Debt Restructuring
➔ where the creditor, for economic or legal
reasons related to the debtor's financial
difficulties, grants to the debtor concession
that would not otherwise be granted in a
normal business relationship.
Concession may stem from:
a. an agreement between the creditor
and debtor
b. imposed by law or a court
★ Creditors part = loss
★ Debtors part = gain
3 Types of debt restructuring
1. ASSET SWAP
➔ transfer by the debtor to the creditor of any
non-cash asset
in full payment of an
obligation
➔ Also known as “dacion en pago”
❖ when a mortgaged property is offered
by the debtor in full settlement of the
debt
➔ PFRS 9, paragraph 3.3.1: treated as a
derecognition of a financial liability or
extinguishment of an obligation
➔ PFRS 9, Paragraph 3.3.3: provides that the
difference between the carrying amount of the
financial liability and the consideration given
shall be recognized in profit or loss.
USA GAAP
★ asset swap is recorded as if two transactions
have taken place, namely, the sale of the asset
and the extinguishment of the liability.
Two gains or losses are recognized:
1. Gain/loss on exchange = Fair Value (FV) of
the asset - CA of the asset
2. Gain/loss from restructuring = CA of the
liability - FV of the asset
Recognition of gain or loss → based on the balance
of the obligation including accrued interest and other
charges.
● GAIN = CA or balance of the obligation
(outstanding face amount + accrued interest) >
CA of the asset given
● LOSS = CA or balance of the obligation
(outstanding face amount + accrued interest) <
CA of the asset given
Computation:
1. Compute total liability
2. Subtract the carrying amount (CA) of the
asset transferred to the total liability to get the
gain /loss on extinguishment of debt.
2. EQUITY SWAP
➔ the issuance of share capital by the debtor to
the creditor in full or partial payment or an
obligation
➔ Also known as “debt-to-equity swap”
Initial Measurement (order of priority):
Note: The difference between the carrying amount
of the financial liability and the initial
measurement of the equity instruments issued
shall be recognized in profit or loss:
CA of financial liability settled
xx
Less: Measurement of equity inst. used (xx)
Gain (loss) on debt restructuring
xx
Recognition of share premium:
Measurement of equity inst. issued
Less: Total par/stated value of shares issued
Share Premium
xx
xx
xx
3. MODIFICATION OF TERMS
➔ a mode of debt restructuring involving
modifications or changes in the terms of the
contract of debt.
❖ Interest concession
● Reduction of interest rate
● Forgiveness of unpaid interest
● Moratorium on interest
❖ Maturity value concession
● Extension of the maturity date
● Reduction of the principal
amount
2 Types of modification:
❖ Substantial
➔ Accounted for as an extinguishment of
the old financial liability and the
recognition of a new financial liability.
Computation:
1. Do the 10% Test:
PV of Principal
Principal x original EIR
PV of interest
(Principal x new interest
rate) original EIR
PV of modified terms
CA of old liab.
Less: PV of modified terms
@ original EIR
Gain (loss) on modification
Divide by: CA of liab.
Percentage of gain on CA
2.
❖ Non-substantial
xx
xx
xx
xx
(xx)
xx
÷ xx
xx