A troubled debt restructuring is a process whereby creditors grant concessions to the debtor that they would not consider otherwise. However, both the debtor and creditor are faced with a difficult situation, and a restructuring offers the creditor the best opportunity to recover the debt, as compared to non-restructuring alternatives.Troubled debt re-structuring generally take several forms. The most common forms of restructuring, along with the appropriate debtor accounting, are summarized as follows:
Transfer of Assets in Full Settlement:
The debtor transfers assets, such as third-party receivables, real estate, and other assets, to the creditors in order to satisfy the debt either totally or partially. The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt, including related accrued interest, premiums, etc., and the fair value of the transferred assets. The restructuring gain should be classified as an extraordinary item, if material. The difference between the book value of assets transferred to the debtor and their fair value results in a gain or loss, which is not part of the gain on restructuring.
The debtor transfers assets, such as third-party receivables, real estate, and other assets, to the creditors in order to satisfy the debt either totally or partially. The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt, including related accrued interest, premiums, etc., and the fair value of the transferred assets. The restructuring gain should be classified as an extraordinary item, if material. The difference between the book value of assets transferred to the debtor and their fair value results in a gain or loss, which is not part of the gain on restructuring.
Granting an Equity Interest:
Excluding existing terms for converting debt into equity (e.g., convertible debt), an equity interest in the company is granted to the creditor in order to satisfy the debt either totally or partially.The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt and the fair value of the equity interest. The restructuring gain should be classified as an extraordinary item, if material.
Excluding existing terms for converting debt into equity (e.g., convertible debt), an equity interest in the company is granted to the creditor in order to satisfy the debt either totally or partially.The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt and the fair value of the equity interest. The restructuring gain should be classified as an extraordinary item, if material.
Granting an Equity Interest:
Excluding existing terms for converting debt into equity (e.g., convertible debt), an equity interest in the company is granted to the creditor in order to satisfy the debt either totally or partially. The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt and the fair value of the equity interest. The restructuring gain should be classified as an extraordinary item, if material.
Excluding existing terms for converting debt into equity (e.g., convertible debt), an equity interest in the company is granted to the creditor in order to satisfy the debt either totally or partially. The debtor records a gain on restructuring measured by the excess of the carrying basis of the debt and the fair value of the equity interest. The restructuring gain should be classified as an extraordinary item, if material.
Combination Restructurings:
A restructuring may involve some combination of the above restructuring features.The accounting for a combination restructuring is the same as discussed above except that first, the carrying basis of the debt should be reduced by the fair market value of assets transferred and/or equity interests granted. This step does not result in the recognition of a gain on restructuring. Second, the remaining carrying basis of the debt is compared against the “modification of terms” portion of the restructuring and accounted for accordingly.
A restructuring may involve some combination of the above restructuring features.The accounting for a combination restructuring is the same as discussed above except that first, the carrying basis of the debt should be reduced by the fair market value of assets transferred and/or equity interests granted. This step does not result in the recognition of a gain on restructuring. Second, the remaining carrying basis of the debt is compared against the “modification of terms” portion of the restructuring and accounted for accordingly.