11.2 Scope
11.2.1 General
ASC 470-60
15-1 The guidance in this
Subtopic applies to all debtors.
15-2 The guidance in this
Subtopic applies to all troubled debt restructurings by
debtors.
15-4 . . . Payables that may
be involved in troubled debt restructurings commonly
result from borrowing of cash, or purchasing goods or
services on credit. Examples are accounts payable,
notes, debentures and bonds (whether those payables are
secured or unsecured and whether they are convertible or
nonconvertible), and related accrued interest, if any. .
. .
15-4A In this Subtopic, a
receivable or a payable (collectively referred to as
debt) represents a contractual right to receive money or
a contractual obligation to pay money on demand or on
fixed or determinable dates that is already included as
an asset or a liability in the creditor’s or debtor’s
balance sheet at the time of the restructuring.
15-9 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.
15-11 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, neither 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.
15-13 For further guidance
on determining whether a modification or exchange is a
troubled debt restructuring, see paragraphs 470-60-55-4
through 55-7. If a debtor concludes that the
modification or exchange is not within the scope of this
Subtopic, the debtor would apply the provisions of
Subtopic 470-50.
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.
11.2.2 Foreclosures and Repossessions
ASC 470-60
15-6 . . . Although troubled
debt that is fully satisfied by foreclosure,
repossession, or other transfer of assets or by grant of
equity securities by the debtor is, in a technical
sense, not restructured, that kind of event is included
in the term troubled debt restructuring in this
Subtopic.
35-9 A troubled debt
restructuring that is in substance a repossession or
foreclosure by the creditor or other transfer of assets
to the creditor shall be accounted for according to the
provisions of the preceding paragraph and paragraphs
470-60-35-2 through 35-3.
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.)
11.2.3 Bankruptcy Proceedings and Quasi-Reorganizations
ASC 470-60
15-10 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. This Subtopic does not apply, however, if under
provisions of those federal statutes or in a
quasi-reorganization or corporate readjustment (see
Topic 852) with which a troubled debt restructuring
coincides, the debtor restates its liabilities
generally, that is, if such restructurings or
modifications accomplished under purview of the
bankruptcy court encompass most of the amount of the
debtor’s liabilities.
55-1 Entities involved with
Chapter 11 bankruptcy proceedings frequently reduce all
or most of their indebtedness with the approval of their
creditors and the court in order to provide an
opportunity for the entity to have a fresh start. Such
reductions are usually by a stated percentage so that,
for example, the debtor owes only 60 cents on the
dollar. Because the debtor would be restating its
liabilities generally, this Subtopic would not apply to
the debtor’s accounting for such reduction of
liabilities.
55-2
On the other hand, this Subtopic would apply to an
isolated troubled debt restructuring by a debtor
involved in bankruptcy proceedings if such restructuring
did not result in a general restatement of the debtor’s
liabilities.
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.