| 2 |
Troubled
Debt
Restructuring -- occurs if the creditor for economic or legal
reasons related to the debtor's financial difficulties grants a
concession
to the debtor that it would not otherwise consider. |
|
Concession either
stems from
an agreement between the creditor and the debtor or is imposed by law
or
a court. |
| 3 |
Creditor's objective
is to make
the best of a difficult situation. The creditor expects to obtain more
cash or other value from the debtor, or to increase the probability of
receipt, by granting the concession than by not granting it. |
| 5 |
A troubled debt
restructuring
may include but is not necessarily limited to, one or a combination of
the following: |
|
a. |
Transfer
from
the debtor to the creditor of receivables from third parties,
real estate, or other assets to satisfy a debt. |
|
b. |
Issuance
or
other granting of an equity interest to the creditor by the
debtor
to satisfy a debt. |
|
c. |
Modification
of
terms of a debt such as one or a combination of: |
|
|
1. |
Reduction of
the stated interest
rate for the remaining original life of the debt. |
|
|
2. |
Extension of the maturity date or
dates
at a stated interest rate lower than the current market rate for new
debt
with similar risk. |
|
|
3. |
Reduction of the face amount or
maturity
amount of the debt as stated in the instrument or other agreement. |
|
|
4. |
Reduction of accrued interest |
|
|
(Note: all of the
reductions
above may be absolute or contingent.) |
| 6 |
Troubled debt
restructurings
may occur before, at, or after the stated maturity of debt. |
| 7 |
A debt restructuring is
not necessarily a troubled debt restructuring even if the
debtor
is experiencing some financial difficulties. |
| Accounting
by
Debtors |
| 12 |
A debtor shall account
for a
troubled debt restructuring according to the type of the restructuring. |
| 13 |
Transfer
of
Assets |
|
Debtor recognizes
gain on the restructuring of payables. The gain shall be
measured
by the excess of (1) the carrying amount of the
payable settled (face amount
increased or decreased
by accrued interest and unamortized premiums, discount, financial
charges
or issue costs) over (2) the fair value of the assets
transferred
to the creditor. |
|
Fair
value
of the assets is the amount that the debtor could reasonably expect to
receive for them is a current sale between a willing buyer and a
willing
seller; that is, other than a forced or liquidation sale. |
| 14 |
Difference between the
fair
value and the carrying amount of assets transferred to a creditor to
settle
a payable is a gain or loss on transfer of assets. |
| 15 |
Grant
of
Equity Interest in Full Settlement |
|
Account for the equity
interest
at fair value difference between the fair value of the equity interest
granted and the carrying amount of the payable settled shall be
recognized
as a gain or restructuring of payables. |
| 16 |
Modification
of Terms |
|
Account for the
effects of the
restructuring prospectively from the time
of restructuring do not change the carrying amount of the payable at
the
time of the restructuring unless the carrying amount exceeds the total
future cash payments specified by the new terms. |
|
The effects of changes
in the
amounts or timing or both of future cash payments designated as either
interest or face amount shall be reflected in future periods |
|
Interest expense shall
be computed
in a way that a constant effective interest rate
is applied to the carrying amount of the payable at the beginning of
each
period between the restructuring and maturity. The new effective
interest
method shall be the discount rate that equates the present value of the
future cash payments specified by the new terms with the carrying
amount
of the payable. |
| 17 |
If total future cash
payments
specified by the new terms of a payable, including both payments
designated
as interest and those designated as face amount, are less
than the carrying amount of the payable, the debtor shall reduce
the carrying amount to an amount equal to the total future cash
payments
specified by the new terms and shall recognize again on restructuring
of
payables equal to the amount of the reduction. |
|
Thereafter, all cash
payments
under the terms of the payable shall be accounted for as reductions
of the carrying amount of the payable and no interest expense
shall
be recognized on the payable for any period between the restructuring
and
maturity of the payable. |
| 18 |
Contingent amounts
(amounts
payable contingent on a specified event or circumstance) shall be
included
in the "total future cash payments specified by the new terms" to the
extent
necessary to prevent recognizing a gain at the time of restructuring
that
may be offset by future interest expense. |
| 19 |
Combination of Types |
|
First, account for the
asset
or equity issuance as prescribed in paragraph 13 and 15. Second,
account
for the remaining carrying amount of the debt as prescribed in
paragraphs
16-18. |
| 21 |
Gains on restructuring
of payables
are aggregated, included in measuring net income for the period of
restructuring
and if material, classified as an extraordinary item, net of related
income
tax effect |
| 24 |
Legal fees and other
direct
costs in a troubled debt restructuring: |
|
a. |
Involving equity
issuance--reduce
the amounts recorded for the equity interest. |
|
All other direct costs
should
be: |
|
b. |
Included as expenses
if no gain
is recognized, or |
|
c. |
Reduce any gain that
might otherwise
be recognized. |
| 25 |
Disclosure
by
Debtors |
|
a. |
For each
restructuring--a description
of the principal changes in terms, the major feature of settlement or
both. |
|
b. |
Aggregate gain on
restructuring
of payables and the related income tax effect. |
|
c. |
Aggregate net gain or
loss on
transfers of assets recognized during the period |
|
d. |
Per share amounts of
the aggregate
gains on restructuring of payables, net of related income tax effect. |
| Accounting
by
Creditors |
|
Receipt of Assets in
Full Satisfaction |
| 28 |
Assets are accounted
for at
their fair value. The excess of the recorded
investment
in the receivable satisfied over the fair value of assets received is a
loss to be recognized. |
| 29 |
Account for assets
received
as if they had been acquired for cash |
| 30 |
Modification of Terms |
|
Account
for the effects prospectively |
|
Do
not change the recorded investment in the receivable at the time of
restructuring
unless that amount exceeds the total future cash receipts specified by
the new terms |
|
The
effects of change in the amounts or timing or both of future cash
receipts
designated as either interest or face amount shall be reflected in
future
periods |
|
Interest
income shall be computed in a way that a constant effective interest
rate
is applied to the recorded investment in the receivable at the
beginning
of each period between restructuring and maturity |
| 31 |
If
total future cash receipts including both receipts designated as
interest
and those designated as face amount, are less than the recorded
investment
in the receivable before restructuring, the creditor shall reduce the
recorded
investment in the receivable to an amount equal to the total future
cash
receipts specified by the new terms. The amount of the reduction is
recognized
as a loss. All future cash receipts, whether designated as interest or
face amount, shall be accounted for as recovery of the recorded
investment
in the receivable and no interest income shall be recognized on the
receivable
for any period between the restructuring and maturity of the receivable |
| 35 |
Losses,
to the extent not offset against allowances for uncollectible amounts
or
other valuation accounts, shall be included in measuring net income for
the period of restructuring and reported according to APB Opinion No.
30. |
| 38 |
Legal
fees and other direct costs incurred by a creditor to effect a troubled
debt restructuring shall be included in expense when incurred. |
| Disclosure
by Creditors |
| 40 |
The
following information shall be disclosed either in the body of the
financial
statements or in the accompanying notes: |
|
a. |
For
outstanding receivables whose terms have been modified: |
|
|
i. |
The
aggregate recorded
investment |
|
|
ii. |
The gross
interest
income that would have been recorded in the period ended if those
receivables
had been current in accordance with their original terms and had been
outstanding
throughout the period or since origination, if held for part of the
period |
|
|
iii. |
The
amount of interest
income on those receivables that was included in net income for the
period. |
|
b. |
The
amount of commitments, if any, to lend additional funds to debtors
owing
receivables whose terms have ben modified in troubled debt
restructurings |
| Effective Date and
Transition |
| 43 |
Effective for troubled
debt
restructurings consummated after December 31, 1977. |