Troubled Debt Restructuring

Question 1

Define Troubled Debt Restructuring

Answer 1

The creditor allows the debtor certain concessions to improve the likelihood of collection that would not be considered under normal circumstances

Question 2

Examples of Concessions

Answer 2

1) Reducted interest rates 2) extension of maturity dates 3) reduction of the face amount of the debt 4) reduction of the amount of accrued interest

Question 3

Accounting for Debtors: What amount is recognized when there is a transfer of assets?

Answer 3

1. Recognize ordinary Gain/Loss on: FV of asset transferred - NBV of asset transferred = Ordinary G/L 2. Recognize (possibly extraordinary) Gain on: Carrying amount of payable - FV of Asset transferred = Gain of Restructuring Note: There is only such thing as an extraordinary gain, NEVER a loss Also, the amount of debt discharge = “extraordinary” gain

Question 4

Accounting for Debtors: Where is the Gain or Loss recognized?

Answer 4

on the income statement

Question 5

Accounting for Debtors: What amount is recognized when there is a Transfer of Equity?

Answer 5

Carrying amount of payable - FV of equity transferred = Gain Note: Gain = the amount of debt discharge.

Question 6

Accounting for Debtors: Modification of Terms

Answer 6

The debtor accounts for the effects of the restructuring prospectively.

Question 7

Accounting for Debtors: Modification of Terms: Total Future Cash payments

Answer 7

the principal and any accrued interest

Question 8

Accounting for Debtors: Modification of Terms: Interest Expense

Answer 8

Use effective interest method to compute. New interest rate = Discount rate which the carrying amount is equal to the Present Value of the Future Cash Payments

Question 9

Accounting for Debtors: Modification of Terms: Future Payments

Answer 9

Carrying amount - Future Cash Payments = Gain. When the total future cash payments are less than the carrying amount, the debtor should reduce the carrying amount accordingly.

Question 10

Accounting for Debtors: Modification of Terms: How is the carrying amount affected after the restructuring?

Answer 10

After the restructuring, the carrying amount is reduced by all cash payments

Question 11

Accounting for Debtors: Modification of Terms: How do you recognize interest expense?

Answer 11

No interest expense is recognized after the date of issuance.

Question 12

Accounting for Creditors: Receipt of Assets or Equity

Answer 12

New asset or Equity is recorded at fair value. The excess of the recorded receivable over the fair value of the asset received is an ordinary loss. Note: the loss is never extraordinary because large write downs and write offs are not extraordinary.

Question 13

Accounting for Creditors: Modification of Terms

Answer 13

Impairment is measured using the present value of future cash flows. Any costs to sell reduces Cash Flows. The impairment JE: Debit: Bad Debt Expense Credit: Allowance for Credit Losses.

Question 14

Accounting for Creditors: DO NOT apply troubled debt restructuring to:

Answer 14

1. groups of loans collectively evaluated for impairment (e.g. credit card loans and residential mortgage loans) 2. Loans measured at market value (or LCM). 3. Leases. 4. HTM Securities