ASC 852-10-45-6 discusses the accounting for debt and debt issue costs when the debt becomes an allowed claim.

The treatment of debt and debt issue costs depends on whether the related debt is secured or unsecured (or undersecured). As discussed in ASC 835-30-45-1A, as it relates to term debt, a debt discount or premium, as well as debt issuance costs, should be reported as an adjustment to the carrying amount of the related debt. However, as discussed in ASC 835-30-S45-1, costs associated with entering into a revolving line of credit or revolving debt arrangement meet the definition of an asset and should be recorded as such on the balance sheet. See FG 1.2 for discussion of the accounting for debt discounts, premiums, as well as debt issue costs related to term debt. See FG 1.3 for discussion of the accounting for debt issue costs related to line of credit arrangements.

Debt discounts, premiums, and debt issue costs on borrowings that are subject to compromise (e.g., unsecured or undersecured debt) that were not adjusted prior to the bankruptcy filing should be viewed as part of the valuation of prepetition debt. For debt that is subject to compromise, these items would no longer be amortized and instead be reflected as an adjustment to the associated debt's carrying amount upon filing for bankruptcy, as ASC 852-10-45-11 specifically limits the recognition of interest expense during a bankruptcy proceeding to only amounts that will be paid during the bankruptcy proceeding or that are probable of becoming allowed claims. If the allowed claim amount for the debt differs from its net carrying amount after reclassification, the net carrying amount should be adjusted to the amount of the allowed claim.

For example, if the reporting entity has unsecured debt with an outstanding principal of $100 and unamortized debt issue costs of $5, the net carrying amount for this borrowing would be $95. If the allowed claim amount for this borrowing is determined by the Court to be $100, the reporting entity would include $5 in reorganization expense (as opposed to interest expense) to adjust the net carrying amount of the debt to its allowed claim amount, thus effectively writing off the debt issue costs.

As with other liabilities subject to compromise discussed earlier, if the Court later adjusted the allowed claim amount, the reporting entity would again adjust the carrying amount of its debt. The gain or loss resulting from the adjustment should be classified as a reorganization item in the income statement.

Some diversity in practice exists as to when a reporting entity should adjust the net carrying amount of its debt which is subject to compromise to the amount of the allowed claim. ASC 852-10-45-6 states that such adjustment to the debt's carrying amount should take place when the claim becomes an allowed claim. This threshold might not be met until some time has passed in the bankruptcy proceedings because a claim is not always considered an allowed claim on the bankruptcy filing date. This would suggest that these items should be left unchanged until the claim becomes an allowed claim. Alternatively, ASC 852-10-45-5 states that liabilities subject to compromise should be recorded at the expected allowed claim amount. The debtor would subsequently adjust the recorded amount for the claim if the Court allows a different amount. With respect to debt subject to compromise, both approaches would appear to be reasonable. However, a reporting entity should apply a consistent approach to each of its borrowings which is subject to compromise.

Debt discounts, premiums, and debt issuance costs on borrowings that are not subject to compromise, such as fully secured debt, should not be adjusted upon filing for bankruptcy.

Figure BLG 3-4 illustrates the typical accounting for debt and debt issuance costs in the periods prior to and during the bankruptcy proceedings.

Figure BLG 3-4
Accounting for debt and debt issuance costs during a typical bankruptcy proceeding

ASC 852-10-45-8 addresses debt classification for a reporting entity in bankruptcy.

Example BLG 3-2 illustrates how secured debt (i.e., not subject to compromise) should be classified on the balance sheet when the debt is callable by the creditor due to an event of default.

EXAMPLE BLG 3-2
Balance sheet classification of debt not subject to compromise but that is callable by the creditor due to an event of default

A reporting entity in bankruptcy has senior debt that will not be impaired in its plan of reorganization (and thus not subject to compromise). However, the senior debt agreement contains a cross-default provision that was triggered when the reporting entity filed for bankruptcy and stopped making payments on its other debt obligations which are subject to compromise. Although they have the right to do so because of the event of default, the senior debt holders have not called the senior debt. Additionally, the senior debt agreement does not contain a grace period during which the reporting entity may cure the violation.

Should the senior debt be classified as a current or noncurrent liability?

ASC 852 states that "liabilities not subject to compromise should be further segregated into current and non-current classifications if the reporting entity presents a classified balance sheet." Consistent with ASC 852-10-45-1, unless the guidance specifically provides an exception, "normal GAAP" would continue to apply while a reporting entity is in bankruptcy.