Chapter 10 — Debt Modifications and Exchanges

10.4 Accounting for Debt Modifications and Exchanges

10.4.1 Background

If the terms of a modification or exchange of debt are substantially different, the transaction is accounted for as the extinguishment of the original debt and the recognition of new debt, which is initially measured at its fair value adjusted for certain third-party costs (see Section 10.4.2). If the terms of a modification or exchange of debt are not substantially different, the new debt is accounted for as a continuation of the original debt. Any fees or other amounts exchanged between the debtor and creditor as part of the modification or exchange adjust the debt’s carrying amount, whereas any third-party costs are expensed as incurred (see Section 10.4.3). Special considerations are necessary if a debtor incurs costs and fees directly related to a contemplated modification or exchange before the modification or exchange is executed (see Section 10.4.4).

The table below provides an overview of the accounting treatment.

	New or Modified Terms Compared With Original Terms
	Substantially Different	Not Substantially Different
Criteria	Any of the following conditions is met: The change in the present value of the cash flows is at least 10 percent (see Section 10.3.3). The change in the fair value of an embedded conversion feature is at least 10 percent of the original carrying amount (see Section 10.3.4.2). A substantive conversion feature is added or removed (see Section 10.3.4.3).	All of the following conditions are met: The change in the present value of the cash flows is less than 10 percent (see Section 10.3.3). The change in the fair value of any embedded conversion feature is less than 10 percent of the original carrying amount (see Section 10.3.4.2). No substantive conversion feature is added or removed (see Section 10.3.4.3).
Is a debt extinguishment gain (or loss) recognized?	Yes. Computed as the net carrying amount of the original debt less the fair value of the new debt adjusted for amounts exchanged between the debtor and creditor as part of the modification or exchange.	No. However, if the modification or exchange includes a partial repayment of the original debt instrument, the debtor should account for that prepayment, and a gain or loss may be recognized for the derecognition of a portion of the unamortized premiums or discount (including debt issuance costs) associated with the partial extinguishment (see Section 10.4.3.2).
Is the debt’s net carrying amount adjusted?	Yes. The original debt is derecognized and the new debt is recognized at its fair value less any costs incurred with third parties as part of the modification or exchange.	Yes. The original debt’s net carrying amount is increased for any amounts received from the creditor and reduced for (1) any amounts paid to the creditor and (2) any increase in the fair value of an embedded conversion feature.
Is a new effective interest rate computed?	Yes. Computed on the basis of the new debt’s net carrying amount and its future cash flows.	Yes. Computed on the basis of the adjusted net carrying amount of the original debt and the revised cash flows.
Do fees and other amounts received by the debtor from the creditor as part of the modification or exchange have an immediate impact on earnings?	Yes. They reduce the extinguishment loss or increase the extinguishment gain, as applicable.	No. They increase the debt’s net carrying amount and reduce interest expense going forward.
Do fees and other amounts paid by the debtor to the creditor as part of the modification or exchange have an immediate impact on earnings?	Yes. They increase the extinguishment loss or reduce the extinguishment gain, as applicable.	No. They reduce the debt’s net carrying amount and increase interest expense going forward.
Are third-party costs incurred in connection with the modification or exchange recognized immediately in earnings?	No. They reduce the debt’s net carrying amount and increase interest expense going forward.	Yes.
Are any remaining discount or premium and debt issuance costs associated with the original debt recognized immediately in earnings?	Yes.	No, unless the modification or exchange involves a partial principal payment by the debtor.

10.4.2 Accounting When Debt Terms Are Substantially Different

10.4.2.1 General

ASC 470-50

40-6 An exchange of debt instruments with substantially different terms is a debt extinguishment and shall be accounted for in accordance with paragraph 405-20-40-1. A debtor could achieve the same economic effect as an exchange of a debt instrument by making a substantial modification of terms of an existing debt instrument. Accordingly, a substantial modification of terms shall be accounted for like an extinguishment.

40-13 If it is determined that the original and new debt instruments are substantially different, the new debt instrument shall be initially recorded at fair value, and that amount shall be used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument.

40-17 Fees paid by the debtor to the creditor or received by the debtor from the creditor (fees may be received by the debtor from the creditor to cancel a call option held by the debtor or to extend a no-call period) as part of the exchange or modification shall be accounted for as follows:

If the exchange or modification is to be accounted for in the same manner as a debt extinguishment and the new debt instrument is initially recorded at fair value, then the fees paid or received shall be associated with the extinguishment of the old debt instrument and included in determining the debt extinguishment gain or loss to be recognized. . . .

For fees between the debtor and creditor for exchanges of or modifications to line-of-credit or revolving-debt arrangements, see paragraph 470-50-40-21.

40-17A An increase or a decrease in the fair value of a freestanding equity-classified written call option held by a creditor (calculated in accordance with paragraph 815-40-35-16) that is modified or exchanged as a part of or is directly related to a modification or an exchange of a debt instrument held by that same creditor (see paragraphs 815-40-35-14 through 35-15 and 815-40-35-17(c)) shall be accounted for in the same manner as fees between the debtor and the creditor as described in paragraph 470-50-40-17.

Third-Party Costs of Exchange or Modification

40-18 Costs incurred with third parties directly related to the exchange or modification (such as legal fees) shall be accounted for as follows:

If the exchange or modification is to be accounted for in the same manner as a debt extinguishment and the new debt instrument is initially recorded at fair value, then the costs shall be associated with the new debt instrument and amortized over the term of the new debt instrument using the interest method in a manner similar to debt issue costs. . . .

For third-party costs for exchanges of or modifications to line-of-credit or revolving-debt arrangements, see paragraph 470-50-40-21.

40-18A An increase (but not a decrease) in the fair value of a freestanding equity-classified written call option held by a third party (calculated in accordance with paragraph 815-40-35-16) that is modified or exchanged as a part of or is directly related to a modification or an exchange of a debt instrument (see paragraphs 815-40-35-14 through 35-15 and 815-40-35-17(c)) shall be accounted for in the same manner as third-party costs incurred that are directly related to the modification or exchange of a debt instrument as described in paragraph 470-50-40-18.

When the terms of the new debt are substantially different from those of the original debt (see Section 10.3), the debtor applies extinguishment accounting to the original debt and recognizes the new debt instrument at its fair value less any direct and incremental costs incurred with third parties (i.e., debt issuance costs).2 The effective interest rate of the new debt is calculated by applying the interest method (see Section 6.2) on the basis of the new debt’s initial net carrying amount and its contractual cash flows.

The calculation of the extinguishment gain or loss recognized in earnings can be summarized as follows:

The debt’s net carrying amount immediately before the modification or exchange.
Less:
- Cash paid by the debtor to the creditor as part of the modification or exchange (e.g., amounts repaid and fees paid).
- The fair value of any noncash consideration (e.g., warrants or preferred stock) delivered by the debtor to the creditor as part of the modification or exchange.
- The fair value of the new debt.
Plus:
- Cash received by the debtor from the creditor as part of the modification or exchange (e.g., additional amounts borrowed and fees received).
- The fair value of any noncash consideration received by the debtor from the creditor (e.g., warrants or preferred stock) as part of the modification or exchange.
Equals extinguishment gain (or loss).

However, special considerations are necessary for transactions involving related parties for which a debt extinguishment gain may be recognized in equity (see Section 9.3.7) and convertible debt that is convertible into the debtor’s equity shares and had a separately recognized equity component (see Section 10.4.2.2). In addition, ASC 848 permits debtors not to apply extinguishment accounting to certain debt modifications made in connection with reference rate reform even if such accounting would have been required under ASC 470-50-40 (see Section 14.2.5).

Example 10-10

Modification of Debt — Extinguishment Accounting

On January 1, 20X0, Entity G issues debt with a stated principal amount of $10 million to Entity C for proceeds of $9.7 million. Interest is payable annually in arrears at 6 percent. The debt contains no call or put options and matures on January 1, 20X5. Entity G determines that the annual effective interest rate is 6.73 percent and prepares the following amortization schedule.

On January 1, 20X3, after G has paid $600,000 of interest for 20X2, G and C agree to modify the debt by extending the term for an additional three years to January 1, 20X8, and increasing the stated interest rate from 6 percent to 8.5 percent per annum. Further, G pays C a fee of $130,000 and incurs $70,000 of third-party costs (e.g., fees to attorneys and accountants).

Entity G performs the 10 percent cash flow test (see Section 10.3.3). On January 1, 20X3, the present value of the remaining original principal and interest cash flows discounted at 6.73 percent is $9,868,181 and the present value of the remaining modified principal and interest cash flows (including the creditor fee of $130,000 but excluding the third-party costs) discounted at the same discount rate is $10,862,605. The difference in present values is $994,424 ($10,862,605 – $9,868,181), which is more than 10 percent of the present value of the remaining original cash flows ($994,424 ÷ $9,868,181 = 10.1%). Therefore, the terms of the modified debt are considered substantially different from the terms of the original debt.

Because the terms are considered substantially different, extinguishment accounting applies and the new debt is initially recognized at its fair value as of the date of the modification. Entity G estimates that the fair value of the new debt under ASC 820 is $9,400,000.

Entity G calculates the extinguishment gain as follows:

Entity G makes the following accounting entry:

Entity G then recognizes the costs incurred with third parties as debt issuance costs as follows:

Entity G then calculates the effective interest rate (including the effect of third-party costs) on the new debt and determines that it is 10.28 percent.

10.4.2.2 Conversion Features

10.4.2.2.1 Background

When a modification or exchange of convertible debt is accounted for as an extinguishment, the debtor should determine the appropriate accounting model to apply to the newly recognized convertible debt instrument (see Section 7.6). The assumed proceeds for the newly recognized convertible debt instrument are equal to the fair value of the new debt as of the date of the modification or exchange. In addition, as discussed below, the accounting for the extinguishment of the original convertible debt instrument depends on whether it contained a separately recognized equity component.

10.4.2.2.2 Convertible Debt Without a Separately Recognized Equity Component

If convertible debt without a separately recognized equity component is accounted for as extinguished, the general accounting guidance for extinguishments applies (see Section 10.4.2.1). If the conversion feature in the original debt instrument was bifurcated as a derivative under ASC 815-15, the net carrying amount of the original debt instrument equals the sum of the carrying amount of the host debt contract and the fair value of the embedded conversion option liability as of the date of the extinguishment. The new convertible debt instrument is recognized at fair value less any direct and incremental issuance costs. The debtor should apply the appropriate convertible debt accounting model to the new instrument on the same basis as it would if the entity had issued the instrument in a transaction that did not involve a modification or exchange of the original convertible debt instrument.

10.4.2.2.3 Convertible Debt With a Separately Recognized Equity Component

ASC 815-15

40-4 If a convertible debt instrument with a conversion option for which the carrying amount has previously been reclassified to shareholders’ equity pursuant to the guidance in paragraph 815-15-35-4 is extinguished for cash (or other assets) before its stated maturity date, the entity shall do both of the following:

The portion of the reacquisition price equal to the fair value of the conversion option at the date of the extinguishment shall be allocated to equity.
The remaining reacquisition price shall be allocated to the extinguishment of the debt to determine the amount of gain or loss.

If the original debt contains an equity component that resulted from the reclassification of an embedded conversion feature from a derivative liability to equity (see Section 8.5.4.3), the calculation of the extinguishment gain or loss should be adjusted by allocating an amount to the reacquisition of the equity component equal to the fair value of the conversion option on the date of the extinguishment in accordance with ASC 815-15-40-4 (i.e., the fair value of the conversion option increases the amount of any extinguishment gain and decreases the amount of any extinguishment loss, as applicable). The Codification does not specifically address how to measure the amount that should be allocated to the reacquisition of an equity component that resulted from a previous modification or exchange that increased the fair value of the conversion feature (see Section 10.4.3.3.1) or the issuance of convertible debt at a substantial premium to par (see Section 7.6.3). Generally, the amount that was previously recognized for that equity component would be allocated to its reacquisition.

10.4.3 Accounting When Debt Terms Are Not Substantially Different

10.4.3.1 General

ASC 470-50

05-3 In circumstances where an exchange of debt instruments or a modification of a debt instrument does not result in extinguishment accounting, this Subtopic provides guidance on the appropriate accounting treatment.

40-14 If it is determined that the original and new debt instruments are not substantially different, then a new effective interest rate shall be determined based on the carrying amount of the original debt instrument, adjusted for an increase (but not a decrease) in the fair value of an embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) resulting from the modification, and the revised cash flows.

b. If the exchange or modification is not to be accounted for in the same manner as a debt extinguishment, then the fees shall be associated with the replacement or modified debt instrument and, along with any existing unamortized premium or discount, amortized as an adjustment of interest expense over the remaining term of the replacement or modified debt instrument using the interest method.

For fees between the debtor and creditor for exchanges of or modifications to line-of-credit or revolving-debt arrangements, see paragraph 470-50-40-21.

Third-Party Costs of Exchange or Modification

40-18 Costs incurred with third parties directly related to the exchange or modification (such as legal fees) shall be accounted for as follows: . . .

b. If the exchange or modification is not to be accounted for in the same manner as a debt extinguishment, then the costs shall be expensed as incurred.

For third-party costs for exchanges of or modifications to line-of-credit or revolving-debt arrangements, see paragraph 470-50-40-21.

When the terms of the new debt are not substantially different from those of the original debt (see Section 10.3), the modification or exchange is treated as a continuation of the original debt instrument. The debtor adjusts the debt’s net carrying amount, as follows:

The debt’s net carrying amount immediately before the modification or exchange.
Less:
- Cash paid by the debtor to the creditor as part of the modification or exchange (e.g., amounts repaid and fees paid).3
- The fair value of any noncash consideration (e.g., warrants or preferred stock) delivered by the debtor to the creditor as part of the modification or exchange.
- The increase in the fair value of an embedded equity conversion feature, if applicable (see Section 10.4.3.3).
Plus:
- Cash received by the debtor from the creditor as part of the modification or exchange (e.g., additional amounts borrowed and fees received).
- The fair value of any noncash consideration received by the debtor from the creditor (e.g., warrants) as part of the modification of exchange.
Equals the debt’s adjusted net carrying amount.

ASC 470-50-40-17(b) requires any fees paid to, or received from, the creditor as part of a modification or exchange (e.g., waiver fees) to be associated with the modified debt and recognized as part of interest expense over the life of the modified debt in accordance with the interest method.

Because the debt is accounted for as a continuation of the original debt, any third-party costs incurred in connection with the modification or exchange do not represent debt issuance costs. ASC 470-50-40-17(b) requires such costs to be immediately expensed as incurred.

As noted in Sections 10.3.2.4 and 10.3.3.2.4, the debtor may need to allocate amounts paid to an underwriter of a loan syndication between fees paid to the underwriter in its capacity as a creditor (for the portion of the debt agreement that the underwriter receives in the syndication) and fees paid to the underwriter in its capacity as a third party underwriting the loan facility with other creditors. Amounts paid to the underwriter in its capacity as a creditor are treated as lender fees, whereas amounts paid to the underwriter in its capacity as an underwriter are treated as third-party costs.

The effect of the debt modification or exchange on the debt’s cash flows is accounted for prospectively as a yield adjustment. Although the debt is not accounted for as extinguished, the debtor must recalculate the effective interest rate it used in applying the interest method (see Section 6.2) since the net carrying amount and the debt’s contractual cash flows have changed.

Example 10-11

Modification of Debt — Modification Accounting

On January 1, 20X0, Entity H issues debt with a stated principal amount of $10 million to Entity B for proceeds of $10.4 million. Interest is payable annually in arrears at 9 percent. There are no call options, put options, or conversion features in the debt, which matures on January 1, 20X5. Entity H determines that the annual effective interest rate is 8 percent and prepares the following amortization schedule.

On January 1, 20X3, after H has paid $900,000 of interest for 20X2, H and B agree to modify the debt by extending the term for an additional three years to January 1, 20X8, and reducing the stated interest rate from 9 percent to 7.5 percent per annum. Further, H pays B a fee of $50,000 and incurs $85,000 of third-party costs (e.g., fees to attorneys and accountants).

Entity H performs the 10 percent cash flow test (see Section 10.3.3). On January 1, 20X3, the present value of the remaining original principal and interest cash flows discounted at 8 percent is $10,178,648, and the present value of the remaining modified principal and interest cash flows (including the creditor fee of $50,000 but excluding the third-party costs) discounted at the same discount rate is $9,801,065. The difference in present values is $377,583 ($10,178,648 – $9,801,065), which is less than 10 percent of the present value of the remaining original cash flows ($377,583 ÷ $10,178,648 = 3.7%). Therefore, the terms of the modified debt are not considered substantially different from the terms of the original debt under the 10 percent cash flow test. Further, neither the original debt nor the modified debt is convertible into the debtor’s equity shares, so there is no need to evaluate whether any conversion feature causes the modified debt to be substantially different from the original debt.

Because the terms of the modified debt are not considered substantially different from the terms of the original debt, the modified debt is treated as a continuation of the original debt. However, H must update the debt’s net carrying amount and amortization schedule and expense the third-party costs incurred as part of its accounting for the modification or exchange.

The updated carrying amount is computed as follows:

Entity H makes the following accounting entry:

The revised effective interest rate is 7.18 percent.

10.4.3.2 Repayment of a Portion of the Principal Amount Outstanding

ASC 470-50-40-17(b) states that any remaining unamortized premium or discount (including debt issuance costs) of the original debt instrument should be amortized over the remaining term by using the interest method when debt is modified or exchanged and extinguishment accounting does not apply. However, if, in conjunction with a modification or exchange that is not accounted for as an extinguishment under ASC 470-50, a debtor repays a portion of the principal amount of the original debt instrument, whether as a result of a contractual prepayment feature or negotiations between the debtor and creditor, the debtor should derecognize a proportionate amount of unamortized premium or discount (including debt issuance costs) in the same manner as if the debt was partially prepaid in the absence of a modification or exchange.4 For example, if a debtor repays $100 million of debt by paying cash and contemporaneously issues $80 million of new debt to the same creditor in exchange for cash and the debt instruments exchanged are not substantially different, the debtor should still treat $20 million of the original debt as having been extinguished under ASC 405 even though the exchange was not accounted for as an extinguishment of the entire $100 million of debt. Accordingly, the debtor would include a portion of the unamortized premium or discount (including debt issuance costs) of the $20 million of debt repaid when calculating the extinguishment gain or loss.

Example 10-12

Modification of Debt — Accounting for Partial Repayment

Entity J has outstanding a debt instrument with a $100 million principal amount and an unamortized discount (including debt issuance costs) of $2.5 million. Interest on the debt is payable annually at a rate of 10 percent. The debt is modified to reduce the interest rate to a market rate of 8 percent and to extend the remaining term by five years. In return for agreeing to the modification, the creditor requires J to repay $20 million of the principal amount without a penalty. In conjunction with the modification, J incurs third-party costs of $200,000. Assume that because the original debt and the modified debt are both prepayable, the modification does not meet the conditions to be accounted for as an extinguishment.

Before accounting for the partial prepayment, J recognizes the following journal entry:

To account for the partial prepayment, J recognizes the following additional journal entry:5

Note that these additional entries are necessary because J’s application of ASC 470-50 does not obviate its need to apply the general debt accounting guidance when it partially prepays the existing debt in conjunction with the modification.

10.4.3.3 Conversion Features

10.4.3.3.1 General

ASC 470-50

40-15 If a convertible debt instrument is modified or exchanged in a transaction that is not accounted for as an extinguishment, an increase in the fair value of the embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) shall reduce the carrying amount of the debt instrument (increasing a debt discount or reducing a debt premium) with a corresponding increase in additional paid-in capital. However, a decrease in the fair value of an embedded conversion option resulting from a modification or an exchange shall not be recognized.

When modified or exchanged debt is convertible into the debtor’s equity shares before and after a modification or exchange and extinguishment accounting does not apply (see Section 10.3), the debtor is required to recognize an increase, if any, in the fair value of the embedded conversion feature that results from the modification or exchange. Such increase is calculated as the amount by which the fair value of the conversion option immediately after the modification or exchange exceeds its fair value immediately before the modification and exchange. This amount is recognized as a decrease in the net carrying amount of the debt and an increase in APIC. Because the amount recorded against the debt increases any debt discount (or reduces a debt premium), whereas the amount in APIC is not remeasured, the effect of this accounting is to increase the debt’s effective interest rate and the amount of interest expense reported over the debt’s remaining life. A decrease in the conversion feature’s fair value is not recognized.

Special considerations are necessary if the conversion feature is bifurcated as a derivative under ASC 815-15 (see the next section).

10.4.3.3.2 Convertible Debt With a Bifurcated Conversion Option

ASC 815-15

35-4 If an embedded conversion option in a convertible debt instrument no longer meets the bifurcation criteria in this Subtopic, an issuer shall account for the previously bifurcated conversion option by reclassifying the carrying amount of the liability for the conversion option (that is, its fair value on the date of reclassification) to shareholders’ equity. Any debt discount recognized when the conversion option was bifurcated from the convertible debt instrument shall continue to be amortized.

The Codification does not specifically address how to account for a change in the fair value of a conversion feature that is bifurcated as a derivative under ASC 815-15 either before or after a modification or exchange.

If the conversion feature is bifurcated as a derivative under ASC 815-15 before and after the modification or exchange, any change in its fair value is recognized in earnings under ASC 815-15. Therefore, the debtor should not apply the guidance in ASC 470-50-40-15 on recognizing an increase in a feature’s fair value in connection with the modification or exchange as a reduction of the debt’s carrying amount (see the previous section).

If the conversion feature is bifurcated as a derivative under ASC 815-15 before the modification or exchange, but not after the modification or exchange, one possible approach would be for the debtor to reclassify the fair value carrying amount of the derivative liability immediately after the modification or exchange to equity under ASC 815-15-35-4 and not apply the guidance in ASC 470-50-40-15 (see the previous section).

If the conversion feature is bifurcated as a derivative under ASC 815-15 after the modification or exchange, but not before the modification or exchange, one possible approach would be for the debtor to recognize an increase in the fair value of the embedded conversion feature in connection with the modification or exchange as a reduction in the debt’s net carrying amount, with an offset to APIC under ASC 470-50-40-15 (see the previous section). The fair value of the conversion feature immediately after the modification or exchange would then be bifurcated from the carrying amount of the debt host (see Section 8.5.4.2).

10.4.4 Other Considerations

10.4.4.1 Costs and Fees Incurred Before a Debt Modification or Exchange

Sometimes, debtors incur fees or costs directly related to a contemplated modification or exchange before it is executed. In a manner similar to the accounting for debt issuance costs incurred before a debt issuance (see Section 5.3.2), specific costs and fees that are directly attributable to a contemplated modification or exchange of debt may be deferred as an asset before such transaction occurs unless (1) it is probable that modification or exchange will not occur or (2) the fees or costs must be expensed under ASC 470-50 upon the occurrence of the transaction. Under ASC 470-50, a fee paid to a creditor (e.g., a waiver fee) must be expensed if the terms of the new debt are substantially different from the terms of the original debt (see Section 10.4.2.1). Third-party costs (e.g., attorney fees) must be expensed if the terms of the new debt are not substantially different from those of the original debt (see Section 10.4.3.1).

Once the modification or exchange occurs, any costs or fees that have been deferred are reflected in the accounting for the modification or exchange under ASC 470-50. If costs and fees have been deferred but it becomes probable that the modification or exchange will not take place or the costs and fees would require expense recognition upon a modification or exchange, the amounts deferred should be charged to earnings.

10.4.4.2 Third-Party Costs

A third party, such as a legal adviser or investment banker, often provides services to the debtor related to a debt modification or exchange simultaneously with other unrelated services. Such fees should be allocated between costs attributable to the debt modification or exchange and costs attributable to other services provided by the third party on a relative fair value basis. Under ASC 340-10-S99-2, similar accounting is required for fees paid to an investment banker for both services related to an acquisition and the issuance of debt securities in a business combination (see Section 3.5.3.3).

Costs attributable to the debt modification or exchange may include:

Amounts paid to legal advisers for drafting modified debt agreements and providing other legal services associated with the debt modification.
Amounts paid to advisers for assistance with the debt negotiations.

Costs attributable to other services may include:

Amounts paid to legal advisers for assistance in drafting documents for a bankruptcy filing.
Amounts paid to legal advisers for providing advice on a corporate restructuring.
Amounts paid to a communications firm in connection with a corporate restructuring.

Once the entity identifies the costs attributable to the debt modification or exchange, it should account for those costs on the basis of whether the modification or exchange represents an extinguishment of the debt in accordance with ASC 470-50 (see Sections 10.4.2 and 10.4.3).

Footnotes

Because the new debt is treated as a new issuance, third-party costs are accounted for as debt issuance costs (see Section 5.3.3). Any fees paid to, or received from, the creditor as part of the modification or exchange are associated with the extinguishment of the original debt and, therefore, affect the calculation of the extinguishment gain or loss. This applies even if some or all of the fees are contractually designated as being attributable to the new debt. As noted in Sections 10.3.2.4 and 10.3.3.2.4, the debtor may need to allocate amounts paid to an underwriter of a loan syndication between fees paid to the underwriter in its capacity as a creditor (for the portion of the debt agreement that the underwriter receives in the syndication) and fees paid to the underwriter in its capacity as a third party underwriting the loan facility with other creditors.

See Sections 10.3.3.2 and 10.4.3.2 for discussions of the accounting for any unamortized premiums, discounts, or issue costs associated with the partial repayment of the existing debt instrument.

Note that for this purpose, a payment of a fee to the creditor in return for the modification would not need to be treated as a partial prepayment.

The amount of unamortized discount (debt issuance costs) written off is based on the proportion of the principal amount of the debt that was repaid (i.e., $20 million ÷ $100 million = 0.2 × $2.5 million = $500,000).

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.