We understand the commitment and scrutiny within this sector and will work with you to meet these challenges. The COVID-19 pandemic caused unprecedented levels of disruption to the global travel industry. As this test is comparing the extent of the change between borrower and lender, the reference to fees in this context should refer to the fees between borrower and lender (eg would not normally include fees paid a lawyer). In the case of a significant modification, the materiality of the changes from the modification results in a deemed retirement of the existing . Equity derivatives need to be indexed to the issuer's own shares to be classified as equity.The assessment follows a two-step approach under ASC 815-40-15. Determining if the modification is substantial applies . Reg. Each member firm is a separate legal entity. IFRS 9 excel examples: illustration of application of amortised cost and effective interest method. Calculate Accumulated Savings After a Certain Period. "BestCase" Loan Modification Where the borrower meets the HAMP eligibility criteria, use HAMP's program limits to test your "BestCase" loan modification, by finding the lowest allowable monthly payment using a mortgage calculator or MS Excel formula. Assume, you have $1,000 in your bank account. Its credit rating has improved since the debt was issued in December 20X3. If you have questions, please contact your supervisory office, the Office of the Chief Accountant at (202) 649-6280, or the Credit and Market Risk Department at (202) 649-6360. We provide a wide range of services to recovery and reorganisation professionals, companies and their stakeholders. To get started, copy the table below and paste it into a new Excel spreadsheet. These interests could take the legal form of either assignments or participations. See, If the lender also holds equity securities, consider whether the gain should be recorded in equity. Cookies that tell us how often certain content is accessed help us create better, more informative content for users. It cannot be assumed that the fair value equals the book value of the existing liability. Tax policies are constantly evolving and there are a number of complex changes on the horizon that could significantly affect your business. In order to properly manage the liquidity and value of the debtor, it is important to consider the tax ramifications before any restructuring. When discounting the cash flows of the restructured Tranche A, we believe a weighted average effective interest rate based on the original Tranche A and Tranche B interest rates should be used. 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. *. You'll receive professionally verified results and insights that help you grow. a. Having a robust process of quality control is one of the most effective ways to guarantee we deliver high-quality services to our clients. One effect of extinguishment accounting is the accelerated expensing of transaction costs. 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). reduces additional paid-in capital under ASC 340-10-S99-1. Capitalize and amortize as part of the effective yield, Capitalize and amortize as a debt issuance cost. Our teams have in-depth knowledge of the relationship between domestic and international tax laws. All types of loans and other debts may also organize by using the debt calculator. 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. Borrowers also need to consider if a substantive conversion feature is added or eliminated in the modification. 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 . We help businesses navigate todays changing private equity landscape, ensuring that you can respond to ever-changing regulations and investor demands. Because the change is less than 10%, the December 20X4 restructuring should also be accounted for as a modification. 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. Time to review funding and financing arrangements? 38 0 obj <> endobj the '10 per cent' test for the purpose of derecognition. 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. However, if you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact oryour local member firm. After both modifications, the debt remained prepayable at any time, but a prepayment penalty was added. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. 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. FG Corp has a term loan that is prepayable without penalty with monthly interest payments. The rise of the Special Purpose Acquisition Company (SPAC). Under IFRS 9, the gain of $85,000 would have been recognized in profit and loss at January 1, 2016. Sign in with LinkedIn to save articles to your bookmarks. a notional repayment of existing debt with immediate re-lending of the same or a different amount with the same counterparty. What are the shortcut keys for AutoSum? 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). 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. An increase in principal should be treated as a day-one cash inflow in the cash flows of the new debt instrument, and a decrease should be treated as a day-one cash outflow. Now, we have to calculate the EMI amount for the same. Our trusted teams can prepare corporate tax files and ruling requests, support you with deferrals, accounting procedures and legitimate tax benefits. In other words, they believe it is not possible to separately identify the prepayment amount. A modification or an exchange affects the terms of an embedded conversion option, from which the change in the fair value of the embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) is at least 10 percent of the carrying amount of the original debt instrument immediately before the modification or exchange. Amortization in excel is calculated using the below formula: = PMT(Rate . However, reporting entities should consider whether any fees paid in the restructuring should be allocated to the delayed draw commitment. See. 5. Modification accounting under FASB Subtopic 470-50 is applied when the modification is deemed significant, and if not significant, the borrower . A thinly capitalised entity is one whose assets are funded by a high level of debt and relatively little equity. There is no guidance on how to account for a refinancing of publicly traded debt securities that does not involve an exchange or modification offer (i.e., when a reporting entity issues new debt securities to investors, which potentially may include holders of the issuers existing debt securities, and uses the proceeds to pay off existing publicly-traded debt securities potentially held by the same investors). *. The COVID-19 global pandemic has resulted in economic consequences that many reporting entities may not have had to previously consider. This is the . Borrowers need to determine the impact of these changes and then apply the guidance set out in IFRS 9 Financial Instruments to determine whether the change is a modification (as defined in IFRS 9). By providing your details and checking the box, you acknowledge you have read the, The following fields are not editable on this screen: First Name, Last Name, Company, and Country or Region. 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. 1.1001-3. %PDF-1.4 % All rights reserved. Globalisation and company growth ambitions are driving an increase in M&A activity worldwide. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. The cash flow assumptions that generate the smaller change would be the basis for determining whether the 10 percent threshold is met. Therefore, the following journal entries should be recorded: The fair value of the modified liability will usually need to be estimated. Should FG Corp account for the change to the provisions of its debt as a modification or an extinguishment? Given that lack of guidance, here are some items borrowers should consider when analyzing the modification of a credit facility that involves both term debt and a revolving line of credit: In October 2020, the FASB issued a Staff Educational Paper that provides a summary of a borrowers accounting for debt modifications. Its credit rating has improved since the debt was issued in June 20X3. 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. cr,; 2N+!>@Ko6m?jRhP TFCD reporting requirements are becoming mandatory. 1. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. One form of modification that has become commonplace during the pandemic is modifications to debt agreements. FG Corp would calculate the change in cash flows as follows: Present value of cash flows on original debt. For example, one entity may recognize an expense, while another may record a dividend for an economically similar warrant modification. 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. Home; About; Maps; FAQ; debt modification 10% test example excel A third-party intermediary (e.g., an investment bank) may arrange a debt modification or exchange offer for a reporting entity. Grow workforce loyalty during the Great Resignation. Our progressive thinkers offer services to help create, protect and transform value today, so you have opportunity to thrive tomorrow. Entity X has a non-amortising loan of CU 1,000,000 from a bank. The following journal should be recorded: Fees paid in a non-substantial modification. Because FG Corps credit rating has improved, this restructuring is not considered a troubled debt restructuring. Because the prepayment scenario resulted in modification accounting, it is not necessary to prepare a cash flow scenario that does not assume prepayment. Which of the following is the correct formula to calculate the weighted average score in cell C8 as shown below? The life sciences industry reaches across biotechnology, pharmaceutical and medical devices, medical technology as well as other industry sub-sectors. Example 3 - a substantial loan modification example Entity X has a non-amortising loan of CU 10,000,000 from the bank. Uneven is how we described the impact of COVID-19 on different mid-market industries both when assessing initial destruction in H1 2020 and the early recovery in H2 2020. IFRS 9 requires the amortised cost of the liability to be recalculated by discounting the modified contractual cash flows (excluding costs and fees) using the original effective interest rate. Here are the For example, cookies allow us to manage registrations, meaning you can watch meetings and submit comment letters. 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. Finally, press Enter to see the annual debt service. In addition, the contractual rate of interest is increased to 8% starting 1 January 2021. The first step is to determine whether the "10% test" is met. This is less than 10%, so the loan modification (waiver of 6 months of interest) considered to be a non-substantial modification. Under ASC 470-50, modifications and exchanges not considered TDRs are accounted for as either: Under U.S. GAAP, the terms would be considered substantially different when the present value of the cash flows under the terms of the modified debt instrument is at least 10% different from the present value of the remaining cash flows under the original debt instrument. 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