Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Specialized Accounting

Troubled Debt Restructuring

This section provides information regarding troubled debt restructuring for both debtors and creditors.

GASB 62 provides standards for accounting and financial reporting for the debtor and creditor in a troubled debt restructuring. GASB 62 does NOT provide guidance for:

• Accounting for allowances for uncollectibles
• Methods for estimating amounts of uncollectibles
• Governments that have filed for protection under chapter 9 of the U.S. Bankruptcy Code

If the creditor, for economic or legal reasons, grants a concession to the debtor that it would not otherwise consider, then the restructuring of debt is considered to be a troubled debt restructuring. Reasons for the concession could be the result of either:

• An agreement between the creditor or debtor
  –OR–
• Imposed by a court ruling

In a troubled debt restructuring, a combination of one or more of the following situations may occur:

• The debtor transfers receivables from third parties, real estate, or other assets to the creditor to satisfy a debt fully or partially. The transfer may result from foreclosure or repossession.
• The debtor grants an equity interest to the creditor to satisfy a debt fully or partially, unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest.
• The debtor and the creditor agree to modify the terms of a debt in one or more combinations of the following:
  • Reduce the interest rate for the remaining life of the debt. The reduction may be absolute or contingent.
  • Extend the maturity date(s) at an interest rate lower than the current market rate for new debt with similar risk.
  • Reduce the face or maturity amount of the debt.
  • Reduce accrued interest. The reduction may be absolute or contingent.

Examples of troubled debt restructuring combination:

• The creditor restructures the terms of a debt to reduce or defer the debtor’s cash payments in the near future to help the debtor improve its financial position and be able to pay the creditor eventually.
• The creditor accepts cash or other assets to satisfy the debt although the value received is less than the debt amount because the creditor decides that this action will maximize recovery of its investment.

Whatever the form of concession granted by the creditor to the debtor in a troubled debt restructuring, the creditor’s objective is to make the best of a difficult situation.

Restructuring of each receivable or payable, including those negotiated and restructured jointly, is accounted for individually.

Troubled debt restructurings may occur before, at or after the stated maturity of debt. Time may elapse during the different steps of the process.

A debt restructuring is not necessarily a troubled debt restructuring even if the debtor is experiencing some financial difficulties. A troubled debt restructuring does not exist if:

• The fair value of assets or an equity interest that the debtor transfers to the creditor in full satisfaction of the debt at least equals:
  • The creditor’s recorded investment in the receivables
    –OR–
  • The debtor’s carrying amount of the payables
• The creditor reduces the interest rate on the debt primarily to reflect a decrease in market interest rates so as to maintain a relationship with a debtor that can readily obtain resources from other creditors at the current market interest rate.
• The debtor issues new marketable debt in exchange for its debt. The effective interest rate on the new debt is based on its market price that is at or near the current market interest rates of debt with similar maturity dates and stated interest rates issued by non-troubled debtors.

Standards for troubled debt restructurings do not apply to changes in lease agreements or employment-related agreements (for example, pension or other postemployment benefit plans and deferred compensation contracts).

The state of Texas has historically been the creditor in troubled debt restructuring. However, the following information outlines the accounting and disclosure requirements for both creditors and debtors.