For a variety of reasons, borrowers and lenders may renegotiate the terms of existing loans or exchange an existing loan for a new loan with the same lender. Naturally, there are accounting implications when the borrower and lender agree to modify or restructure an existing loan or exchange one loan for another. The accounting implications differ depending on whether the borrower’s or lender’s accounting is being considered. Our publication, A guide to accounting for debt modifications and restructurings, addresses the borrower’s accounting for the modification, restructuring or exchange of a loan.
The primary decision points considered by the borrower in accounting for the modification, restructuring or exchange of one of its loans include:
- Do the changes result in meeting the liability derecognition threshold?
- Do the changes meet the definition of a troubled debt structuring?
- Do the changes make a new or changed term loan substantially different from the old term loan?
- Do the changes increase the borrowing capacity of a line-of-credit or revolving debt arrangement?
The conclusion reached by a borrower in considering each of these decision points (in conjunction with the related authoritative literature) could have a significant effect on its financial statements. Depending on its facts and circumstances, the borrower may be required to: (a) adjust the carrying amount of the loan, (b) change the amount of interest expense recognized in the income statement on a going-forward basis or recognize a gain or loss in the income statement and (or) (c) expense some of the costs incurred to execute the changes and (or) defer and amortize other costs.
Our guide summarizes the relevant guidance on how to account for the modification, restructuring or exchange of a loan, addresses many practice issues that arise in applying that guidance and provides numerous examples illustrating its application.