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If a restructuring of debt is not a troubled debt restructuring, then term debt restructuring is accounted for as either a modification or as an extinguishment. Accounting for unamortized debt issue costs and new fees relating to modifications of line of credit and revolving-debt arrangements is based on a borrowing capacity analysis.
The following discussion addresses the cash flow classification for new fees incurred in connection with a term debt restructuring. See FG 3 for a detailed discussion of accounting for modifications and extinguishments, and accounting for modifications to line of credit and revolving debt arrangements. The treatment of unamortized fees or principal that remains outstanding is not addressed, as there is no cash flow effect. Although, if they are expensed in the period, they will be a reconciling item between net income and cash flow from operations if using the indirect method of presentation.
Term debt modifications
In connection with a restructuring of term debt accounted for as a modification, companies may incur creditor fees and fees to other parties. Creditor fees incurred in these situations are capitalized as a debt discount and amortized. ASU 2016-15 states than when a discount is repaid for debt instruments with coupon interest rates that are not insignificant in relation to the effective interest rate of the debt, the repayment of that discount should be a financing cash outflow. In a modification, the creditor fees paid on the modification date are capitalized as a debt discount. Therefore, the borrower is paying that portion of the discount on the modification date. By analogy to ASC 230-10-45-15(g), we believe that it is acceptable to classify all creditor fees incurred in conjunction with a debt restructuring accounted for as a modification as financing cash outflows.
Fees paid to third parties associated with a term debt restructuring accounted for as a modification are expensed. The payment, which has entered into the determination of net income, is not considered a debt issuance cost since there is no new issuance of debt. Therefore, the payment of these costs should be presented as an operating cash outflow.
Term debt extinguishments
As  required in ASC 230-10-45-15(g), all fees incurred in conjunction with a debt restructuring that is accounted for as an extinguishment under ASC 470-50 (irrespective of whether the fees are paid to creditors or third parties) should follow the same classification as discussed in FSP 6.9.9 for debt extinguishment payments costs, which are financing outflows.
Modifications to line of credit and revolving debt arrangements
  • Third-party and creditor fees incurred in connection with a modification to a line of credit or revolving debt arrangements are considered to be associated with the new arrangement and should therefore be capitalized.
  • We believe the classification of these costs in the statement of cash flows depends on the purpose of the line of credit. Will it be drawn upon, or is it more like “insurance” that enables the entity to access cash should it be needed?
    • If the reporting entity does not intend to draw down on the line: All third-party and creditor fees should be classified as operating activities because the entity does not expect them to be related to a borrowing.
    • If the reporting entity intends to draw down on the line: The fees are costs to issue debt in the future, and should be classified as financing outflows.
Troubled debt restructurings
A troubled debt restructuring (TDR) can occur in a variety of ways including delivering assets or equity to fully or partially settle the debt and modifying the debt terms. In certain situations, a gain is recognized, and if there are on-going debt service payments, the carrying value of the debt is set at the undiscounted future cash flow amount. In these cases, all on-going debt service payments reduce the carrying value of the debt, and no interest expense is recognized going forward. See FG 3.3 for further details on TDRs.
Some of the key cash flow considerations relating to TDRs include:
  • Any delivery of equity or assets to partially or fully settle debt should be reported as noncash investing or financing activities, as appropriate
  • Costs incurred with third parties directly related to the restructuring (including legal fees) generally should be classified in operating; however, any direct costs associated with the issuance of equity securities in partial or full settlement of the debt should be reflected as financing outflows
  • Any fees paid to the lender should be classified as a financing outflow
Additionally, when debt is modified in a troubled debt restructuring, the presentation of the subsequent cash payments made post restructuring depend on whether there was a gain recorded from the modification of terms.
  • Gain recognized All on-going debt payments should be reflected as financing outflows. This includes any contractual interest payments since, for accounting purposes, all payments are treated as reductions to the carrying value of the debt instead of interest expense.
  • No gain recognized On-going debt payments should be reflected in a manner consistent with non-troubled debt. Interest payments should be reflected as operating outflows while principal repayments should be reflected as financing outflows.
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