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10A.2 Analyzing a refinancing or restructuring
Publication date: 31 May 2022
us Loans & investments guide
A creditor should account for the refinancing or restructuring of debt as either a modification of the original instrument or as the extinguishment of the original instrument and issuance of a new instrument. Figure LI 10A-1 can be used to determine the appropriate accounting treatment for a loan refinancing or restructuring.
Figure LI 10A-1
Lenders’ analysis of a debt refinancing or restructuring
Lenders’ analysis of a debt refinancing or restructuring
10A.2.1 Determining whether a refinancing or restructuring is a TDR
A troubled debt restructuring is the result of a creditor trying to maximize recoveries on an existing loan. Under the guidance in ASC 310-40, a troubled debt restructuring is accounted for as a modification, and not the creation of a new loan. ASC 310-40-15-5 provides guidance on when a debt refinancing or restructuring is considered a troubled debt restructuring from a creditor’s perspective.
A restructuring of a debt constitutes a troubled debt restructuring for purposes of this Subtopic if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.
ASC 310-40-15-13 through ASC 310-40-15-20 provides additional guidance for creditors to consider in evaluating whether the borrower is experiencing financial difficulty and whether the creditor has granted a concession.
Figure LI 10A-2 illustrates the ASC 310-40-15-5 assessment criteria.
Figure LI 10A-2
TDR evaluation decision tree
TDR evaluation decision tree
ASC 310-40-15-9 and ASC 310-40-15-10 provide examples of scenarios that may result in a troubled debt restructuring. Those examples include the transfer of assets by the debtor to the creditor/lender to satisfy all or part of the debt, issuance of equity interests by the debtor to the creditor/lender to satisfy all or part of the debt, and modifications to the terms of the loan or debt instrument. The accounting for restructured debt is based on the substance of the modification, irrespective of whether the modification impacts the timing of cash flows, amounts designated as interest, or amounts designated as principal.
A troubled debt restructuring may include, but is not necessarily limited to, one or a combination of the following:
- Transfer from the debtor to the creditor of receivables from third parties, real estate, or other assets to satisfy fully or partially a debt (including a transfer resulting from foreclosure or repossession)
- Issuance or other granting of an equity interest to the creditor by the debtor to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest
- Modification of terms of a debt, such as one or a combination of any of the following:
- Reduction (absolute or contingent) of the stated interest rate for the remaining original life of the debt
- Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk
- Reduction (absolute or contingent) of the face amount or maturity amount of the debt as stated in the instrument or other agreement
- Reduction (absolute or contingent) of accrued interest.
The guidance in this Subtopic shall be applied to all troubled debt restructurings including those consummated under reorganization, arrangement, or other provisions of the Federal Bankruptcy Act or other federal statutes related thereto.
ASC 310-40-15-11 and ASC 310-40-15-12 provide examples of transactions that are not considered troubled debt restructurings.
For purposes of this Subtopic, none of the following are considered troubled debt restructurings:
- Lease modifications (for guidance, see Topic 842)
- Changes in employment-related agreements, for example, pension plans and deferred compensation contracts
- Unless they involve an agreement between debtor and creditor to restructure, either of the following:
- Debtors' failures to pay trade accounts according to their terms
- Creditors' delays in taking legal action to collect overdue amounts of interest and principal.
A debt restructuring is not necessarily a troubled debt restructuring for purposes of this Subtopic even if the debtor is experiencing some financial difficulties. For purposes of this Subtopic, none of the following debt restructurings, for example, are considered troubled debt restructurings:
- The fair value of cash, other assets, or an equity interest accepted by a creditor from a debtor in full satisfaction of its receivable at least equals the creditor's amortized cost basis.
- The fair value of cash, other assets, or an equity interest transferred by a debtor to a creditor in full settlement of its payable at least equals the debtor's carrying amount of the payable.
- The creditor reduces the effective interest rate on the debt primarily to reflect a decrease in market interest rates in general or a decrease in the risk so as to maintain a relationship with a debtor that can readily obtain funds from other sources at the current market interest rate.
- The debtor issues in exchange for its debt new marketable debt having an effective interest rate based on its market price that is at or near the current market interest rates of debt with similar maturity dates and stated interest rates issued by nontroubled debtors.
Question LI 10A-1
Debtors apply the guidance in ASC 470-60-55-10 to determine whether a loan refinancing or restructuring should be accounted for as a troubled debt restructuring. Can a creditor apply the same guidance?
Debtors apply the guidance in ASC 470-60-55-10 to determine whether a loan refinancing or restructuring should be accounted for as a troubled debt restructuring. Can a creditor apply the same guidance?
PwC response
No. The guidance in ASC 310-40-15-8A specifically prohibits a creditor from applying the guidance in ASC 470-60-55-10 when evaluating whether a restructuring constitutes a troubled debt restructuring. There can be instances when a modification is a TDR for the creditor and not the debtor.
10A.2.1.1 TDRs - determining if financial difficulties exist
ASC 310-40-15-20 provides indicators to be considered when evaluating whether a borrower is experiencing financial difficulties. In addition to those listed in the guidance, other factors may exist that may indicate that a borrower is experiencing financial difficulties.
In evaluating whether a receivable is a troubled debt restructuring, a creditor must determine whether the debtor is experiencing financial difficulties. In making this determination, a creditor shall consider the following indicators:
- The debtor is currently in payment default on any of its debt. In addition, a creditor shall evaluate whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without the modification. That is, a creditor may conclude that a debtor is experiencing financial difficulties, even though the debtor is not currently in payment default.
- The debtor has declared or is in the process of declaring bankruptcy.
- There is substantial doubt as to whether the debtor will continue to be a going concern.
- The debtor has securities that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange.
- On the basis of estimates and projections that only encompass the debtor’s current capabilities, the creditor forecasts that the debtor’s entity-specific cash flows will be insufficient to service any of its debt (both interest and principal) in accordance with the contractual terms of the existing agreement for the foreseeable future.
- Without the current modification, the debtor cannot obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a nontroubled debtor.
The above list of indicators is not intended to include all indicators of a debtor’s financial difficulties.
10A.2.1.2 TDRs - determining whether a creditor has granted a concession
ASC 310-40-15-13 provides a starting point for the guidance for evaluating whether a creditor has granted a concession.
A creditor has granted a concession when, as a result of the restructuring, it does not expect to collect all amounts due, including interest accrued at the original contract rate. In that situation, and if the payment of principal at original maturity is primarily dependent on the value of collateral, an entity shall consider the current value of that collateral in determining whether the principal will be paid.
When a restructuring occurs, the creditor will need to consider all factors that changed to determine if a concession was granted, including changes to collateral that may be used to repay the loan.
ASC 310-40-15-14 provides guidance for evaluating a restructuring in which the creditor receives additional collateral or a guarantee. When this occurs, the creditor should consider whether the nature and amount of the additional collateral or guarantee is sufficient to compensate it for the change in terms associated with the restructuring. The guidance specifies that the creditor should evaluate whether the guarantor has both the ability and willingness to pay. Determining the value of a guarantee may not be straightforward when certain information necessary to evaluate a guarantor’s ability to perform is not readily available or current.
A creditor may restructure a debt in exchange for additional collateral or guarantees from the debtor. In that situation, a creditor has granted a concession when the nature and amount of that additional collateral or guarantees received as part of a restructuring do not serve as adequate compensation for other terms of the restructuring. When additional guarantees are received in a restructuring, an entity shall evaluate both a guarantor’s ability and its willingness to pay the balance owed.
ASC 310-40-15-15 and ASC 310-40-15-16 provide guidance that requires the creditor to evaluate if the debtor would be able to get the same terms and market rate from a different lender. Market rates for borrowers experiencing financial difficulty may not be readily observable; therefore, when assessing whether market-rate funds are available to borrowers in financial difficulty, creditors may need to refer to other data points, such as acquisitions or sales of troubled loans and the discount rates applied in those transactions. If the debtor would be unable to get the same rate from a different lender, the rate would be considered below market. This fact and all other aspects of the restructuring would need to be considered in determining whether a concession has been granted.
If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the restructured debt, the restructuring would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession. In that situation, a creditor shall consider all aspects of the restructuring in determining whether it has granted a concession.
A temporary or permanent increase in the contractual interest rate as a result of a restructuring does not preclude the restructuring from being considered a concession because the new contractual interest rate on the restructured debt could still be below market interest rates for new debt with similar risk characteristics. In that situation, a creditor shall consider all aspects of the restructuring in determining whether it has granted a concession.
Question LI 10A-2
If a restructuring results in an increase (temporarily or permanently) to the contractual interest rate, does it need to be evaluated as a possible troubled debt restructuring?
If a restructuring results in an increase (temporarily or permanently) to the contractual interest rate, does it need to be evaluated as a possible troubled debt restructuring?
PwC response
Yes. As discussed in ASC 310-40-15-16, a temporary or permanent increase in the contractual interest rate as a result of a restructuring does not preclude a restructuring from being considered a troubled debt restructuring because the new contractual rate, despite being higher than the original contractual rate, may still be below market rates for new debt with similar characteristics. When this occurs, all aspects of the restructuring should be considered in determining whether a concession has been granted.
Even if the restructuring only delays the timing of payments, a concession may have been granted unless the delays are insignificant. Additionally, if the debt has been previously restructured, the reporting entity is required to consider the cumulative impact of all past restructuring when determining if the concession is insignificant. ASC 310-40-15-17 and ASC 310-40-15-18 address whether a restructuring results in a delay in payment that is insignificant.
A restructuring that results in only a delay in payment that is insignificant is not a concession. The following factors, when considered together, may indicate that a restructuring results in a delay in payment that is insignificant:
- The amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value of the debt and will result in an insignificant shortfall in the contractual amount due.
- The delay in timing of the restructured payment period is insignificant relative to any one of the following:
- The frequency of payments due under the debt
- The debt’s original contractual maturity
- The debt’s original expected duration.
If the debt has been previously restructured, an entity shall consider the cumulative effect of the past restructurings when determining whether a delay in payment resulting from the most recent restructuring is insignificant.
Example LI 10A-1 and Example LI 10A-2 illustrate the application of the guidance on insignificant delays.
EXAMPLE LI 10A-1
Two-month interest deferral on a five-year loan
Two-month interest deferral on a five-year loan
Bank Corp originates a five-year loan that has a fixed interest rate, with monthly interest payments due of $1,000 and a balloon payment due at maturity of $100,000. The loan is collateralized by new construction. Bank Corp expects the loan to be repaid no sooner than maturity.
Six months before the maturity date of the loan, the borrower is unable to make the required interest payments, and Bank Corp determines that the borrower is experiencing financial difficulties as defined in ASC 310-40.
Bank Corp agrees to restructure the loan to defer two interest payments until the completed construction is sold, which is expected to occur in two months. Bank Corp will earn interest on the deferred payments, the value of the collateral has not declined, and the borrower is expected to pay back the principal and interest due.
Is the loan restructuring a troubled debt restructuring?
Analysis
Bank Corp expects to collect all contractual amounts due, despite the two-month delay in payment. In addition, the two months of delayed interest payments are insignificant when compared with the balloon principal due, the delay in timing of the two payments is insignificant relative to the frequency of the payments due, the debt’s original contractual maturity, and the debt’s original expected duration.
Because the delay in payment as a result of the restructuring is considered insignificant, the restructuring would not be considered a troubled debt restructuring.
EXAMPLE LI 10A-2
One-year interest deferral on two-year loan
One-year interest deferral on two-year loan
Bank Corp originates a two-year loan that has a fixed interest rate, with quarterly interest payments due of $3,000 and a balloon payment due at maturity of $100,000. The loan is collateralized by real estate. Bank Corp expects the loan to be repaid no sooner than maturity.
One year prior to the maturity date of the loan, the borrower is unable to make the required interest payments, and Bank Corp determines that the borrower is experiencing financial difficulties as defined in ASC 310-40.
Bank Corp agrees to restructure the loan to defer all remaining interest payments until maturity. Bank Corp expects to collect all contractual amounts due, despite the payment delay, and the collateral value has not declined significantly.
Is the loan restructuring a troubled debt restructuring?
Analysis
The delayed interest payment amounts are significant when compared with the balloon principal due. The delay in timing of the interest payments is also significant relative to the frequency of the payments due, the debt’s original contractual maturity, and the debt’s original expected duration.
The delay in payment as a result of the restructuring would be considered significant. Since the borrower is experiencing financial difficulties and Bank Corp has granted a concession, the restructuring would be considered a troubled debt restructuring.
Trial modifications
Some lenders participate in trial modification programs such as the Home Affordable Modification Program (HAMP). Under these programs, lenders enter into an agreement with a borrower to modify their loan for an initial trial period. Upon successful completion of the trial period, the loan is permanently modified.
We are aware that the SEC staff has provided guidance that the lender is considered to have granted to the borrower a modification with a contingent concession that qualifies as a troubled debt restructuring at the start of the trial period when there is a legally binding obligation to the borrower on the part of the lender. In evaluating the significance of the concession granted to the borrower, the SEC staff concluded that the lender should consider the modification of payments both during the trial period as well as the expected modification in loan terms assuming the loan will be permanently modified, notwithstanding the possibility that an individual borrower may not successfully complete the trial period and his loan may not be permanently modified.
This guidance may also apply to other types of trial-period modifications.
10A.2.2 Analyzing a refinancing or restructuring that is not a TDR
If a refinancing or restructuring does not meet the requirements to be considered a troubled debt restructuring, it should be analyzed to determine if it is a modification of the original instrument or a new instrument. As discussed in ASC 310-20-35-9, a loan refinancing or restructuring, that is not a troubled debt restructuring, should be accounted for as a new loan (i.e., as an extinguishment of the original debt instrument and issuance of a new loan) when both of the following occur:
- The new loan’s effective yield is at least equal to the effective yield for similar loans
- The modifications are more than minor
If these conditions are not met, the refinancing or restructuring should be accounted for as a modification of the original debt instrument, not as a new loan. The determination of whether the restructuring is a modification or the creation of a new instrument impacts the accounting for certain fees and costs and is important in determining the origination date for certain “vintage disclosures.” See LI 12 for information on presentation and disclosure.
If the terms of the new loan resulting from a loan refinancing or restructuring, in which the refinancing or restructuring is not itself a troubled debt restructuring, are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks who are not refinancing or restructuring a loan with the lender, the refinanced loan shall be accounted for as a new loan. This condition would be met if the new loan's effective yield is at least equal to the effective yield for such loans and modifications of the original debt instrument are more than minor. Any unamortized net fees or costs and any prepayment penalties from the original loan shall be recognized in interest income when the new loan is granted. The effective yield comparison considers the level of nominal interest rate, commitment and origination fees, and direct loan origination costs and would also consider comparison of other factors where appropriate, such as compensating balance arrangements.
When determining if the modification of a contract to replace LIBOR, or another reference rate expected to be discontinued should be accounted for as a continuation of the existing contract or as an extinguishment and creation of a new contract, a reporting entity may elect to apply the guidance in ASC 848. See REF 2 for further details.
10A.2.2.1 Non-TDR refinancing/restructuring: assessment of more than minor
To determine whether a modification is considered “more than minor,” a reporting entity should perform the assessment shown in Figure LI 10A-3, which starts with comparing the present value of cash flows of the new debt with the remaining cash flows of the old debt.
However, when determining if a modification of a contract to replace LIBOR, or another reference rate expected to be discontinued should be accounted for as a continuation of the existing contract or as an extinguishment and creation of a new contract, a reporting entity may elect to apply the guidance in ASC 848. See REF 2 for further details).
Figure LI 10A-3
Assessment of more than minor
Assessment of more than minor
Step 1
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In accordance with ASC 310-20-35-11, compare the present value of the cash flows of the new debt with the present value of the remaining cash flows of the original debt utilizing the guidance in ASC 470. See FG 3 for an illustration of this assessment.
If the present value of cash flows differs by at least 10%, the modification is considered more than minor.
If the present value of cash flows differs by less than 10%, further analysis should be performed under Step 2.
ASC 470-50-40-12 provides specific guidance on performing the 10% test. Key takeaways from this guidance include:
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Step 2
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The creditor should evaluate whether the modification is more than minor based on the specific facts and circumstances surrounding the modification and other relevant considerations. The accounting literature does not provide specific guidance on what factors a reporting entity should consider.
Relevant facts may include considering the impact of the modification on the following:
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PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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