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Many financing arrangements involve multiple lenders that are members of a loan syndicate or loan participation. The accounting for a modification of a loan syndication differs from that of a loan participation.
Figure FG 3-5 summarizes how to perform the 10% test for a loan syndication and loan participation.
Figure FG 3-5
10% test for loan syndication and loan participation
Loan syndication
Loan participation
Description
Each lender has a separate loan with the borrower
The lead lender has a loan with the borrower; participating lenders have an interest represented by a certificate of participation
How to do the 10% test
The borrower performs the 10% test separately for each lender in the syndication
The borrower performs the 10% test for the entire loan with the lead lender
The accounting for each lender in a term loan syndicate can be different; one lender’s loan may be considered modified, while another’s may be considered extinguished. Similarly, under ASC 470-50-40-21, issuance costs may be written off for one member of a line-of-credit syndicate but not another.
As discussed in ASC 470-50-55-2, if an exchange or modification offer is made to all members of a loan syndicate and only some of the lenders agree to the offer, the 10% test should be applied to the debt instruments held by the lenders that accept the offer. Debt instruments held by lenders that do not agree to the exchange or modification offer are not affected unless they are paid off, in which case they are extinguished.
If a new lender enters a loan syndicate and provides a new term loan or access to a new line of credit, it is considered a new arrangement and not a modification. Therefore, fees paid to that lender and allocated third-party costs should be accounted for in the same way as for a new loan or line of credit (i.e., deferred as debt issuance costs and amortized over the life of the new term loan or line of credit).
The modification of a loan syndication will typically be arranged by an investment bank; oftentimes, that investment bank is also a lender in the loan syndication. A reporting entity should assess whether fees paid to the investment bank arranging the restructuring are being paid for third-party services or as a lender fee. If the investment bank is being compensated to perform services that could be performed by a third party, the fee should generally be accounted for as a third-party cost.
Question FG 3-2 discusses the application of the 10% test when debt is replaced with new debt issued to a loan syndicate that includes some of the original lenders.
Question FG 3-2
A reporting entity issues debt to a loan syndicate, which includes two funds managed by FG Group, FG Fund 1 and FG Fund 2. The reporting entity later replaces this debt with new debt issued to a loan syndicate which includes FG Fund 1 and FG Fund 5, which is also managed by FG Group.
Should the reporting entity treat the funds as one lender or separate lenders for purposes of determining whether its debt has been modified or extinguished?
PwC response
It depends on how the funds are structured and managed. If FG Group’s funds are effectively operated as separate funds, they should be treated as such in the analysis. Conversely, if the funds are effectively operated as one fund, they should be treated as a single lender. For example, if the FG Funds are (1) separate legal entities, (2) not consolidated by FG Group, and (3) FG Group has a fiduciary responsibility to manage each fund for the best interest of the holders of each particular fund, then each FG Group fund should be treated as a separate lender for purposes of determining whether its debt has been modified or extinguished. The debt held by FG Fund 2 should be extinguished because it is not participating in the new loan syndication. The debt issued to FG Fund 5 should be accounted for as new debt because it did not hold debt in the original syndicate. The debt held by FG Fund 1 should be assessed under the guidance in ASC 470-50-40 to determine whether the transaction should be accounted for as a modification or an extinguishment.

3.6.1 Cost allocation for multiple instruments with multiple lenders

In practice, a reporting entity may modify non-revolving (i.e., term debt) and revolving-debt arrangements at the same time. When this occurs, the reporting entity should allocate the new lender fees and third-party costs to the individual instruments using a reasonable and rational approach. These new fees and costs should be first allocated to each instrument; then further allocated to each lender. Once this allocation is complete, the reporting entity should determine (1) whether the non-revolving debt has been modified or extinguished under the guidance in ASC 470-50-40, and (2) the appropriate accounting for the revolving-debt arrangement under the guidance in ASC 470-50-40-21.
Question FG 3-3 discusses how to determine whether a term loan has been modified or extinguished when it is replaced with a revolving-debt arrangement.
Question FG 3-3
A reporting entity has a $5,000,000 term loan that is prepayable without penalty. Two years prior to the maturity of the term loan, the reporting entity repays the term loan and concurrently enters into a revolving-debt arrangement with the same lender. The revolving-debt arrangement has a maximum amount available of $5,000,000 for five years. The reporting entity immediately draws $5,000,000 on the revolving-debt arrangement.
How should the reporting entity determine whether the term loan has been modified or extinguished for accounting purposes?
PwC response
Although there is no guidance on how to account for a term loan that is replaced with a revolving-debt arrangement, ASC 470-50-55-10 through ASC 470-50-55-13 discusses the accounting for a modification of a revolving-debt arrangement with a term loan. This guidance respects the initial form of the debt instrument and states that a modification of a revolving-debt arrangement with a term loan should be assessed under the revolving debt guidance in ASC 470-50-40-21. We believe it is appropriate to analogize to that guidance and respect the initial form of the debt instrument. Therefore, when a term loan is replaced with a revolving-debt arrangement, we believe the 10% test should be used to determine whether a term loan has been modified or extinguished for accounting purposes given the terms of the amount borrowed under the new revolving-debt arrangement.

Example FG 3-7 illustrates the accounting for a modification of a term loan syndication.
EXAMPLE FG 3-7
Modification of a term loan syndication
FG Corp has a term loan syndication. Its credit rating has improved, and interest rates have declined since the original loan syndication was entered into, so FG Corp has decided to modify its loan syndication to lower its borrowing costs.
The existing loans in the loan syndication are prepayable at any time without penalty; therefore, the fees paid by FG Corp are related to the borrowing of additional funds. The terms of the original loan syndication and the new loan syndication at the modification date are summarized in the following table.
Original loan syndication
New loan syndication
Principal balance
$52,000,000
$100,000,000
Annual coupon
5.5%
5.0%
Original term
10 years
5 years
Remaining term
3 years
5 years
Unamortized debt issuance costs
$695,000
New lender fees
$4,000,000
New third-party fees
$1,000,000
View table
The modification is not a TDR because FG Corp is not experiencing financial difficulties.
How should FG Corp account for the restructuring of its term loan syndication?
Analysis
FG Corp should perform the following analysis.
Compare lender balances
Lenders in the original and new loan syndications are compared to determine common lenders to both agreements. The principal balances of common lenders are classified as (1) original debt, (2) additional borrowing, or (3) pay-down.
The lender by lender balances in the original and new loan syndications, the change in each lender’s balance, and the classification of each lender’s principal balance are summarized in the following table.
Bank
Balance of original syndication
Balance of new syndication
Principal change
Classification
A
$5,000,000
$5,000,000
Original debt
B
$20,000,000
$30,000,000
$10,000,000
Original debt and additional borrowing
C
$60,000,000
$60,000,000
Additional borrowing
D
$12,000,000
$5,000,000
($7,000,000)
Original debt and partial pay-down
E
$15,000,000
($15,000,000)
Full pay-down
Total
$52,000,000
$100,000,000
View table
Allocate new lender fees to each lender
Next, the new lender fees paid are allocated to each lender in the syndicate. New fees paid to lenders are allocated to each bank in the new syndicated facility using a rational approach, which is determined to be pro-rata in this fact pattern. Because all of the loans are prepayable without penalty, none of the fees paid are associated with the pay-off amounts.
Bank
Balance of new syndication
Percentage of new syndication
Allocation of new lender fees
A
$5,000,000
5.0%
$200,000
B
$30,000,000
30.0%
$1,200,000
C
$60,000,000
60.0%
$2,400,000
D
$5,000,000
5.0%
$200,000
E
Total
$100,000,000
100.00%
$4,000,000
View table
Perform the 10% test
Using the information in the two tables above, FG Corp would perform the 10% test for the lenders that were in the facility before and after the restructuring; the results of the 10% test are summarized in the table below.
The new loan syndication is prepayable at any time without penalty; therefore, to determine the cash flows of the new loan syndication, FG Corp would assume prepayment at the modification date and calculate the new loan syndication cash flows as the sum of (1) the change in principal balance, (2) the new lender fees, and (3) the repayment of the “new” principal (i.e., assume the principal balance post modification is pre-paid).
See FG 3.4.5 for further information on changes in principal balance.
New cash flow detail
Bank
Original cash flows
Principal change
Lender fees
Repayment
Total new cash flows
Percent change
A
($5,000,000)
($200,000)
($5,000,000)
($5,200,000)
(4%)
B
($20,000,000)
$10,000,000
($1,200,000)
($30,000,000)
($21,200,000)
(6%)
D
($12,000,000)
($7,000,000)
($200,000)
($5,000,000)
($12,200,000)
(2%)
View table
Because each change in cash flows is less than 10%, it is not necessary to perform the cash flow scenarios assuming no prepayment. The change in each lender’s loan balance should be accounted for as a modification.
Account for unamortized costs
Unamortized debt issuances costs from the original syndicated facility are allocated to each bank on a pro-rata basis using the original syndication balances. The unamortized debt issuance costs associated with loans that are paid in full are expensed. The remaining unamortized debt issuance costs continue to be deferred.
The following table summarizes the allocation of unamortized issuance costs.
Bank
Balance of original syndication
Percentage of original syndication
Allocation of unamortized issuance costs
Accounting for unamortized issuance costs
A
$5,000,000
9.6%
$66,827
Defer
B
$20,000,000
38.5%
$267,308
Defer
D
$12,000,000
23.1%
$160,385
Defer
E
$15,000,000
28.8%
$200,480
Expense
Total
$52,000,000
100.0%
$695,000
View table
The amounts allocated to the loans that are fully paid off are written off pursuant to ASC 470-50-40-2. The amounts allocated to the original debt that remains outstanding continue to be deferred because the loans were modified for accounting purposes, rather than extinguished.
Account for lender fees
As noted above, new fees paid to lenders were allocated to each bank in the new syndicated facility on a pro-rata basis and all of the fees paid are associated with either the remaining original debt or the additional borrowings. No amounts were allocated to the loans paid off. Therefore, all of the lender fees are capitalized in accordance with ASC 470-50-40-17 for the original loan and ASC 835-30-45-1A for the additional borrowings.
Account for third-party costs
New fees paid to third parties are allocated to each bank in the new syndicated facility using a rational approach. The third-party fees allocated to the new borrowing with Bank C should be deferred in accordance with ASC 835-30-45-3. The remaining third-party costs should be expensed in accordance with ASC 470-50-40-18.
The following table summarizes the allocation of the third-party fees.
Bank
Balance of new syndication
Percentage of new syndication
Allocation of new third-party fees
Accounting for new third-party fees
A
$5,000,000
5.0%
$50,000
Expense
B
$30,000,000
30.0%
$300,000
Expense
C
$60,000,000
60.0%
$600,000
Defer
D
$5,000,000
5.0%
$50,000
Expense
E
Total
$100,000,000
100.00%
$1,000,000
View table
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