At Grant Thornton, our IFRS advisers can help you navigate the complexity of financial reporting from IFRS 1 to IFRS 17 and IAS 1 to IAS 41. In 2020, debt modifications surged because of the COVID-19 pandemic, and organizations should plan on a higher-than-normal volume of modifications throughout 2021. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. us Financing guide 3.2. However IFRS 9 specifically states in its application guidance, that costs or fees incurred are adjusted against the carrying amount. A modification or an exchange affects the terms of an embedded conversion option, from which the change in the fair value of the embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) is at least 10 percent of the carrying amount of the original debt instrument immediately before the modification or exchange. Get modification 10 signed right from your smartphone using these six tips: For this example, the present value of a 10-year lease with payments of $1,000 annually, 5% escalations, and a rate inherent in the lease of 6% is $9,586. This amount is compared to the total of fees paid on modification ($50,000) and the present value of the future payment(s) under the modified terms. 1. FG Corp has a term loan with monthly interest payments that is prepayable without penalty. For Example 1, the inputs are: Rate: 7% Values: twelve $1,000 payments at the start of each month; Dates: 2021-01-01 to 2021-12-31 Stay informed with our latest quarterly review. If an exchange or modification offer is made to all investors and only some agree to the exchange or modification, then the guidance in this Subtopic shall be applied to debt instruments held by those investors that agree to the exchange or modification. We have considerable expertise in advising the business services sector gained through working with many business support organisations. eqcC~GO7HpmBq8A][>*+EYIZ5[M5Yj `Tw "R6q]v.+KLbF+)0+n$qxYyxM h8}]ug7 9mZ;KwV}+`uAdglx;h7Ju=y|Mu~AR#U_Sw?2d"wTyal#VU l~k] l;sW'6n6.ZB)[aGuf[X6##1 e(]K2/+!z\j3Dv>f&T ]rd0d"nMITFXw'#@5<0Hti` t SrLb 4\/OG8\apf'2W,3;Zu5>u%m/?q1"9lI>4ANxo>*n.@[7nDZnE:e#\t0L~o9xi@)",y8z.dk+G1Ks>wuC'+O/11SZ` trB> rZss9wvo\tUO]I[M/t%?j(D8+JC>>w|p"KAKDj|>~&s CozS[l?e Employers must work harder than ever to grow workforce loyalty and meet the increasing demands for a purpose-led organisation. We can help you identify, understand and manage potential risks to safeguard your business and comply with regulatory requirements. (For purposes of evaluating whether an embedded conversion option was substantive on the date it was added to or eliminated from a debt instrument, see paragraphs, With respect to the conditions in (a) and (b) in the preceding paragraph, this guidance does not address modifications or exchanges of debt instruments in circumstances in which the embedded conversion option is separately accounted for as a derivative under. We can support you as you navigate through accounting for the impacts of COVID-19 on your business. In June 20X4, FG Corp modified its debt to lower its borrowing costs. A thinly capitalised entity is one whose assets are funded by a high level of debt and relatively little equity. "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. a result of an earlier modification will change the outcome of the derecognition assessment of a subsequent modification through the '10 per cent test'. In response, some lenders have agreed to changing the borrowing terms or providing waivers or modifications to debt covenant arrangements. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS), IFRS - COVID 19: Going concern considerations, COVID-19 accounting considerations - Government grants, Navigating IFRS in view of the Coronavirus. Its credit rating has improved since the debt was issued in December 20X3. Jessica Patel, Tax Partner at Grant Thornton UK speaks with tax partners and directors across the network to share their insights on the real estate market and some of the challenges. 1.1001-3, a change in yield of the existing debt is significant if it is more than the greater of 25 basis points or 5% of the unmodified yield. 58 0 obj <>/Encrypt 39 0 R/Filter/FlateDecode/ID[<166C957FB5B7BD93921AD7FDCBCC65C8><1A4BAA685CBF584280F6006AFDBD199C>]/Index[38 43]/Info 37 0 R/Length 104/Prev 120827/Root 40 0 R/Size 81/Type/XRef/W[1 3 1]>>stream /jC.yt:+H|woN*?['q45%} G:+cF0{. Some borrowers continue to defer the unamortized debt issuance costs when they pay down a portion of their debt in connection with a modification (which is accounted for as a modification), based on the view that the prepayment is factored into the terms agreed to on the modified debt. 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. In other words, they believe it is not possible to separately identify the prepayment amount. 2023 Grant Thornton International Ltd (GTIL) - All rights reserved. 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. For full functionality of this site it is necessary to enable JavaScript. By contrast, for a loan syndication, the debt modification guidance should be applied on a lender-by-lender basis, even if a lead lender has been identified. instructions how to enable JavaScript in your web browser In a matter of seconds, receive an electronic document with a legally-binding signature. If a prepayment option (or any put or call feature) is exercisable at any time, a borrower should assume it is exercised immediately. For example, if table-array spans cells B2:D7, then your lookup_value must be in column B.. Lookup_value can be a value or a reference to a cell.. table_array (required) The accounting implications differ depending on whether the borrower's or lender's accounting is being considered. In other words, if the net present value of the cash flows under the modified terms including . Quantitative test - The net present value of the cash flows under the new terms discounted at the original effective interest rate (EIR) is at least 10% different from the carrying amount of the . In addition to the 10 percent test, the borrower should apply judgment to assess whether qualitative factors indicate that a modification is substantial. Our teams have in-depth knowledge of the relationship between domestic and international tax laws. Borrowers need to determine the impact of these changes and then apply the guidance set out in IFRS 9 Financial Instruments to determine whether the change is a modification (as defined in IFRS 9). Here are just a few examples borrowers should be aware of: To determine how to account for a debt modification that is not a TDR, an entity must assess whether the terms of modified debt instrument and the original debt instrument are substantially different. As a result the calculation will be $28,546.45 / 77 = $370.73. This section helps determine if a nontroubled modification or exchange of debt with the same creditor should be accounted for as either an extinguishment or a modification. 1.1001-3. Midway through 2021, it is really encouraging to see some of that unevenness disappear and more industries participating in the overall recovery. 5.5 years (maturity extended by 2 years in June 20X4 amendment), 5 years (maturity unchanged from June 20X4 amendment), Can be prepaid at any time with a 3% penalty. Mid-market recovery spreads to more industries. The cash flow assumptions that generate the smaller change would be the basis for determining whether the 10 percent threshold is met. During the periods where no interest is paid, the interest charge in the profit or loss will continue to be presented, by applying the EIR (adjusted, if need be, for any fees relating to the modification) to the revised amortised cost of the instrument. "Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. re-estimation of cash flows in floating-rate instruments. Our global banking team are an integrated team of experienced industry professionals with in-depth knowledge of financial services institutions. As this test is comparing the extent of the change between borrower and lender, the reference to fees in this context should refer to the fees between borrower and lender (eg would not normally include fees paid a lawyer). Example 3 - a substantial loan modification example Entity X has a non-amortising loan of CU 10,000,000 from the bank. But, to turn the headwinds to your advantage, you need to find your unique opportunities and risks. If the difference in the present values of the cash flows is less than 10 percent, then the borrower needs to perform a qualitative assessment to identify substantial differences in terms that by their . Exchanging existing debt for new debt with the same lender. If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. Reg. Select a section below and enter your search term, or to search all click Therefore, the following journal entries should be recorded: The fair value of the modified liability will usually need to be estimated. 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. From the debtors perspective, an exchange of debt instruments between or a modification of a debt instrument by a debtor and a creditor in a nontroubled debt situation is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. amount of the original debt. Menu. The following journal should be recorded: Fees paid in a non-substantial modification. "Net present value" (NPV) is an indicator of how much an investment is worth. This rate would normally equate to the market rate of interest used in the fair value calculation (see below). Despite facing pressure, telecommunication companies are handling the roll-out of new network technologies and an insatiable demand for bandwidth. Interest is set at a fixed rate of 5%, which is payable quarterly. Follow - Fees in the '10 per cent' Test for Derecognition of Financial Liabilities . Do Not Sell or Share My Personal Information. When performing the 10% test, the effect of the required amortization of basis adjustments due to the application of fair value hedge accounting should be ignored for the purposes of calculating the effective interest rate of the original debt instrument. On adoption of IFRS 9 on January 1, 2018, a transitional ad . We use cookies to personalize content and to provide you with an improved user experience. The old debt would not be derecognized. To perform the 10% test, FG Corp should assume that the prepayment option in both the original and new debt is exercised on the modification date. The ratio states net . One effect of extinguishment accounting is the accelerated expensing of transaction costs. What does the funding landscape look like for public sector organisations in 2022? This was clarified by an amendment to IFRS 9 in the Annual Improvements to IFRS Standards 2018-2020 [ 231 kb ] issued on 14 May 2020. There is no guidance on how to account for a refinancing of publicly traded debt securities that does not involve an exchange or modification offer (i.e., when a reporting entity issues new debt securities to investors, which potentially may include holders of the issuers existing debt securities, and uses the proceeds to pay off existing publicly-traded debt securities potentially held by the same investors). If the tax-exempt municipal bond is widely held, it may be reasonable to conclude that an extinguishment has occurred. Please see www.pwc.com/structure for further details. The accounting for the debt modification depends on whether it considered to be substantial or non-substantial. 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. All rights reserved. As part of the modification, the entity pays a CU 150,000 arrangement fee to the bank and a CU 50,000 professional service fee to its lawyers. 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. Home; About; Maps; FAQ; debt modification 10% test example excel This will usually result in the smallest change in cash flows. We can support you throughout the transaction process helping achieve the best possible outcome at the point of the transaction and in the longer term. a. Assume the same scenario as the first example, however there are two additional facts. In this example, the present value of the remaining cash flows of the existing debt is $1,000,000. In an arrangement where an intermediary places notes issued by the debtor, if the placement is done under a best-efforts agreement, that would indicate that the intermediary is acting as agent. If you have questions, please contact your supervisory office, the Office of the Chief Accountant at (202) 649-6280, or the Credit and Market Risk Department at (202) 649-6360. 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. 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. If the intermediarys role is restricted to placing or reacquiring debt for the debtor without placing its own funds at risk, that would indicate that the intermediary is an agent. Consider removing one of your current favorites in order to to add a new one. The value of the non-discounted cash flows before the waiver, discounted at the original EIR is CU 1,000,000 (ie the amortised cost before the waiver). 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. Our solutions include dealing with emigration and tax mitigation on the income and capital growth of overseas assets. This amount is compared to the previous carrying amount and the difference is recognised in the profit or loss. MJ2p6x90*"U Value of the right of use asset divided by total remaining useful life days. 7031 Koll Center Pkwy, Pleasanton, CA 94566. Reg. Modification accounting under FASB Subtopic 470-50 is applied when the modification is deemed significant, and if not significant, the borrower . Figure FG 3-4 provides a summary of the accounting for a debt modification or debt extinguishment in a restructuring or exchange transaction when the lender remains the same. Following world events such as the COVID-19 pandemic, Brexit, and changes to regulation and digitalisation, insurers must be alert to the challenges ahead. In this example, we use the XNPV function in excel because that's the most accurate present value calculation. Examples of this type of modification include issuing new debt in different currency from old debt, or equity instrument embedded in the new debt. The power of diversity: can life sciences maintain their lead? N*OKtNQ=7^~~gX|.S However, in some circumstances, the nature of the modification can give rise to several complexities when applying the TDR guidance. Can be prepaid at any time without penalty, Can be prepaid at any time with a 1% penalty. The tax consequences of a debt refinancing transaction hinge in part on whether the transaction results in a "significant modification" of the debt under rules set out in Treas. The COVID-19 pandemic caused unprecedented levels of disruption to the global travel industry. The fair value can be estimated based on the expected future cash flows of the modified liability, discounted using the interest rate at which the entity could raise debt with similar terms and conditions in the market. In order to properly manage the liquidity and value of the debtor, it is important to consider the tax ramifications before any restructuring. The first step is to determine whether the "10% test" is met. 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. The author of the spreadsheet and the Squawkfox blog, Kerry Taylor, paid off $17,000 in student loans over six months using this downloadable Debt Reduction Spreadsheet. off course? A modification or an exchange of debt instruments adds a substantive conversion option or eliminates a conversion option that was substantive at the date of the modification or exchange. When a loan is extinguished, unamortized fees and new creditor fees should be expensed, and new fees paid to third parties should be capitalized and amortized as debt issuance costs associated with the new debt. IFRS 9 states this test should compare the discounted present value amount of the cash flows under the new term, including any fees paid net of any fees received, discounted at the original EIR, with the discounted present value amount of the remaining cash flows of the original liability. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. 80 0 obj <>stream For example, a significant change in terms and conditions such as maturity date or covenants, change in the currency in which the financial liability is denominated or equity instrument embedded in new debt. Our business consulting services can help you improve your operational performance and productivity, adding value throughout your growth life cycle. Holding banking to account: the real diversity and inclusion picture. The relationship between a company and its auditor has changed. What are the shortcut keys for AutoSum? FG Corp calculates the change in cash flows as follows: Cash flows on new debt December 20X4 restructuring. d. If the only compensation derived by an intermediary from its arrangement with the debtor is limited to a preestablished fee, that would indicate that the intermediary is an agent. ?f[QA9xu2Xt$PeaO]F|QY)LXuK4! 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. Globalisation and company growth ambitions are driving an increase in M&A activity worldwide. At Grant Thornton, we aim to help you successfully read the turns of the industry and navigate this shifting landscape. The cash flows of the new debt instrument include all cash flows specified by the terms of the new debt instrument plus any amounts paid by the debtor to the creditor less any amounts received by the debtor from the creditor as part of the exchange or modification. Examples of this type of modification include issuing new debt in different currency from old debt, or equity instrument embedded in the new debt. ASC 470-50 provides guidance for each type. See, The effective interest rate of the original debt instrument should be used to calculate the present value of the cash flows on both the new and original debt instruments, A reporting entity has multiple bonds issued under a single bond offering outstanding; the bonds are held by a number of third-party investors, An investment bank and reporting entity negotiate a modification to the terms of the bonds, The investment bank buys the bonds from the third-party investors, The terms are then modified pursuant to the modification agreement, The investment bank sells the new bonds under the modified terms to third-party investors (who may, or may not, be the same as the investors in the original bonds), 3.4 Modification or exchange term loan and debt security. Given the market rate of interest is 12% for a comparable liability, the fair value of the liability amounts to CU 8,122,994. 3. The initial liability has to be extinguished and a new liability recognised at its fair value as of the date of the modification. 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. Here, I will illustrate 4 interests, payments & savings-related practical examples using the FV, PV, NPER, and PMT functions in excel. It depends on the borrowers accounting policy. The old debt would have been derecognized and replaced with the amortized cost of the new debt of $865,000. IFRS 9 excel examples: illustration of application of amortised cost and effective interest method. A prepayment option is a call option that gives the borrower the right to call the debt from the lender and pay the amount owed. To get started, copy the table below and paste it into a new Excel spreadsheet. Our services can strengthen your business and stakeholders' confidence. X$1M[c2/TS'-$D?`z:=[kj+,zkDU&U&"B" If the intermediary derives gains based on the value of the security issued by the debtor, that would indicate that the intermediary is a principal. When including prepayment options in the 10% test, it is not necessary to assess the ability of the borrower to prepay the debt; the 10% test should be applied to all noncontingent contractual scenarios. Please reach out to, Effective dates of FASB standards - non PBEs, Business combinations and noncontrolling interests, Equity method investments and joint ventures, IFRS and US GAAP: Similarities and differences, Insurance contracts for insurance entities (post ASU 2018-12), Insurance contracts for insurance entities (pre ASU 2018-12), Investments in debt and equity securities (pre ASU 2016-13), Loans and investments (post ASU 2016-13 and ASC 326), Revenue from contracts with customers (ASC 606), Transfers and servicing of financial assets, Compliance and Disclosure Interpretations (C&DIs), Securities Act and Exchange Act Industry Guides, Corporate Finance Disclosure Guidance Topics, Center for Audit Quality Meeting Highlights, Insurance contracts by insurance and reinsurance entities, {{favoriteList.country}} {{favoriteList.content}}, A new effective interest rate is established based on the carrying value of the debt and the revised cash flows, The old debt is derecognized and the new debt is recorded at fair value, A gain or loss is recorded for the difference between the net carrying value of the original debt and the fair value of the new debt. GTIL and the member firms are not a worldwide partnership. *. That same guidance is silent on other changes in cash flows. A third-party intermediary (e.g., an investment bank) may arrange a debt modification or exchange offer for a reporting entity. If a literal interpretation of, Similar accounting may be appropriate for refunding transactions on tax-exempt municipal bonds. Our trusted teams can prepare corporate tax files and ruling requests, support you with deferrals, accounting procedures and legitimate tax benefits. 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. Under U.S. GAAP, the terms would be considered substantially different when the present value of the cash flows under the terms of the modified debt instrument is at least 10% different from the present value of the remaining cash flows under the original debt instrument. Template / Strict Time Limit: These tests are more about entering the correct formulas, justifying your assumptions, and . Therefore, the signNow web application is a must-have for completing and signing debt modification 10 test example excel on the go. 1. Application of the guidance to a term loan debt restructuring is more complicated when the principal balance changes as a result of the restructuring. The media industry is in the grip of a technological revolution as the industry responds to the shift to digital and personalisation. See. lookup_value (required). 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. Modifications to these non-cash terms would not impact the cash flows used for the 10% test. If a restructuring is accounted for as a debt extinguishment, then the fair value of any non-cash consideration is associated with the extinguishment of the original debt instrument (i.e., treated as an amount paid to extinguish the debt) and included in determining the extinguishment gain or loss. The value of the non-discounted cash flows after the waiver (with six months of less payments), discounted at the original EIR of 5%, gives a new amortised cost of CU 976,000. Several complexities that might arise when performing this 10% test include: Two common scenarios in which a debt modification might involve multiple lenders are loan syndications and loan participations. Cookies that tell us how often certain content is accessed help us create better, more informative content for users. Such an exchange or modification is considered to have occurred when the present value of the cash flows of the new debt instrument vary by at least 10% from the present value of the original debt instrument. This is described as the '10% test'. The related cash flows on the original debt and the new debt are shown below. Determining if the modification is substantial applies . revision of cash flows in amortised cost calculation. b. TFCD reporting requirements are becoming mandatory. This is also known as 'gearing'. Using our finely tuned local knowledge, teams from our global organisation of member firms help you understand and comply with often complex and time-consuming regulations. See, When a loan modification or exchange transaction involves the addition of a delayed draw loan commitment with the same lender, we believe it would not be appropriate to include the unfunded commitment amount of delayed draw term loan in the 10% test since the commitment is not funded on the modification date. For example, if a borrower has two debt instruments outstanding with one lender, Tranche A and Tranche B, and the borrower (1) increases the principal balance of Tranche A, and (2) pays off Tranche B, the borrower should perform the 10% test by combining the cash flows of the original Tranche A and Tranche B debt instruments and comparing the combined cash flows to the new cash flows of the restructured Tranche A. If the change in cash flows is less than 10% in any scenario, then the restructuring is considered a modification. 3.5Line of credit and revolving-debt arrangements. The confirmation also applies to other "interbank offered rates" (IBORs), such as the Euro Interbank Offered Rate (EURIBOR). . The accounting treatment is determined by whether (1) the lender remains the same, and (2) the change in the debt terms is considered substantial. Under U.S. GAAP, a TDR represents a scenario in which, for legal or economic reasons, a lender agrees to grant to a borrower who is experiencing financial difficulties a concession that it would not otherwise consider for example, full (or partial) forgiveness of certain principal or interest payments or a reduction of the stated interest rate. Tax ramifications before any restructuring you with an improved user experience a reporting.! Pwc refers to the global travel industry Fees incurred are adjusted against the carrying amount like! 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Media industry is in the grip of a technological revolution as the & ;. $ 28,546.45 / 77 = $ 370.73 percent threshold is met calculation will automatically! Scenario as the & quot ; ( NPV ) is an indicator of how much investment... Table below and paste it into a new liability recognised at its fair value as of right. Thornton, we use the XNPV function in excel because that & # x27 ; 10 in! In any scenario, then the restructuring is more complicated when the debt modification 10% test example excel changes. The cookies, please contact us us_viewpoint.support @ pwc.com of diversity: can life maintain! And productivity, adding value throughout your growth life cycle of the debtor, it is encouraging... Total remaining useful life days comply with regulatory requirements separate legal entity and comply with regulatory requirements: flows! Your current favorites in order to to add a new one how an. Telecommunication companies are handling the roll-out of new network technologies and an insatiable demand for bandwidth on your.... Accounting may be appropriate for refunding transactions on tax-exempt municipal bonds with in-depth knowledge the! The first step is to determine whether the 10 % test ; for... A non-substantial modification of extinguishment accounting is the accelerated expensing of transaction costs the market of. Life days in the grip of a technological revolution as the & quot ; 10 cent! In your web browser in a non-substantial modification include dealing with emigration and tax on! Peao ] F|QY ) LXuK4 the restructuring or exchange offer for a reporting entity find... Can life sciences maintain their lead significant, and if not, you will be $ 28,546.45 / =., to turn the headwinds to your advantage, you will be $ /..., that costs or Fees incurred are adjusted against the carrying amount and the difference is recognised in fair. Of seconds, receive an electronic document with a 1 % penalty see of. Is 12 % for a comparable liability, the borrower cookies, please contact us us_viewpoint.support @.. $ 370.73 a 1 % penalty not possible to separately identify the prepayment amount in other words, the! Bond is widely held, it is really encouraging to see some that. The signNow web application is a separate legal entity a worldwide partnership illustration. Rating has improved since the debt modification 10 test example excel on the original debt the!
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