Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Specialized Accounting

Troubled Debt Restructuring
Accounting by Creditors

Creditors account for a troubled debt restructuring according to the type of the restructuring as described in the following sections.

Full Satisfaction of Debt

A creditor may receive either physical or intangible assets in full satisfaction of a troubled debt restructuring and may also receive in full satisfaction of debt if the debtor, in full satisfaction of a receivable, gives the creditor:

• Receivables from third parties
• Real estate or other assets
• Shares of stock and/or an equity interest in the debtor

A creditor accounts for those assets (including equity interest) at fair value at the time of the restructuring:

• If an active market exits, the assets are measured and transferred at the current market value.
• If no active market exists, use the selling prices of similar assets for which there is an active market.
• If no market price is available, estimate the fair value by making a forecast of expected cash flows.

Loss recognition is recorded as the recorded investment in the receivable minus the fair value of assets received. Use the recorded investment in the receivable instead of using the carrying amount of the receivable because the latter is net of allowance for estimated uncollectible amounts or other valuation account.

Modification of Terms

A creditor in a troubled debt restructuring involving only the modification of terms of a receivable accounts for the effects of the restructuring prospectively as:

• The recorded investment in the receivable at the time of the restructuring does not change unless that amount exceeds the total future cash receipts specified by the new terms.
• The effects of changes in the amounts or timing (or both) of future cash receipts designated as interest or face amount is reflected in future periods.
• The constant effective interest rate (interest method) is applied to the recorded investment in the receivable at the beginning of each period between restructuring and maturity to compute interest revenue.
• The new effective interest rate is the discount rate that equates the present value of the future cash receipts specified by the new terms (excluding contingent receivable) with the recorded investment in the receivable.

If the total future cash receipts under the new terms of the receivable (face amount and the interest) are less than the recorded investment in the receivable before restructuring, the creditor:

• Reduces the recorded investment in the receivable to an amount equal to the total future cash receipts specified by the new terms.
• Recognizes the amount of the reduction as a loss.
• Does not recognize any interest revenue on the receivable for any period between the restructuring and maturity of the receivable.

Combination of Types

A troubled debt restructuring may involve receipt of assets (including an equity interest in the debtor) in partial satisfaction of a receivable and a modification of terms of the remaining receivable.

• A creditor:
  • Accounts for the assets received at its fair value.
  • Reduces the recorded investment in the receivable by the fair value of the assets received.
• Loss recognition applies if the remaining recorded investment in the receivable exceeds the total future cash receipts under the new terms of the receivable.
• Future interest revenue (if any) is determined using the rules described above under Modification of Terms.

Methods for Recognizing a Loss

There are several methods for recognizing a loss:

• Recognize losses (to the extent they are not offset against allowances for uncollectible amounts or other valuation accounts) in the period of restructuring.
• A loss from reducing the recorded investment in a receivable may have been recognized before the restructuring by recognizing an expense for an estimate of uncollectible amounts and increasing an appropriate valuation allowance. If this is the case, a reduction in the recorded investment in the receivable is a deduction from the valuation allowance — rather than a loss for the period of restructuring.
• A valuation allowance can also be used to recognize a loss that has not been previously recognized. For example, a creditor with an allowance for uncollectible amounts pertaining to a group of receivables including the restructured receivable may recognize a loss in the period of restructuring by estimating the appropriate allowance for remaining receivables — including the restructured receivable.

Contingent Receipts

There could be contingent receipts as the result of a troubled debt restructuring, such as:

• Amounts designated as interest or face amount receivable from the debtor may be contingent on a specified event or circumstance. For example, specified amounts may be receivable from the debtor if the debtor’s financial condition improves to a specified degree within a specified period.
• To determine if the creditor will recognize a loss, include the contingent amounts in the total future cash receipts under the new terms only if those amounts meet the criteria for accruing a loss contingency.
• If a troubled debt restructuring involves contingent receipts, do not recognize interest revenue on those contingent amounts before both the contingency has been removed and the interest has been earned.
• Before recognizing interest revenue, deduct the contingent receipts from the recorded investment in the restructured receivable to the extent that recognition of a loss can be avoided.

Estimated Future Cash Receipts

As a result of interest rate fluctuations, future cash payments may be accounted for using estimates of minimum total future receipts based on the interest rate in effect at the time of the restructuring. For example, the restructured terms may specify the stated interest rate to be the prime interest rate increased by a specified amount or proportion.

Fluctuations in the effective interest rate after the restructuring due to changes in the prime rate or other causes are accounted for as changes in estimates in the period the changes occur.

If the interest rate decreases to an extent that the minimum total future cash receipts determined using that interest rate falls below the recorded investment in the receivable at that time — in which case, the creditor recognizes a loss and reduces the recorded investment in a restructured receivable.

Direct Costs

Legal fees and other direct costs incurred by a creditor to affect a troubled debt restructuring are included in expense when incurred.

Receivable From Sale of Assets

When a debtor sells assets that were previously obtained in a troubled debt restructuring, the resulting receivable to the creditor is accounted for according to the rules described in the “Interest Costs — Imputation” section of GASB 62, regardless of whether the assets were obtained in satisfaction (full or partial) of the debt.

Recognize gain or loss on sale of assets for the difference between the amount of the new receivable and the carrying amount of the assets sold.