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. Rapid change and complexity have always been hallmarks of the technology industry. 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. Entity X has a non-amortising loan of CU 10,000,000 from the bank. Should FG Corp account for the restructuring of its debt as a modification or an extinguishment? 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. re-estimation of cash flows in floating-rate instruments. Under this guidance, a modification would quantitatively be more than minor if the present value of the cash flows under the terms of the new debt instrument is at least 10% different from the present value of the remaining cash flows under the terms of the original debt instrument. Because the change in present value of cash flows is less than 10%, the change is considered a modification. Across the globe, countries are moving towards leaner, more commercial, locally focused and responsive government and public sectors. GTIL and the member firms are not a worldwide partnership. The Discount Rate is around 4.0% with this approach (assuming ~90% Equity and ~10% Debt for Walmart), close to the 4.37% in the full model. The scenario that generates the smallest change should be used. In addition to the 10 percent test, the borrower should apply judgment to assess whether qualitative factors indicate that a modification is substantial. Now more than ever the need for businesses, their auditor and any other accounting advisors to work closely together is essential. However, for the purposes of the accounting entries, our view is the fees to the lender should be expensed while the legal fees should be amortised as explained above. Qualitative test: IFRS 9 allows consideration of qualitative factors which may also indicate a substantial modification. FG Corp restructures its term loan again in December 20X4. Follow - Fees in the '10 per cent' Test for Derecognition of Financial Liabilities . Despite facing pressure, telecommunication companies are handling the roll-out of new network technologies and an insatiable demand for bandwidth. Start by entering your creditors, current balance, interest rates, and monthly payments to see your current total debt, average interest rate, and average monthly interest . We can support you as you navigate through accounting for the impacts of COVID-19 on your business. Assume, you have $1,000 in your bank account. This is the consequence of applying IFRS 9, according to which the liability should be restated to its revised future cash flows discounted by the original EIR. the legal fees are judged not to be incremental to the issue of the new debt, as they include elements relating to advice on the pre-existing debts contractual terms. 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). Cash settlements. 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 original debt. Menu. Whereas above, in the final step, the fees included as an adjustment to the EIR are all fees, including external fees (such as lawyer fees). Mid-market recovery spreads to more industries. In a loan syndication, each lender loans the borrower a specific amount and has the right to repayment from the borrower. Example FG 3-4 illustrates the application of the 10% test to a debt instrument with a prepayment option. However, we typically would not expect a long time lag between incurring such costs and the finalization of the debt restructuring since the costs must be directly related to the restructuring. Inappropriate recognition or measurement of a gain or loss upon modification of the debt arrangement, Inappropriate recognition of future interest expense on the modified debt arrangement, Inappropriate accounting of legal fees and other direct costs incurred in connection with the modification. Make sure the table is aligned correctly . 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. However, if you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact oryour local member firm. 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. In our view, fees to third parties such as lawyers fees should be amortised (and the EIR adjusted). Exchanging existing debt for new debt with the same lender. FG Corp would calculate the change in cash flows as follows: Present value of cash flows on original debt. The calculation of yield for tax purposes may differ from the calculation of yield that a company uses for book purposes. See Example FG 3-7 for an illustration of the application of this guidance. 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. If a literal interpretation of, Similar accounting may be appropriate for refunding transactions on tax-exempt municipal bonds. This is less than 10%, so the loan modification (waiver of 6 months of interest) considered to be a non-substantial modification. The following journal should be recorded: Fees paid in a non-substantial modification. PSR report aims to make digital payments accessible. Example 3 - a substantial loan modification example Entity X has a non-amortising loan of CU 10,000,000 from the bank. And it is even more so today. In addition, the contractual rate of interest is increased to 8% starting 1 January 2021. Climate change: planning for mandatory TCFD reporting. At Grant Thornton, we aim to help you successfully read the turns of the industry and navigate this shifting landscape. Midway through 2021, it is really encouraging to see some of that unevenness disappear and more industries participating in the overall recovery. Modification accounting under FASB Subtopic 470-50 is applied when the modification is deemed significant, and if not significant, the borrower . If you're curious how the XNPV calculation is different from the NPV or PV function in excel, refer here. Ok so the financial instrument to classify and measure is a debt instrument and the business model is hold to collect. IFRS 9 contains guidance on non-substantial modifications and the accounting in such cases. In this example, we use the XNPV function in excel because that's the most accurate present value calculation. Once you have finished answering the questions, open the Excel Test Questions and Answers page to see the full answers. If the costs associated with each transaction are not separately identifiable, the reporting entity should allocate the total costs incurred between the issuance of the new debt and the reacquisition of the existing debt, on a rational basis. . For example, that may be the case if the intermediarys own funds are committed and those funds are not truly at risk because the intermediary is made whole by the debtor (and therefore is indemnified against loss by the debtor). Agenda ref 14A IBOR Reform - Phase 2 Classification and measurement - modification of financial instruments . Our tax services help you gain trust and stay ahead, enabling you to manage your tax transparently and ethically. 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. Present value of $5,000,000 at the stated interest rate of 5.5% discounted at the original effective rate of 6% for 3 years, Present value of $5,000,000 at the new stated interest rate of 5% discounted at the original effective rate of 6% for 5 years, Lender fees, undiscounted because it is a day one cash flow. When performing the 10% test, there is a general presumption that all of a lenders debt instruments should be included whether the debt was modified or not in order to accurately capture the economics of the transaction. See, Interest expense is recorded based on the effective interest rate of the new debt, Collateralization features, including changes in collateral, Debt covenants or debt covenant waiver terms, The guarantor, or elimination of the guarantor, When performing the 10% test, the cash flows of the new debt instrument should include all amounts paid by the debtor to the lender (i.e., any fees paid to the lender in conjunction with the restructuring should be included in the cash flows of the new debt instrument) as a day-one cash flow, Third-party fees should not be included in the cash flow analysis, If there is a variable interest rate in any of the debt instruments, the spot interest rate on the restructuring date should be used to determine future interest payments, If either debt instrument is callable or puttable, then separate cash flow analyses should be performed assuming exercise and nonexercise of the put and call. If the third-party intermediary is considered a principal to the transaction, it is the investor. ?f[QA9xu2Xt$PeaO]F|QY)LXuK4! Excel will provide the beginning liability balance and your amortization schedule will be completed automatically as a result of the formulas you input. PwC. Significant changes to the dynamic of the financial services sector in recent years have shifted the paradigms in how we work. Debt instruments held by those investors that do not agree would not be affected. a notional repayment of existing debt with immediate re-lending of the same or a different amount with the same counterparty. When a reporting entity issues new debt and uses the proceeds to pay off existing debt, it may incur issuance costs with the same party to (1) issue the new debt, and (2) reacquire the existing debt. Follow along as we demonstrate how to use the site. Please see www.pwc.com/structure for further details. Changing the interest rate. The borrower will usually incur costs in a debt restructuring, and other fees might also be paid or received. Amortization in excel is calculated using the below formula: = PMT(Rate . A transaction involving the issuance of a new term loan or debt security to one lender (or investor) and the concurrent satisfaction of an existing term loan or debt security to another unrelated lender (or investor) is always accounted for as an extinguishment of the existing debt and issuance of new debt. 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. There are some narrow exceptions to this, but generally this is only where the fees do not clearly relate to the modification, but are incremental to issuing the new debt that is payable to a party other than the lender, eg stamp duty paid on new financial instrument that is put in place. 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