Troubled Debt Flashcards
What is a debt restructuring?
Creditor grants concessions to the debtor that would otherwise not be considered. Either a modification of terms or a settlement of the debt.
How do you account for a TDR settlement for the creditor and debtor?
Creditor: Accepts assets with market value < book value of debt, record a loss.
Debtor: Records a gain
How do you account for a TDR modification of terms: Sum of new cash flows < book value of the debt for creditor and debtor?
Creditor: Loan impairment
Debtor: new debt book value = sum of new cash flows
How do you account for a modification of terms: sum of new cash flows > book value of the debt?
Creditor: Loan impairment
Debtor: No gain, recognize interest at a lower rate
In a settlement, you most likely don’t have cash so you have to settle with an asset. How do you account for that transfer of the asset?
Difference between the carrying value and the market value will result in a gain or loss on disposal.
The difference between the market value and the carrying value of the debt will represent a gain on restructuring.
Under Modification Type 1 (CF < BV), how do you account for this?
DEBTOR:
1) Records the new liability at its new carrying value; the sum of restructured cash flows
2) Recognize a gain = BV - Sum of Cash Flows
3) No interest is recognized during the new loan
All payments are treated as principal payments
How do you determine the cash flows for modification?
New face value of the note payable + Interest that is going to be paid. The total CF will be reported as your new note payable.
Under modification 2 (BV>CF), how do you account for this?
1) Compare the new CF to the BV
2) If the CF is greater than the BV, compare to the effective interest rate. If the effective rate is less than the original, then there is a restructuring.
3) Write off the note payable for the remaining balance + Interest and credit a note payable for the (Note payable+Interest Amount)
4) use the new interest rate to write-down interest expense
