Debt Restructuring o Carrying Amount (Liability) = Note Payable +

- Creditor, for economic or legal reasons related to the Accrued Interest Payable
debtor’s financial difficulties, grants to the debtor Journal entries:
concession that would not otherwise be granted in a Note Payable 2,000,000
normal business relationship. Accrued interest payable 400,000
- Concession either stems from: Land 1,500,000
o Agreement between the creditor and debtor Gain on exchange 700,000
o Imposed by law or a court Gain on debt restructuring 200,000
- Objective of the creditor:
o Make of the best of bad situation Gain on extinguishment
o Maximize recovery of investment o Under IFRS, includes both the gain on exchange and gain on
debt restructuring under USA GAAP
THREE TYPES OF DEBT RESTRUCTURING
1. Asset Swap Dacion en pago accounting
2. Equity Swap - Arises when a mortgaged property is offered by the debtor
3. Modification of terms of the old liability in full settlement of the debt.
- Transaction shall be accounted for as an asset swap from
ASSET SWAP debt restructuring.
- Transfer by the debtor to the creditor of any asset, such as - Requires recognition of gain or loss based on the balance of
real estate, inventory, accounts receivable and investment the obligation including accrued interest and other charges.
in full payment of an obligation.
PFRS 9, paragraph 3.3.1 Computation:
- Asset swap is treated as a derecognition of a financial Gain on extinguishment of debt
liability or extinguishment of an obligation. o Balance of the obligation is more than the carrying amount
Paragraph 3.3.3 of the property mortgaged.
- The difference between the carrying amount of the Loss on extinguishment
financial liability and the consideration given shall be o Balance of the obligation is less than the carrying amount
recognized in profit or loss. of property mortgaged.
Illustration:
An entity provided the following balances at year-end: Illustration:
Notes Payable 2,000,000 Land costing 500,000 and building costing 4,000,000 with
Accrued interest payable 400,000 accumulated depreciation of 800,000, were mortgaged to secure a
At year-end, the entity transferred to the creditor land with carrying bank loan of 3,000,000
amount of 1,500,000 and fair value of 2,200,000.
Face amount of the loan 3,000,000
Note Payable 2,000,000 Accrued interest payable 200,000
Accrued interest payable 400,000 Bank service charges 50,000

Total Liability 2,400,000 Subsequently, the land and building were given to the bank in full
Carrying amount of land (1,500,000) payment of the liability

Gain on extinguishment of debt 900,000 Journal entries & Computation:

Mortgage payable 3,000,000
Journal entries: Accrued interest payable 200,000
Note Payable 2,000,000 Bank service charges 50,000
Accrued interest payable 400,000 Loss on extinguishment of debt 450,000
Land 1,500,000 Accumulated Depreciation 800,000
Gain on extinguishment 900,000 Land 500,000
Building 4,000,000
USA GAAP on asset swap
- recorded as if two transactions have taken place, namely Total Liability 3,250,000
the sale of the asset and the extinguishment of the liability. Carrying amount of land and building (3,700,000)
- Two gains and losses are recognized. (500,000 + 3,200,000)
Loss on extinguishment of debt (450,000)
Computation:
Gain or loss on exchange EQUITY SWAP
o Fair Value (Asset) – Carrying Amount (Asset) - Transaction whereby a debtor and creditor may
Gain or loss from restructuring renegotiate the terms of a financial liability with the result
o Carrying Amount (Liability) – Fair Value (Asset)
 that the liability is fully or partially extinguished by the To get Share Premium:
debtor issuing equity instruments to the creditor. Fair value of bonds payable 4,700,000
- Issuance of share capital by the debtor to the creditor in Par value of shares issued (2,000,000)
full or partial payment of an obligation. Share Premium 2,700,000

IFRIC 19, the equity instruments issued to extinguish a financial To get Gain on Extinguishment of debt:
liability shall be measured at the following amounts in the order of Bonds Payable 5,000,000
priority: Accrued interest payable 500,000
a. Fair Value of equity instruments issued Carrying amount of bonds payable 5,500,000
b. Fair Value of liability extinguished Fair value of bonds payable (4,700,000)
c. Carrying amount of liability extinguished Gain on extinguishment of debt 800,000

Computation: c. Carrying amount of bonds payable is used

Gain or Loss on extinguishment Bonds Payable 5,000,000
o Carrying amount of the financial liability - initial Accrued interest payable 500,000
measurement of the equity instruments Share Capital 2,000,000
Share Premium 3,500,000
The gain or loss on extinguishment of a financial liability by issuing
equity shares shall be reported as a separate line item in the income To get Share Premium:
statement. Carrying amount of bonds payable 5,500,000
Par value of shares issued (2,000,000)
Illustration: Share Premium 3,500,000
An entity showed the following data at year-end:
Bonds Payable 5,000,000 If carrying amount of the liability is used, there is no gain or loss on
Accrued interest payable 500,000 extinguishment.

The entity issued share capital with a total par value of P2,000,000 MODIFICATION OF TERMS
and fair value of P4,500,000 in full settlement of the bonds payable 1) Interest concession
and accrued interest payable. a) Reduction of interest rate
b) Forgiveness of unpaid interest
On the other hand, the fair value of the bonds payable is P4,700,000. c) Moratorium on interest

Journal entries & Computation: 2) Maturity value

a. Fair value of shares issued is used a) Concession may involve an extension of the maturity date
Bonds Payable 5,000,000 b) Reduction of the principal amount
Accrued interest payable 500,000
Share Capital 2,000,000 PFRS 9, paragraph 3.3.2
Share Premium 2,500,000 - Substantial modification of terms of an existing financial
Gain on extinguishment of debt 1,000,000 liability shall be accounted for as extinguishment of the old
financial liability and the recognition of the new financial
To get Share Premium: liability.
Fair value of shares issued 4,500,000 Application Guidance B3.6 of PFRS 9,
Par value of shares issued (2,000,000) - There is substantial gain or loss on modification of terms if
Share Premium 2,500,000 the gain or loss on modification is at least 10% of the old
financial liability.
To get Gain on Extinguishment of debt:
Bonds Payable 5,000,000 Computation:
Accrued interest payable 500,000 - Gain or loss on modification
Carrying amount of bonds payable 5,500,000 o Carrying amount (Old liability) – Present value
Fair value of shares issued (4,500,000) (New liability)
Gain on extinguishment of debt 1,000,000 o Including any fees paid, discounted at the original
effective interest rate
b. Fair value of bonds payable is used
Bonds Payable 5,000,000 The new liability is discounted using the original effective rate only
Accrued interest payable 500,000 for purposes of determining whether the gain or loss on modification
Share Capital 2,000,000 satisfies the 10% test.
Share Premium 2,700,000
Gain on extinguishment of debt 800,000
If the old liability is determined to be substantially modified, the new Fair value of the new note payable
liability shall be measured at fair value or present value using the - Since there is substantial modification of terms, the new
prevailing market rate of interest. note payable shall be measured at fair value.
- The fair value is equal to the present value of the new note
- Gain or loss on extinguishment payable using the market rate of interest.
o Carrying amount (Old liability) – Fair
Value/Present Value (New liability) at market rate Journal entries & Computation:
of interest PV of Principal (4,000,000 * 0.636) 2,544,000
o Any costs incurred because of a substantial PV of Interest payments (400,000 * 3.037) 1,214,800
modification of terms shall be deducted from any Present Value of new note payable 3,758,800
gain on extinguishment or added to the loss on Principal amount (4,000,000)
extinguishment of the old financial liability. Present value of new note payable 14% 241,200

Illustration: Recognized as Gain or Loss on Extinguishment of a financial liability.

On January 1, 2022, an entry showed the following Note payable – old 5,000,000
Bonds Payable 5,000,000 Accrued interest payable 700,000
Accrued interest payable 700,000 Carrying amount of the old liability 5,700,000
Present value of new note payable 12% 3,758,800
The entity is granted by the creditor the following concessions on Gain on extinguishment 1,941,200
January 1, 2022: Arrangement fee (150,000)
a) The accrued interest of 700,000 is forgiven. Net gain on modification 1,791,200
b) The principal obligation is reduced to 4,000,000
c) The new interest rate is 10% payable every December 31 1. To record the extinguishment of the old note payable:
d) The new date of maturity is December 31, 2025 Note payable - old 5,000,000
e) The market rate of interest is 12% for similar liability Accrued interest payable 700,000
f) The entity paid 150,000 to the creditor as arrangement fee Discount on new note payable 500,000
for the restructuring. Note payable - new 4,000,000
Gain on extinguishment of debt 1,791,200
Initially, this requires computation of the present value of the new Cash (arrangement fee) 150,000
note payable using the 14% original effective rate in applying the 2. To record the interest payment on the new note payable for 2022:
“10% test” of determining substantial modification of terms. Interest expense (10% * 4,000,000) 400,000
Cash 400,000
The present value of 1 at 14% for 4 periods is 0.592 and the present 3. To amortize the discount on new note payable for 2022:
value of an ordinary annuity of 1 at 14% for 4 periods is 2.914. Interest expense (10% * 4,000,000) 51,056
Cash 51,056
Journal entries & Computation:
PV of Principal (4,000,000 * 0.592) 2,368,000 Table of amortization of discount
PV of Interest payments (400,000 * 2.914) 1,165,600 Date Interest Interest Discount Carrying
Present Value of new note payable 3,533,000 paid expense amortization amount
(10%) (12%)
New annual interest payment (10% * 4,000,000) 400,000 1/1/22 3,758,800
12/31/22 400,000 451,056 51,056 3,809,856
Note payable – old 5,000,000 12/31/23 400,000 457,183 57,183 3,867,039
Accrued interest payable 700,000 12/31/24 400,000 464,045 64,045 3,931,084
12/31/25 400,000 468,916 68,916 4,000,000
Carrying amount of the old liability 5,700,000
Present value of new note payable 14% 3,533,600 No substantial modification
Illustration:
Gain on modification 2,166,400 An entity had negotiated a restructuring of its 8% P6,000,000 note
Arrangement fee (150,000) payable on December 31, 2022. There is no accrued interest on the
note. The creditor has reduced the principal obligation from
Net gain on modification 2,016,400 P6,000,000 to P5,000,000 and extended the maturity to 3 years on
December 31, 2025.
There is a substantial modification of terms accounted for as
extinguishment of the old note payable and recognition of the new However, the new interest rate is 12% payable annually every
note payable. December 31. The entity paid P120,000 to the creditor as an
- Net gain on modification greater than 10% carrying amount arrangement fee. The new effective rate is 9% after considering the
of the old note payable of 5,700,000 arrangement fee.
The present value of 1 at 8% for three periods is 0.79 and the present o Carrying amount * new effective rate after
value of an ordinary of 1 at 8% for the three periods is 2.58. considering arrangement fee
- Premium amortization
PV of Principal (5,000,000 * 0.79) 3,950,000 o Interest paid – Interest expense
PV Interest payments (5,000,000 * 12% * 2.58) (1,548,000)
Present Value of new note payable 5,498,000
Carrying amount of the old liability 6,000,000
Present value of new note payable 12% 5,498,000
Gain on modification 502,000
Arrangement fee (120,000)
Net gain or modification 382,000

The net gain of P382,000 is less than 10% of the carrying amount of
old liability of P6,000,000. Thus, there is no substantial modification
of terms.

Paragraph B5. 4.6, the IASB clarified that any gain or loss on
modification shall be recognized even if there is no substantial
modification of terms.
o Only the gain on modification is recorded.
o The arrangement fee or any modification cost is included in
the measurement of the new liability.

Present value of new note payable 5,498,000

Arrangement fee (120,000)
Adjusted present value of new note payable 5,378,000
Face amount of new note payable (5,000,000)
Premium on note payable 378,000

The prevailing market rate of interest is ignored if there is no

substantial modification of terms because the old liability is simply
continued.

The new effective rate must be computed since the arrangement fee
is included in the measurement of the new liability.

Journal entries & Computation:

1. To record the modified liability on December 31, 2022:
Note Payable 1,000,000
Premium on note payable 378,000
Gain on modification 502,000
Cash (arrangement fee) 120,000
2. To record the annual interest payment for 2023:
Interest expense (12% * 5,000,000) 600,000
Cash 600,000
3. To amortize the premium on note payable 2023:
Premium on note payable 115,980
Cash 115,980

Date Interest Interest Discount Carrying

paid expense amortization amount
12/31/22 5,378,000
12/31/23 600,000 484,020 115,980 5,262,020
12/31/24 600,000 473,582 126,418 5,135,602
12/31/25 600,000 464,398 135,602 5,000,000

- Interest paid
o Face amount * modified stated rate
- Interest expense