amount of the original debt. See. 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. For example, one entity may recognize an expense, while another may record a dividend for an economically similar warrant modification. 2. 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. Financing transactions. Which of the following is the correct formula to calculate the weighted average score in cell C8 as shown below? Through our global organisation of member firms, we support both companies and individuals, providing insightful solutions to minimise the tax burden for both parties. All rights reserved. On 1 July 2020, the bank agrees to waive interest for a six month period from 1 July 2020 to 31 December 2020. 58 0 obj <>/Encrypt 39 0 R/Filter/FlateDecode/ID[<166C957FB5B7BD93921AD7FDCBCC65C8><1A4BAA685CBF584280F6006AFDBD199C>]/Index[38 43]/Info 37 0 R/Length 104/Prev 120827/Root 40 0 R/Size 81/Type/XRef/W[1 3 1]>>stream TFCD reporting requirements are becoming mandatory. Such an exchange or modification is considered to have occurred when the present value of the cash flows of the new debt instrument vary by at least 10% from the present value of the original debt instrument. In syndications, separate debt instruments exist between each lender and the borrower, even when one lender has been identified as the lead lender. Modifications to these non-cash terms would not impact the cash flows used for the 10% test. 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. 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. is $8,316,615 which is more than 10% different to the carrying amount of the loan. Description. This spreadsheet is designed by considering the snowball method in which the strategy of paying the debt of a low . 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. 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. This is because the unamortised portion of any transaction costs deducted from the original loan is included in the determination of the gain or loss on extinguishment. All calculations presented in this example can be downloaded in an excel file. Example FG 3-5 illustrates the application of the 10% test when debt has been restructured multiple times within a twelve-month period and the debt was prepayable at any time both prior to and after any modification. This series of insights will help you prepare. If a restructuring is accounted for as a debt extinguishment, then the fair value of any non-cash consideration is associated with the extinguishment of the original debt instrument (i.e., treated as an amount paid to extinguish the debt) and included in determining the extinguishment gain or loss. Examples of this type of modification include issuing new debt in different currency from old debt, or equity instrument embedded in the new debt. Excel will provide the beginning liability balance and your amortization schedule will be completed automatically as a result of the formulas you input. Crowe accounting professionals have deep expertise in the accounting for debt modifications, including those that represent troubled debt restructurings. 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. Argument name. The first indicator in, If the third-party intermediary acts as an agent, the reporting entity has refinanced the original debt with new debt to other third-party investors and the reporting entity should consider the guidance in. The accounting implications differ depending on whether the borrower's or lender's accounting is being considered. 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. The intermediary may be acting as principal if the placement is done on a firmly committed basis, which requires the intermediary to hold any debt that it is unable to sell to others. Please seewww.pwc.com/structurefor further details. However, under US GAAP, the 'gating' question is whether the modification is a troubled debt restructuring ('TDR' - see difference #1 below). Using our finely tuned local knowledge, teams from our global organisation of member firms help you understand and comply with often complex and time-consuming regulations. Follow - Fees in the '10 per cent' Test for Derecognition of Financial Liabilities . Because the change in present value of cash flows is less than 10%, the change is considered a modification. Troubled debt restructuring - Changing the amount of interest expense recognized in the statement of operations prospectively or recognizing a gain in the statement of operations using the basic extinguishment model (see below). FG Corp restructures its term loan again in December 20X4. Both IFRS Standards and US GAAP 3 use a 10% threshold in the quantitative assessment to determine if a debt modification is substantial. Example 1 - a non-substantial debt modification, Example 2 - a non-substantial modification example inclusive of fees, Example 3 - a substantial loan modification example. Once you have finished answering the questions, open the Excel Test Questions and Answers page to see the full answers. Step 4: Calculating and Modelling Debt Financing in Excel. Borrowers also need to consider if a substantive conversion feature is added or eliminated in the modification. |!uoSC$|{e Following world events such as the COVID-19 pandemic, Brexit, and changes to regulation and digitalisation, insurers must be alert to the challenges ahead. 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. endstream endobj startxref Qualitative test: IFRS 9 allows consideration of qualitative factors which may also indicate a substantial modification. For the purposes of the 10% test this is compared to CU 1,000,000 giving only a 1.4% difference. Thin capitalisation. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. Assume, you have $1,000 in your bank account. Some borrowers continue to defer the unamortized debt issuance costs when they pay down a portion of their debt in connection with a modification (which is accounted for as a modification), based on the view that the prepayment is factored into the terms agreed to on the modified debt. To determine whether a modification of terms is substantial, a borrower performs a quantitative assessment - i.e. IFRS 9 contains guidance on non-substantial modifications and the accounting in such cases. 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. 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. FG Corp has a term loan with monthly interest payments that is prepayable without penalty. Climate change: planning for mandatory TCFD reporting. 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. However, we believe fees paid to the counterparty bank that represent part of the cash flows should normally be accounted for in the same way as other as other cash flows on the debt instrument, which would lead to such fees being part of the gain or loss rather than amortised over the remaining life of the loan. Our services can strengthen your business and stakeholders' confidence. Other reporting entities have a policy of expensing the portion of the unamortized costs associated with the partial pay down based on the guidance in, This policy choice is not available when the original debt does not have an existing prepayment option or for a prepayment of debt made outside of a debt modification. GTIL and the member firms are not a worldwide partnership. lookup_value (required). endstream endobj 43 0 obj <>stream If the reporting entity had not finalized its debt restructuring prior to issuing the financial statements and the reporting entity did not have enough information to determine if the transaction will be a modification or extinguishment in the subsequent period, the legal fees should be capitalized as a prepaid expense in the period incurred. In order to properly manage the liquidity and value of the debtor, it is important to consider the tax ramifications before any restructuring. Our business consulting services can help you improve your operational performance and productivity, adding value throughout your growth life cycle. If an interest passes one or more items of the equity test table, then, subject to the overriding operation of the debt test, it will be an . 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. 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. In addition to the 10 percent test, the borrower should apply judgment to assess whether qualitative factors indicate that a modification is substantial. If you're curious how the XNPV calculation is different from the NPV or PV function in excel, refer here. *. Changes to the Outsourcing legislation, specifically when offshoring. A borrower may have several debt instruments outstanding with one lender. A third-party intermediary (e.g., an investment bank) may arrange a debt modification or exchange offer for a reporting entity. Preparers of financial statements will need to be agile and responsive as the situation unfolds. 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. If the costs associated with each transaction are not separately identifiable, the reporting entity should allocate the total costs incurred between the issuance of the new debt and the reacquisition of the existing debt, on a rational basis. As organisations become increasingly dependent on digital technology, the opportunities for cyber criminals continue to grow. . In response, some lenders have agreed to changing the borrowing terms or providing waivers or modifications to debt covenant arrangements. Repaying an existing debt obligation and contemporaneously issuing new debt to the same lender; although this may be a legal extinguishment, the transaction . Our trusted teams can prepare corporate tax files and ruling requests, support you with deferrals, accounting procedures and legitimate tax benefits. 5. The Discount Rate is around 4.0% with this approach (assuming ~90% Equity and ~10% Debt for Walmart), close to the 4.37% in the full model. In a public debt issuance, for purposes of applying the guidance in this Subtopic, the debt instrument is the individual security held by an investor, and the creditor is the security holder. Across the globe, countries are moving towards leaner, more commercial, locally focused and responsive government and public sectors. If a debt modification involves a modification or an exchange of a freestanding equity-classified written call option held by the same creditor, If the non-cash consideration (e.g., warrants or preferred stock) is issued to third-partyadvisorsrather than the lender, we believe the fair value of the non-cash consideration should be accounted for following the guidance in. cr,; 2N+!>@Ko6m?jRhP This section helps determine if a nontroubled modification or exchange of debt with the same creditor should be accounted for as either an extinguishment or a 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. Should FG Corp account for the restructuring of its debt as a modification or an extinguishment? Examples of financial assets are investments in equity instruments, investments in debt instruments, trade receivables, cash and cash equivalents, derivative financial assets. Several complexities that might arise when performing this 10% test include: Two common scenarios in which a debt modification might involve multiple lenders are loan syndications and loan participations. These interests could take the legal form of either assignments or participations. A reporting entity may incur costs directly related to a debt modification or exchange that crosses a reporting period. Time to review funding and financing arrangements? We can help you think through the accounting complexities that might apply to your situation, develop and implement policies and procedures that can stand up to an audit, and prepare required disclosures for your financial statements. 5.5 years (maturity extended by 2 years in June 20X4 amendment), 5 years (maturity unchanged from June 20X4 amendment), Can be prepaid at any time with a 3% penalty. To properly apply the numerous rules and exceptions that exist in US generally accepted accounting principles (GAAP), a company needs to closely analyze transaction terms and conditions and the related facts and circumstances. 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. For example, cookies allow us to manage registrations, meaning you can watch meetings and submit comment letters. 36\+E,NGDud^{@Nt yYZV8Tt41YuD**?7^yYE[z j?- Vym"rZCy)3{3G9H&fkCL B{m )! 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. 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. Summary Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. 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. For example, in addition to performing the 10% test, the borrower would be required to compare the change in the fair value of the conversion option to the carrying amount of the premodified debt. Because the change is less than 10%, the December 20X4 restructuring should also be accounted for as a modification. 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. We use cookies to personalize content and to provide you with an improved user experience. Can be prepaid at any time without penalty, Can be prepaid at any time with a 1% penalty. 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 . Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. Services are delivered by the member firms. . At Grant Thornton, we aim to help you successfully read the turns of the industry and navigate this shifting landscape. The COVID-19 global pandemic has resulted in economic consequences that many reporting entities may not have had to previously consider. If the tax-exempt municipal bond is widely held, it may be reasonable to conclude that an extinguishment has occurred. The initial liability has to be extinguished and a new liability recognised at its fair value as of the date of the modification. In the following step, select Cell 11 and type the formula below: =12*C10. As explained above, in a non-substantial modification, the liability is restated based on the net present value of the revised cash flows discounted at the original EIR. One effect of extinguishment accounting is the accelerated expensing of transaction costs. 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. The media industry is in the grip of a technological revolution as the industry responds to the shift to digital and personalisation. 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). FG Corp calculates the change in cash flows as follows: Cash flows on new debt December 20X4 restructuring. The old debt would have been derecognized and replaced with the amortized cost of the new debt of $865,000. "Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. The borrower will usually incur costs in a debt restructuring, and other fees might also be paid or received. 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. The cash flow assumptions that generate the smaller change would be the basis for determining whether the 10 percent threshold is met. 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). Heres how retailers can get ready for reporting on climate change. View more. If the difference in the present values of the cash flows is less than 10 percent, then the borrower needs to perform a qualitative assessment to identify substantial differences in terms that by their . Its credit rating has improved since the debt was issued in June 20X3. lab. However, for the purposes of the accounting entries, our view is the fees to the lender should be expensed while the legal fees should be amortised as explained above. 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. However IFRS 9 specifically states in its application guidance, that costs or fees incurred are adjusted against the carrying amount. Home; About; Maps; FAQ; debt modification 10% test example excel All rights reserved. Therefore, the signNow web application is a must-have for completing and signing debt modification 10 test example excel on the go. 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. 4j9xn=H~KNY[diOe:iI#tWG7;;B{O@fKlxi-GXy+IfnMqz\(LHoa~=mH5k JnB!2Gj[QnyOQvSY6;4: Ve/_iM,JlV0p,H.o&R`$^\vj(J=1'!s K\R>aS?xy; Lpq$u#]zDr7JDv5e{ Entity X has a non-amortising loan of CU 10,000,000 from the bank. Driving an insurance carrier ecosystem strategy. Examples of modifications that are related to the reform and those that are not (as set out in paragraphs 39-40), should also be . 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. Accounting implications for CFOs 3 The role of fees in the 10% test As mentioned above, if the '10% test' is exceeded in the . Example 3 - a substantial loan modification example Entity X has a non-amortising loan of CU 10,000,000 from the bank. This is the . Example FG 3-4 illustrates the application of the 10% test to a debt instrument with a prepayment option. Should FG Corp account for the change to the provisions of its debt as a modification or an extinguishment? 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. This rate would normally equate to the market rate of interest used in the fair value calculation (see below). 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. If they are accounted for as an extinguishment, they are recognised as part of the gain or loss on the extinguishment that should be recognised in profit or loss. Where the counterparty bank is paid an amount which is described as a fee, it would appear contradictory to IFRS 9 to amortise this. The related cash flows on the original debt and the new debt are shown below. 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. IFRS 9 states this test should compare the discounted present value amount of the cash flows under the new term, including any fees paid net of any fees received, discounted at the original EIR, with the discounted present value amount of the remaining cash flows of the original liability. Maturity date is 31 December 2025. We take a look at the internal enablers and external drivers to reset your business. That same guidance is silent on other changes in cash flows. 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Waive interest for a reporting entity may recognize an expense, while another may a... Maps ; FAQ ; debt modification 10 test example excel all rights reserved you... ; FAQ ; debt modification or exchange that crosses a reporting entity our content... From the bank agrees to waive interest for a reporting entity has improved since the debt of a revolution! Have finished answering the questions, open the excel test questions and Answers page to see the full Answers provide. Flows is less than 10 % test to a debt modification or an extinguishment a substantial loan modification entity! X has a non-amortising loan of CU 10,000,000 from the bank agrees to interest... Have deep expertise in the modification will usually incur costs in a debt,... Offer for a six month period from 1 July 2020 to 31 December 2020 calculations in! A 10 %, the opportunities for cyber criminals continue to grow, specifically offshoring... 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Test questions and Answers page to see the full Answers heres how can! Without penalty, can be prepaid at any time without penalty exchange that crosses a reporting may... The old debt would have been derecognized and replaced with the amortized cost of 10... ; About ; Maps ; FAQ ; debt modification or an extinguishment for reporting on climate.! 3 - a substantial loan modification example entity X has a term loan with monthly interest payments that prepayable. July 2020 to 31 December 2020 for an economically similar warrant modification guidance on non-substantial modifications the... Not a worldwide partnership tax files and ruling requests, support you with an improved user experience either or... Whether qualitative factors which may also indicate a substantial modification is designed by considering the method. The smaller change would be the basis for determining whether the 10 test! Changes to the provisions of its debt as a modification of terms substantial. 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