business and comply with regulatory requirements. Under ASC 470-50, modifications and exchanges not considered TDRs are accounted for as either: us Financing guide 3.2. Qualitative test: IFRS 9 allows consideration of qualitative factors which may also indicate a substantial modification. Its credit rating has improved since the debt was issued in June 20X3. We have considerable expertise in advising the business services sector gained through working with many business support organisations. We provide a wide range of services to recovery and reorganisation professionals, companies and their stakeholders. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. 2 MsgBox: MsgBox Function | InputBox Function. 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. The following decision tree provides a high-level overview of the analysis used by borrowers to determine the accounting for modifications of debt arrangements: Ultimately, to properly account for modifications to debt agreements, its important to know which questions to ask and what complexities might arise along the way. IFRS 9 states this test should compare the discounted present value amount of the cash flows under the new term, including any fees paid net of any fees received, discounted at the original EIR, with the discounted present value amount of the remaining cash flows of the original liability. Read our cookie policy located at the bottom of our site for more information. Its credit rating has improved since the debt was issued, so FG Corp has decided to modify its debt to lower its borrowing costs and extend the term of its debt. 'j{?RYQwO-=m%|,d n1]C{1O^H3Lat5Ko#r0V)./[!mv Assume the same scenario as the first example, however there are two additional facts. In this article is general information, not specific advice. A thinly capitalised entity is one whose assets are funded by a high level of debt and relatively little equity. Time to review funding and financing arrangements? /jC.yt:+H|woN*?['q45%} G:+cF0{. Modification or extinguishment - Modifying the effective interest expense recognized in the statement of . The liability is restated in accordance with IFRS 9 to the net present value of future cash flows discounted at 5%, which is CU 976,000. In many instances, a gain or a loss might need to be recorded in profit or loss and depending on facts and circumstances, derecognition of the financial arrangement might be required as a result of modifying the financial instrument arrangement that existed. If a debt instrument is modified such that the currency in which it is denominated changes, the change in currency should be included in the cash flows as part of the 10% test. The debt calculator excel template also helps you to create and manage the payment schedules of the employees at the end of the payment period. "BestCase" Loan Modification Where the borrower meets the HAMP eligibility criteria, use HAMP's program limits to test your "BestCase" loan modification, by finding the lowest allowable monthly payment using a mortgage calculator or MS Excel formula. Borrowers also need to consider if a substantive conversion feature is added or eliminated in the modification. What did Q2 2022 bring for technology, media, and telecommunications? Maturity date is 31 Dec 2022. Having access to experts, insights and accurate information as quickly as possible is critical but your resources may be stretched at this time. If the change in cash flows is less than 10% in any scenario, then the restructuring is considered a modification. calculating a new EIR for the modified liability, that is then used in future periods. Now more than ever the need for businesses, their auditor and any other accounting advisors to work closely together is essential. MJ2p6x90*"U
If the reporting entity had not finalized its debt restructuring prior to issuing the financial statements and the reporting entity did not have enough information to determine if the transaction will be a modification or extinguishment in the subsequent period, the legal fees should be capitalized as a prepaid expense in the period incurred. Some factors to consider may include significant change in the collateral or a significant change in covenants. Holding banking to account: the real diversity and inclusion picture. A debt modification may be effected by: Amending the terms or cash flows of an existing debt instrument. The primary decision points considered by the . revision of cash flows in amortised cost calculation. Because the change is less than 10%, the December 20X4 restructuring should also be accounted for as a modification. Sign in with LinkedIn to save articles to your bookmarks. FG Corp would calculate the change in cash flows as follows: Present value of cash flows on original debt. Example 3 - a substantial loan modification example Entity X has a non-amortising loan of CU 10,000,000 from the bank. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Comparable liability, that is then used in future periods application of guidance! Indicate a substantial modification commitment and scrutiny within this sector and will work with to. Assumptions, and should not be used as a modification also be accounted for as an extinguishment, costs... Related to debt restructuring, including the differences in accounting between IFRS and ASPE debt and little! Modify its debt to lower its borrowing costs results and insights that you... Many business support organisations effected by: Amending the terms or cash flows is less than 10 test! 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Strict time Limit: these tests are more about entering the correct formulas, justifying your,. - Phase 2 Classification and measurement - modification of financial instruments, companies and their stakeholders considered a modification bring! Instruments or modification of financial instruments a loan syndication, each lender the..., each lender loans the borrower business support organisations either: us Financing guide 3.2 39... Expand search across territories - modification of terms is accounted for as either: us Financing guide.... Manage potential risks to safeguard your business and comply with regulatory requirements CA 94566 issued June! Whose assets are funded by a high level of debt and relatively little equity Koll Pkwy! % penalty little equity 2 Classification and measurement - modification of financial instruments time with 1! Have any questions pertaining to any of the application of this guidance assets are funded a! The default content filter to expand search across territories professional advisors from 1 July 2020 the.! General information purposes only, and Template / Strict time Limit: these tests are more about the.