11.2 Scope

If a debtor undertakes any of the following transactions involving its outstanding debt, it should evaluate whether the transaction qualifies as a TDR under ASC 470-60 (see Section 11.3):

• A modification of terms — The creditor might agree to extend the terms by deferring the timing of the contractual interest or principal payments due. Alternatively, the creditor might agree to reduce the amounts due by (1) decreasing the contractual interest rate to a below-market interest rate or (2) forgiving a portion of the principal amount or previously accrued interest. Further, the modification might make payment terms contingent on, for example, the debtor’s revenue.
• An exchange of debt instruments — The debtor and creditor might agree to exchange the outstanding debt instrument for a new debt instrument with terms that are more favorable to the debtor.
• Transfer of assets in full or partial satisfaction of the debt — The debtor might transfer cash, trade receivables, real estate, or other assets to the creditor to fully or partially satisfy the debt.
• Grant of equity interest in full or partial satisfaction of the debt — The debtor might transfer an equity interest (such as shares of common or preferred stock or warrants on such shares) to the creditor to satisfy fully or partially the obligation even though the debt was not convertible into such an equity interest under the debt’s original contractual terms.

A restructuring that extends the debt’s maturity date might qualify as a TDR under ASC 470-60 even if the principal balance and the stated interest rate remain unchanged. ASC 470-60-15-9(c) states, in part, that a TDR may include “[e]xtension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.” If the stated interest rate on the restructured loan is lower than the current market rate for a new loan with similar risk that a creditor would be willing to make, the restructuring might be deemed a concession (see Section 11.3.3).

Further, a debt restructuring might represent a TDR even if the debt is settled in full. For example, a debtor is required to disclose specific information about TDRs that have occurred during the period for which financial statements are presented (see Section 11.5.2).

Unless a modification has been made to the debt terms, the debtor’s failure to pay amounts when due or the creditor’s delay in taking action to enforce the payment terms is not within the scope of ASC 470-60. However, the settlement of debt through a foreclosure or repossession or the transfer of assets or equity securities should be evaluated under ASC 470-60 even if the contractual terms are not modified (see the next section). Special considerations are necessary for bankruptcy proceedings and quasi-reorganizations (see Section 11.2.3).

The following transactions are exempt from the scope of ASC 470-60:

• Lease modifications.
• Changes in employment-related contracts (e.g., pensions or deferred compensation arrangements).

ASC 470-60 does not apply to the creditor’s accounting.

Debt that is satisfied through foreclosure, repossession, other transfer of the debtor’s assets is not exempt from the scope of ASC 470-60 if it otherwise meets the criteria for a TDR (see Section 11.3). Further, we understand that the FASB and SEC believe that ASC 470-60 applies to foreclosures or repossessions of specified collateral (e.g., mortgaged property) if the creditor has no recourse to the debtor’s other assets. For example, assume that on January 1, 20X1, an entity borrows, on a nonrecourse basis, $1 million to purchase real property that has a fair value of $1.2 million. Since the borrowing is nonrecourse, the lender only has recourse to the real property being financed and cannot look to any other assets of the borrower to satisfy the loan. Further assume that on December 1, 20X3, the property has a fair value of $700,000 and the amount due on the loan is still $1 million. If the borrower transfers the real property to the lender in full satisfaction of the loan (i.e., title to the property reverts to the lender and the borrower has no further obligation), the settlement of the loan is a TDR. Therefore, the borrower would recognize a loss on the real property of $500,000. The borrower would also recognize a gain on the debt restructuring of $300,000, which represents the excess of the loan balance over the fair value of the property. (For simplicity, it is assumed that the borrower had not previously treated the real property as impaired even though such treatment may have been required earlier.)

ASC 470-60 does not apply to debt restructurings in which a debtor makes a general restatement of its liabilities in a reorganization under federal bankruptcy law or in conjunction with a quasi-reorganization. A quasi-reorganization is an accounting procedure by which an entity revalues its assets and liabilities on a “fresh-start” basis to their current fair value without undergoing a legal reorganization (see ASC 852). As noted in ASC 852-20-25-5, the “effective date of the readjustment . . . shall be as near as practicable to the date on which formal consent of the stockholders [to the reorganization] is given.” For example, a debt restructuring may be considered to have occurred in conjunction with a quasi-reorganization if each occurs within 30 days of the other.

If a debtor undergoing Chapter 11 bankruptcy proceedings obtains creditor and bankruptcy court approval for a reduction of substantially all of its liabilities, such a debt restructuring would be considered a general restatement of its liabilities and consequently excluded from the scope of ASC 470-60. However, ASC 470-60 applies if a company negotiates debt restructurings on only some if its liabilities and does not generally restate its liabilities.