New Guidelines for Debt Modifications & Restructurings

New Guidelines for Debt Modifications & Restructurings

FASB recently published borrower guidelines on accounting for debt modifications and restructurings, LIBOR and other challenges which have emerged from the financial market impacted by COVID, along with guidance on benchmark interest rates, forwards and options accounting, and implementation relief for insurance companies. The staff paper also lays down examples of common modifications and restructurings.

Apart from assisting borrowers on factual accounting, these guidelines also essentially emphasize upon accurate reporting of Debt modifications and restructurings by companies from a 360 degree perspective. It includes:

  • Classification of a borrower’s financial distress and if he manages to get lender concession.
  • Troubled debt restructurings.
  • Modifications & extinguishments.
  • Classification of substantial modification(s) if any.
  • Line-of-credit or revolving debt arrangements.

FASB also proceeds to elaborate few of its below new standards:

1. Reference Rate Reform

Under Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. FASB ASC Topic 848 provides guidelines on temporary, optional expedients and exceptions for using GAAP to contract modifications and hedging relationships w.r.t the London Interbank Offered Rate (LIBOR) or any other reference rate which can be potentially discontinued.

It provides insights upon optional expedients and exceptions for contract modifications and hedge accounting applicable to contracts impacted by the “discounting transition”.

2. Forwards & Options

With regard to free standing equity classified forwards and options, FASB provides a principle based framework to help an issuer identify any modification or exchange as an adjustment to any equity/expense.

3. Minor Codification Changes

This standard provides incremental improvements to its Accounting Standards Codification for addressing any minor improvements to GAAP (considered essential by the FASB).

4. Implementation Relief

This new standard allows COVID-19 impacted insurance companies an additional year to implement Accounting Standards Update (ASU) No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long Duration Contracts, in an easy and cost-effective way.

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