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)
Debt modification or exchange — substantially different terms1	The terms of new or modified debt are considered substantially different from the terms of the original debt (such that the original debt is accounted for as being extinguished) if the 10 percent cash flow test is passed or, in limited circumstances, the terms are determined to be qualitatively different.	The terms of new or modified debt are considered substantially different from the terms of the original debt (such that the original debt is accounted for as being extinguished) if (1) the 10 percent cash flow test is passed, (2) a substantive conversion option is added or removed, or (3) the change in the fair value of an embedded conversion option is at least 10 percent of the original carrying amount. This guidance does not apply to troubled debt restructurings (see below).
Debt modification or exchange — terms not substantially different	If the terms of new or modified debt are not considered substantially different from the terms of the original debt, the debtor must recognize a modification gain or loss in profit or loss on the basis of the difference between (1) the carrying amount immediately before the modification or exchange and (2) the present value of the modified contractual cash flows discounted by using the original effective interest rate.	If the terms of new or modified debt are not considered substantially different from the terms of the original debt, the effect of the modification or exchange on the debt’s cash flows is accounted for prospectively as a yield adjustment.
Debt modification or exchange — 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.
Debt modification or exchange — third-party costs	If the original debt is accounted for as being extinguished, third-party costs are expensed as incurred. If the new debt is accounted for as a continuation of the original debt, third-party costs are amortized over the life of the new debt by using the interest method.	If the original debt is accounted for as being extinguished, third-party costs are amortized over the life of the new debt by using the interest method. If the new debt is accounted for as a continuation of the original debt, such costs are expensed as incurred.
Debt extinguishments — expected breakage	An entity cannot derecognize a financial liability on the basis of expected breakage.	An entity derecognizes a financial liability related to a prepaid stored-value product on the basis of expected breakage even if the obligation has not been legally extinguished.
Troubled debt restructurings (TDRs)	There is no special guidance on TDRs. Debtors apply the guidance on a debt modification or exchange (see above).	A debt modification or exchange is accounted for as a TDR if the creditor grants a concession as a result of the debtor’s financial difficulties. Gain recognition is precluded unless the carrying amount exceeds the total amount of the undiscounted future cash flows of the restructured debt.