On August 26, 2026, the Financial Accounting Standards Board (FASB or Board) added a project to reconsider how borrowers account for debt modifications, exchanges and troubled debt restructurings (TDRs). As part of the new project, the Board is pursuing a tentative approach that would eliminate the current 10% cash flow test used to determine whether a debt modification or exchange should be accounted for as a modification or extinguishment. Under that approach, modifications and exchanges within the scope of FASB’s Accounting Standards Codification (ASC) Subtopic 470-50 that change the timing or amount of cash flows or the fair value of an embedded conversion option would be accounted for as extinguishments. The Board also tentatively decided that all changes to cash flows, written call options, and conversion options should be considered in determining whether there is an extinguishment. In addition, the Board tentatively decided to remove the TDR accounting model in Subtopic 470-60.
Summary of key tentative decisions
- Eliminate the 10% cash flow test—The Board tentatively decided to remove the quantitative test currently used under Subtopic 470-50 to evaluate whether a debt modification or exchange should be accounted for as an extinguishment.
- Expand extinguishment accounting—The Board tentatively decided to require extinguishment accounting for modifications and exchanges within the scope of Subtopic 470-50 that change the timing or amount of cash flows or the fair value of an embedded conversion option. Entities would consider all changes to cash flows, written call options, and conversion options in making that determination.
- Provide private-company measurement relief—Non-public business entities (non-PBEs) would be permitted to make an entity-wide accounting policy election to initially measure qualifying new or modified debt at its principal amount.
- Eliminate TDR guidance—The Board tentatively decided to remove the separate TDR accounting model for debtors in Subtopic 470-60.
- Expand disclosures—Entities would be required to provide more transparent information about debt modifications and exchanges, including changes in terms, reasons for the transaction, and recognized gains or losses. While this would not represent a significant change for public business entities already subject to reporting under SEC Regulation S-X, this could significantly increase disclosure obligations for non-PBEs.
Why this matters
If finalized, the tentative model would cause more modifications and exchanges to result in derecognition of the existing debt, recognition of the new or modified debt instrument, and an immediate gain or loss. Accounting outcomes also would become less dependent on whether the transaction involves an existing lender or a new lender. Investor feedback played an important role in the Board’s discussion. Investors emphasized that understanding the economics of the transaction, the amount owed, and ongoing interest costs are more useful to their analysis than the TDR label. Board members noted that extinguishment accounting may better align future interest expense with the restructured cash flows. Subsequent interest expense would be based on the initial carrying amount of the new or modified debt, the revised contractual cash flows, and the effective interest method. This could be particularly significant for transactions that are currently accounted for as TDRs, where the initial fair-value measurement could produce an extinguishment gain followed by higher interest expense in later periods.
For non-PBEs, the Board tentatively approved an entity-wide accounting policy election to initially measure qualifying new or modified debt at its principal amount. The election would not be available when the effective interest rate differs from the stated interest rate because the arrangement includes multiple units of account, such as debt issued with warrants or derivatives that are separately recognized.
What still needs to be decided before an exposure document
The effective date, transition requirements, detailed scope provisions, and other implementation matters remain subject to future deliberations. In addition, the separate debt exchanges project, which was previously exposed for comment, remains paused while the Board considers whether to subsume it into this broader project.
What reporting entities should do now
The Board’s decisions are tentative, and current U.S. GAAP remains unchanged, so reporting entities do not need to change their accounting policies at this stage. However, entities with frequent debt amendments, refinancing activity, related-party financing, or debt issued with warrants should monitor the project, identify the arrangements that could be affected, and consider modeling potential financial-statement effects. They also should assess whether existing processes capture the information that could be required under the tentative disclosure package.
