2.3 Debt Modifications and Extinguishments | DART – Deloitte Accounting Research Tool

The accounting for a modification or exchange of a financial liability differs between IFRS Accounting Standards and U.S. GAAP. For example, while both standards use a 10 percent quantitative test to determine whether such a transaction is accounted for as a modification or extinguishment of existing debt, some of the consideration points differ.

The table below further outlines the differences between IFRS Accounting Standards and U.S. GAAP regarding the accounting for debt modifications and extinguishments.

Topic	IFRS Accounting Standards (IFRS 9)	U.S. GAAP (ASC 470-50, ASC 470-60)
Exchange or modification of a financial liability1	When the existing borrower and lender exchange instruments with terms that are substantially different, the exchange is accounted for as an extinguishment of the original liability and a recognition of a new liability. Similarly, a modification of the terms of a liability is accounted for as an extinguishment of the original liability and a recognition of a new liability when the modification is substantial. The terms are considered substantially different if the discounted present value of the cash flows of the new or modified debt (including any fees paid net of any fees received and discounted by using the original effective interest rate) is at least 10 percent different from the discounted present value of the remaining cash flows of the original financial liability.	When a debtor and a creditor exchange or modify a debt instrument in a transaction that does not qualify as a troubled debt restructuring, that modification or exchange is accounted for as an extinguishment of the original debt and the recognition of new debt if the terms are substantially different. The terms are considered substantially different if (1) the discounted present value of the cash flows under the new or modified debt (including any fees paid net of any fees received and discounted by using the original effective interest rate) is at least 10 percent different from the discounted present value of the remaining cash flows of the original financial liability, (2) the change in the fair value of an embedded conversion option is at least 10 percent of the original debt’s carrying amount, or (3) a substantive conversion option is either eliminated or added.
Increase in the fair value of an embedded conversion option	There is no specific guidance on the accounting for an increase in the fair value of an embedded conversion option. Conversion features that are recognized in equity are not remeasured.	If the terms of the new or modified debt are not considered substantially different from the terms of the original debt, the debtor must recognize an increase (but not a decrease) in the fair value of an embedded conversion option in connection with the modification or exchange by reducing the debt’s carrying amount with an offset to equity.
Third-party costs	Third-party costs are (1) included in the extinguishment gain or loss if extinguishment accounting applies and (2) amortized over the term of the new debt instrument if extinguishment accounting does not apply.	Third-party costs are (1) amortized over the term of the new debt instrument if extinguishment accounting applies and (2) expensed as incurred if extinguishment accounting does not apply.
Accounting for a modification or an exchange of financial liability that does not result in derecognition	Upon modification or exchange (together referred to as a “modification”) of a financial liability that does not lead to derecognition, the revised cash flows as a result of the modification should be discounted as of the date of the modification at the original effective interest rate. The difference between the carrying amount of the liability immediately before the modification and the sum of the present value of the cash flows of the modified liability discounted at the original effective interest rate should be recognized in profit or loss as a modification gain or loss.	If extinguishment accounting does not apply, an increase (but not a decrease) in the fair value of any embedded conversion option in connection with the modification or exchange reduces the debt’s carrying amount and adjusts the debt’s effective interest rate (accounted for prospectively as a yield adjustment).
Troubled debt restructurings	Debtors apply the same guidance to troubled debt restructurings that they apply to other exchanges and modifications of debt instruments.	A modification or exchange of debt is accounted for as a troubled debt restructuring if the creditor grants a concession as a result of the debtor’s financial difficulties. If troubled debt restructuring accounting applies, a restructuring gain is recognized only to the extent the debt’s carrying amount exceeds the total amount of the undiscounted future cash flows of the restructured debt.