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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Specialized Accounting

Troubled Debt Restructuring
Accounting by Debtors

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

Full Settlement of Debt

A debtor may transfer the following assets to the creditor in full settlement of a payable:

  • Receivables from third parties
  • Real estate
    –OR–
  • Other assets

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

  • An active market exists, at the current market value.
  • No market exists, at selling prices of similar assets in active markets.
  • No market price is available, at estimated fair value based on a forecast of expected cash flows.

A debtor recognizes either a gain or loss on the restructuring of debt in the period of the transfer if:

  • The carrying amount of the payable is more than the fair value of the assets transferred, a debtor will recognize a gain on restructuring of debt.
  • The carrying amount of the payable is less than the fair value of the assets transferred, a debtor will recognize a loss on restructuring of debt.

Modification of Terms

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

  • The carrying amount of the payable 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 carrying amount of the payable 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 payments specified by the new terms (excluding contingent payable) with the carrying amount of the payable.

If the total future cash receipts under the new terms of the payable (face amount and the interest) are less than the carrying amount of the payable before restructuring, the debtor:

  • Reduces the carrying amount of the payable to an amount equal to the total future cash payments specified by the new terms.
  • Recognizes a gain on restructuring of payable equal to the amount of the reduction.
  • Does not recognize any interest revenue on the payable for any period between the restructuring and maturity of the payable.

Combination of Types

A troubled debt restructuring may involve partial settlement of a payable by the debtor’s transferring assets to the creditor and a modification of terms of the remaining payable.

  • A debtor:
    • Accounts for the assets transferred at its fair value
    • Reduces the carrying amount of the payable by the fair value of the assets received
  • Gain recognition applies if the carrying amount of the payables exceeds the total future cash payments specified by the terms of the debt remaining unsettled after the restructuring.
  • Future interest expense (if any) is determined using the rules described above under Modification of Terms.

Recognizing a Gain

Do not recognize gains involving indeterminate future cash payments if the maximum total future cash payment may exceed the carrying amounts.

Contingent Payments

There could be contingent payments as the result of a troubled debt restructuring, such as amounts designated as interest or face amount by the new terms may be payable contingent on a specified event or circumstance. For example, the debtor may be required to pay specified amounts if the debtor’s financial condition improves to a specified degree within a specified period.

Recognize contingent payable amounts as payables and interest expense in future periods. Interest expense must be recognized each period in which:

  • It is probable that a liability has been incurred
    –AND–
  • The amount can be reasonably estimated

Before recognizing payables and interest expense for amounts contingently payable, deduct accrual or payment of those amounts from the carrying amount of the restructured payable to the extent that contingent payments prevent recognition of a gain at the time of restructuring (GASB 62, paragraph 144).

Estimated Future Cash Payments

As a result of interest rate fluctuations, future cash payments may be accounted for using estimates of minimum total future payments 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.

The carrying amount of the restructured payable must remain unchanged and future cash payments reduce the carrying amount until a gain is recognized.

Direct Costs

All direct costs incurred by a debtor to affect a troubled debt restructuring are deducted in measuring gains or included in expense if there is no gain.