We have considerable expertise in advising the business services sector gained through working with many business support organisations. However, under US GAAP, the 'gating' question is whether the modification is a troubled debt restructuring ('TDR' - see difference #1 below). At Grant Thornton, we have a wealth of knowledge in forensic services and can support you with issues such as dispute resolution, fraud and insurance claims. 1.1001-3. 3 Workbook and Worksheet Object: Path and FullName | Close and Open | Loop through Books and Sheets | Sales Calculator . Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. When a loan is extinguished, unamortized fees and new creditor fees should be expensed, and new fees paid to third parties should be capitalized and amortized as debt issuance costs associated with the new debt. Transaction costs are assessed to be Nil, meaning the EIR equals the contractual interest of 5%. In 2020, debt modifications surged because of the COVID-19 pandemic, and organizations should plan on a higher-than-normal volume of modifications throughout 2021. The COVID-19 pandemic caused unprecedented levels of disruption to the global travel industry. Debt restructuring can take various legal forms including: There are two tests to check whether the modification is substantial, and these are as follows: The following flowchart sets out how to assess whether or not a debt modification is substantial: As mentioned above, if the 10% test is exceeded in the quantitative test, this results in a substantial modification. While the accounting guidance outlines separate models for modifications to term loans and revolving credit loans, it does not explain how a borrower would apply the two accounting models when a modification is made to a credit facility that contains both. 36\+E,NGDud^{@Nt yYZV8Tt41YuD**?7^yYE[z j?- Vym"rZCy)3{3G9H&fkCL B{m )! The what is the SPPI test is part of the decision model for the classification and measurement of financial assets, that started in the IFRS 9 Framework for financial assets.But you can also read it without doing the test . Should FG Corp account for the restructuring of its debt as a modification or an extinguishment? You can set the default content filter to expand search across territories. a notional repayment of existing debt with immediate re-lending of the same or a different amount with the same counterparty. Any additional fees or costs incurred on modification are also included in the gain or loss. Following world events such as the COVID-19 pandemic, Brexit, and changes to regulation and digitalisation, insurers must be alert to the challenges ahead. 2023 Grant Thornton International Ltd (GTIL) - All rights reserved. the '10 per cent' test for the purpose of derecognition. As a result the calculation will be $28,546.45 / 77 = $370.73. As part of the modification, the entity pays a CU 150,000 arrangement fee to the bank and a CU 50,000 professional service fee to its lawyers. Example 3 - a substantial loan modification example Entity X has a non-amortising loan of CU 10,000,000 from the bank. A prepayment option is a call option that gives the borrower the right to call the debt from the lender and pay the amount owed. The old debt would not be derecognized. Workable solutions to maximise your value and deliver sustainable recovery. Download my Financial Model with Debt Funding Template to follow the Excel spreadsheet and examples used. The increased digitisation of the workforce, changes in business models, globalisation, and remote working capabilities have led to a new approach to the delivery of services. Here are just a few examples borrowers should be aware of: To determine how to account for a debt modification that is not a TDR, an entity must assess whether the terms of modified debt instrument and the original debt instrument are substantially different. Follow - Fees in the '10 per cent' Test for Derecognition of Financial Liabilities . IFRS 9 contains guidance on non-substantial modifications and the accounting in such cases. 2. A reporting entity may incur costs directly related to a debt modification or exchange that crosses a reporting period. That same guidance is silent on other changes in cash flows. In addition to the 10 percent test, the borrower should apply judgment to assess whether qualitative factors indicate that a modification is substantial. In some cases, a borrower might need to apply judgment to determine if its debt arrangement is more akin to a loan participation or a loan syndication. If the intermediarys role is restricted to placing or reacquiring debt for the debtor without placing its own funds at risk, that would indicate that the intermediary is an agent. Debt-Service Coverage Ratio (DSCR): In corporate finance, the Debt-Service Coverage Ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. In a loan participation, the debtor borrows from a lead lender who then typically would issue participating interests in the loan to other third parties. Cookies that tell us how often certain content is accessed help us create better, more informative content for users. Stay informed with our latest quarterly review. A modification or an exchange of debt instruments adds a substantive conversion option or eliminates a conversion option that was substantive at the date of the modification or exchange. Step 1Considers whether there are any contingent exercise provisions, and if so, they cannot be based on an observable market or index other than those referenced to the issuer's own shares or operations. *. The following journal should be recorded: Fees paid in a non-substantial modification. After both modifications, the debt remained prepayable at any time, but a prepayment penalty was added. In terms of the 10% test, CU 976,000 is less than 10% different to the previous carrying amount, therefore this is treated as a non-substantial modification. Preparers of financial statements will need to be agile and responsive as the situation unfolds. For this example, the present value of a 10-year lease with payments of $1,000 annually, 5% escalations, and a rate inherent in the lease of 6% is $9,586. Each member firm is a separate legal entity. However, IFRS 9 clarifies in the Basis for Conclusions the IASB intends that adjustments to amortised cost in such cases should be recognised in profit or loss. Under Treas. The goal of the 10% test is to determine whether the terms of the relationship between the debtor and lender before and after a modification or exchange are substantially different. For example, if table-array spans cells B2:D7, then your lookup_value must be in column B.. Lookup_value can be a value or a reference to a cell.. table_array (required) ?f[QA9xu2Xt$PeaO]F|QY)LXuK4! The life sciences industry reaches across biotechnology, pharmaceutical and medical devices, medical technology as well as other industry sub-sectors. We provide a wide range of services to recovery and reorganisation professionals, companies and their stakeholders. hbbd```b``f`D2~ R0Dw 5LHI%0{d "` P,$92L@md` o Qg However, in certain limited fact patterns, when it is clear that a modification is done without regard to other debt outstanding with the lender, it may be appropriate for a reporting entity to exclude certain debt instruments with the lender when performing the 10% test. The cash flow assumptions that generate the smaller change would be the basis for determining whether the 10 percent threshold is met. US GAAP. For example: To determine the appropriate accounting treatment for a modification or exchange transaction arranged by a third-party intermediary, a reporting entity should determine whether the intermediary is a principal to the transaction (i.e., the investor in the bonds whose terms were modified) or the reporting entitys agent (i.e., facilitating a refunding of the old bonds on behalf of the reporting entity through issuance of new debt). Our solutions include dealing with emigration and tax mitigation on the income and capital growth of overseas assets. FG Corp restructures its term loan again in December 20X4. The debt and equity tests determine whether a return on an interest in an entity may be frankable and non-deductible (like a dividend) or may be deductible to the entity and not frankable (like interest). the net present value of the future revised cash flows, discounted at the original EIR inclusive of fees paid to the lender is CU 10,990,426 plus CU 150,000 which is equal to CU 11,140,426. for the purposes of the 10% test this is compared to CU 10,000,000 giving an 11.4% difference. FG Corp has a term loan that is prepayable without penalty with monthly interest payments. The capitalized amount, along with any existing unamortized debt discount or premium, should be amortized as an adjustment to interest expense over the remaining term of the modified debt instrument using the effective interest method. Grow workforce loyalty during the Great Resignation. X$1M[c2/TS'-$D?`z:=[kj+,zkDU&U&"B" us Financing guide 3.2. In many instances, a gain or a loss might need to be recorded in profit or loss and depending on facts and circumstances, derecognition of the financial arrangement might be required as a result of modifying the financial instrument arrangement that existed. Any changes to the terms of loan agreements, for example providing any kind of payment holidays on either principal or interest or changing interest rates, should be carefully assessed. These interests could take the legal form of either assignments or participations. IFRS 9 excel examples: illustration of application of amortised cost and effective interest method. For example, that may be the case if the intermediarys own funds are committed and those funds are not truly at risk because the intermediary is made whole by the debtor (and therefore is indemnified against loss by the debtor). Both IFRS Standards and US GAAP 3 use a 10% threshold in the quantitative assessment to determine if a debt modification is substantial. However, if you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact oryour local member firm. Because the change in cash flows in the immediate prepayment scenario is less than 10%, FG Corp should account for the changes to its debt as a modification. We apply our global audit methodology through an integrated set of software tools known as the Voyager suite. There is a general presumption that a third-party intermediary is acting as an agent; however, this presumption can be overcome. Amortization in excel is calculated using the below formula: = PMT(Rate . The fact that the debtor designated the debt as the hedged item in a fair value hedging relationship does not affect the relationship between the debtor and lender. At Grant Thornton, we aim to help you successfully read the turns of the industry and navigate this shifting landscape. Demographic, organisational and resourcing issues are radically changing the global healthcare industry. Determining if the modification is substantial applies . A third-party intermediary (e.g., an investment bank) may arrange a debt modification or exchange offer for a reporting entity. A borrower may have several debt instruments outstanding with one lender. All types of loans and other debts may also organize by using the debt calculator. Known as the "10 per cent test," the borrower should first use the original effective interest rate (EIR) to discount the cash flows under the new terms, including any fees paid net of any fees received. In the case of a significant modification, the materiality of the changes from the modification results in a deemed retirement of the existing . When applying the 10% test, it may also be appropriate to consider contingent prepayment options, such as a call option exercisable upon a change in control, or upon completion of a qualified financing. 1. Modification accounting under FASB Subtopic 470-50 is applied when the modification is deemed significant, and if not significant, the borrower . The difference is an immediate gain of CU 24,000 (CU 1,000,000-CU 976,000) which is recognised in the profit or loss. When including prepayment options in the 10% test, it is not necessary to assess the ability of the borrower to prepay the debt; the 10% test should be applied to all noncontingent contractual scenarios. Read More: How to Calculate Before Tax Cost of Debt in Excel (3 Easy Ways) 3. If this present value Financing transactions. MJ2p6x90*"U A debt modification may involve changes to embedded features (e.g., covenants, collateral, or seniority position) that have no effect on cash flows. We can support you as you navigate through accounting for the impacts of COVID-19 on your business. The initial liability has to be extinguished and a new liability recognised at its fair value as of the date of the modification. Some modifications might involve modification of terms only, whereas others might include partial satisfaction of the debt balance in connection with modification of debt terms. Should FG Corp account for the change to the provisions of its debt as a modification or an extinguishment? An entity's debt-to-equity funding is sometimes expressed as a ratio. The laws surrounding transfer pricing are becoming ever more complex, as tax affairs of multinational companies are facing scrutiny from media, regulators and the public. One of the primary purposes of the TDR analysis is to identify those situations in which a lender is working with a troubled borrower to make the best of a difficult situation. Finally, press Enter to see the annual debt service. To convert the cash flows on the new debt into the currency of the original debt, we believe there are two acceptable methods, use (1) the spot rate in effect at the debt modification or exchange date, or (2) the forward rates corresponding to each cash flow (i.e., interest payment and principal) payment date. The accounting implications differ depending on whether the borrower's or lender's accounting is being considered. However, we typically would not expect a long time lag between incurring such costs and the finalization of the debt restructuring since the costs must be directly related to the restructuring. Reg. The author of the spreadsheet and the Squawkfox blog, Kerry Taylor, paid off $17,000 in student loans over six months using this downloadable Debt Reduction Spreadsheet. FG Corp has a term loan with monthly interest payments that is prepayable without penalty. c. If the debtor directs the intermediary and the intermediary cannot independently initiate an exchange or modification of the debt instrument, that would indicate that the intermediary is an agent. 'j{?RYQwO-=m%|,d n1]C{1O^H3Lat5Ko#r0V)./[!mv The following table summarizes the terms of the original debt and new debt on the restructuring dates. One of those consequences is their ability to repay loans. debt for assessing whether a concession has been granted under the TDR guidance and in applying the 10% cash flow test under the debt modification guidance: Other modifications (unrelated to . For example, if it is probable that the contingent event that gives rise to exercise of the call option will occur, a cash flow scenario assuming exercise of the call should be performed. It cannot be assumed that the fair value equals the book value of the existing liability. The liability is restated in accordance with IFRS 9 to the net present value of future cash flows discounted at 5%, which is CU 976,000. The following table summarizes the terms of the original debt and new debt on the modification date. Thin capitalisation. (For purposes of evaluating whether an embedded conversion option was substantive on the date it was added to or eliminated from a debt instrument, see paragraphs, With respect to the conditions in (a) and (b) in the preceding paragraph, this guidance does not address modifications or exchanges of debt instruments in circumstances in which the embedded conversion option is separately accounted for as a derivative under. Step 4: Calculating and Modelling Debt Financing in Excel. When performing the 10% test, there is a general presumption that all of a lenders debt instruments should be included whether the debt was modified or not in order to accurately capture the economics of the transaction. See below. Our publication, A guide to accounting for debt modifications and restructurings, addresses the borrower's accounting for the modification, restructuring or exchange of a loan. See, For debt that has been amended more than once in a twelve-month period, the debt terms that existed just prior to the earliest amendment occurring in the prior twelve months should be used to apply the 10% test, provided modification accounting was previously applied. The rise of the Special Purpose Acquisition Company (SPAC). In June 20X4, FG Corp decides to modify its debt to lower its borrowing costs. Changes to the Outsourcing legislation, specifically when offshoring. 5 See, Interest expense is recorded based on the effective interest rate of the new debt, Collateralization features, including changes in collateral, Debt covenants or debt covenant waiver terms, The guarantor, or elimination of the guarantor, When performing the 10% test, the cash flows of the new debt instrument should include all amounts paid by the debtor to the lender (i.e., any fees paid to the lender in conjunction with the restructuring should be included in the cash flows of the new debt instrument) as a day-one cash flow, Third-party fees should not be included in the cash flow analysis, If there is a variable interest rate in any of the debt instruments, the spot interest rate on the restructuring date should be used to determine future interest payments, If either debt instrument is callable or puttable, then separate cash flow analyses should be performed assuming exercise and nonexercise of the put and call. TFCD reporting requirements are becoming mandatory. As most businesses brace for an economic downturn, tech and telecom could see new prospects. Present value of $5,000,000 at the stated interest rate of 5.5% discounted at the original effective rate of 6% for 3 years, Present value of $5,000,000 at the new stated interest rate of 5% discounted at the original effective rate of 6% for 5 years, Lender fees, undiscounted because it is a day one cash flow. Value of the right of use asset divided by total remaining useful life days. The fair value can be estimated based on the expected future cash flows of the modified liability, discounted using the interest rate at which the entity could raise debt with similar terms and conditions in the market. See, The effective interest rate of the original debt instrument should be used to calculate the present value of the cash flows on both the new and original debt instruments, A reporting entity has multiple bonds issued under a single bond offering outstanding; the bonds are held by a number of third-party investors, An investment bank and reporting entity negotiate a modification to the terms of the bonds, The investment bank buys the bonds from the third-party investors, The terms are then modified pursuant to the modification agreement, The investment bank sells the new bonds under the modified terms to third-party investors (who may, or may not, be the same as the investors in the original bonds), 3.4 Modification or exchange term loan and debt security. On 1 July 2020 the bank agrees to waive interest for two quarterly periods from 1 July 2020 to 31 December 2020. a. Sure, you could make it more complicated, but I would argue it's a waste of time in a case study or modeling test unless they specifically ask for it. At Grant Thornton, our IFRS advisers can help you navigate the complexity of financial reporting from IFRS 1 to IFRS 17 and IAS 1 to IAS 41. Climate change: planning for mandatory TCFD reporting. This is the consequence of applying IFRS 9, according to which the liability should be restated to its revised future cash flows discounted by the original EIR. A company's determination of the appropriate accounting for a debt transaction is often time-consuming and complex. Once the debt restructuring is completed, the fees should be accounted for using the guidance in, On a consolidated basis, the debt of a consolidated subsidiary represents debt of the parent. To determine whether a modification of terms is substantial, a borrower performs a quantitative assessment - i.e. %PDF-1.4 % Grant Thornton can help you capitalise on opportunities to unlock your potential for growth. The debt calculator excel template also helps you to create and manage the payment schedules of the employees at the end of the payment period. 3. Modification or extinguishment - Modifying the effective interest expense recognized in the statement of . This rate would normally equate to the market rate of interest used in the fair value calculation (see below). Can tech and telecom leverage economic headwinds. Now, we have to calculate the EMI amount for the same. Examples of financial assets are investments in equity instruments, investments in debt instruments, trade receivables, cash and cash equivalents, derivative financial assets. Under this guidance, a modification would quantitatively be more than minor if the present value of the cash flows under the terms of the new debt instrument is at least 10% different from the present value of the remaining cash flows under the terms of the original debt instrument. calculating a new EIR for the modified liability, that is then used in future periods. Its credit rating has improved since the debt was issued in June 20X3. Ok so the financial instrument to classify and measure is a debt instrument and the business model is hold to collect. With a finance lease under ASC 842, the calculation methodology to calculate the amortization rate post modification follows the same methodology at initial recognition. Our Women in Business 2022 report shows that life sciences companies in line with other mid-market businesses are taking deliberate, necessary action to create more inclusive working practices and giving female talent access to senior positions in greater numbers than ever before. Menu. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one anothers acts or omissions. As part of this modification the entity: The net present value of the future cash flows, (discounted at the original EIR inclusive of fees paid to the lender) is CU 976,000 plus CU 10,000 = CU 986,000. b. Get modification 10 signed right from your smartphone using these six tips: BIO 123. lab. 1 This became effective in the third quarter of 2011 for public banks and in the first quarter of 2012 for calendar year-end nonpublic banks. For example, a ratio of 1.5:1 means that for every $3 of debt, the entity is funded by $2 of equity. Where the counterparty bank is paid an amount which is described as a fee, it would appear contradictory to IFRS 9 to amortise this. Examples of this type of modification include issuing new debt in different currency from old debt, or equity instrument embedded in the new debt. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. off course? lab. b. FG Corp has a term loan that is not prepayable. However, in some circumstances, the nature of the modification can give rise to several complexities when applying the TDR guidance. Once you have finished answering the questions, open the Excel Test Questions and Answers page to see the full answers. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS), IFRS - COVID 19: Going concern considerations, COVID-19 accounting considerations - Government grants, Navigating IFRS in view of the Coronavirus. The difference of CU 1,877,006 between this initial fair value of the new liability and the carrying amount of the liability derecognised (CU 10,000,000) is recognised as a gain upon extinguishment. The PSR aims to reduce barriers to digital payments but many remain hesitant. In that case, the reporting entity should perform the 10% test based on the cash flows of the debt held by the third-party intermediary before and after the modification or exchange. In addition, these amendments also clarify that when the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. In the context of a loan modification, lenders and servicers calculate the NPV to evaluate whether it is more cost effective to modify a loan or foreclose. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. instructions how to enable JavaScript in your web browser, Supporting you to navigate the impact of COVID-19, Annual Improvements to IFRS Standards 2018-2020 [ 231 kb ], an amendment to the terms of a debt instrument (eg the amounts and timing of payments of interest and principal) or. June 20X4, FG Corp decides to modify its debt to lower its borrowing costs effective. Debt Calculator formula: = PMT ( rate results in a non-substantial modification of 5.! Is not prepayable or loss remain hesitant payments but many remain hesitant that third-party. The basis for determining whether the 10 percent threshold is met Before tax cost of in. Acquisition Company ( SPAC ) with immediate re-lending of the right of use asset divided total! Corp restructures its term loan with monthly interest payments that is prepayable without penalty the accounting in such.! Can be overcome same guidance is silent on other changes in cash flows incurred on modification are included! Would normally equate to the 10 percent test, the borrower should judgment. Spac ) radically changing the global travel industry an agent ; however, in some,. It can not be used as a modification or extinguishment - Modifying the effective interest recognized... The change to the 10 percent threshold is met s debt-to-equity Funding is sometimes expressed as a modification substantial. Are radically changing the global travel industry reporting period the life sciences industry reaches across biotechnology pharmaceutical. Shifting landscape for consultation with professional advisors, in some circumstances, the debt prepayable... Calculating and Modelling debt Financing in Excel a wide range of services to recovery reorganisation... 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