DEBT RESTRUCTURING

- Creditor grants to the debtor concession (either by agreement or impose by law) with the objective of
maximizing the recovery of investment; that is not normal in a business relationship.
- Creditor usually sustain an accounting loss; Debtor usually realized an accounting gain.

THREE TYPES OF DEBT RESTRUCTURING (AME)

1. Asset Swap
2. Equity Swap
3. Modification of Terms

ASSET SWAP - debtor transfer any asset to the creditor for the fulfillment of an obligation.

Accordingly, it is treated as derecognition of financial liability or extinguishment of debt (PFRS 9

3.3.1)
The difference between the carrying amount of the financial liability and
consideration given shall be recognized in the profit and loss. (PFRS 9 3.3.3)

BASIC PROBLEM 1 (BP 1) *from Valix FA2 2017

An entity provided the following balances at year-end:

Note Payable 2,000,000

Accrued Interest Payable 400,000

At year end, the entity transferred to the creditor land with carrying amount of P1500,000 and fair value
of 2,200,000.

Computation Journal Entry

NP 2000,000 Note payable 2000,000
AIP 400,000 Accrued Interest Payable 400,000
CA of FL 2400,000 Land 1500,000
Less: CA of Land 1500,000 Gain on Extinguishment 900,000
Gain on Extinguishment 900,000
Asset Swap - US GAAP (not use in PH; for comparison purpose only)
Recorded as if two transactions occurred; sale of asset and extinguishment of liability.
Thus, two gain or losses are recognized. (Gain on Exchange and Gain on Restructuring)

FV of Asset XX CA of Liability xx
Less: CA of Asset XX Less: FV of Asset xx
Gain on Exchange XX Gain on Restruct. xx

SOLUTION BASED ON BP 1
FV of Land 2200,000
Note Payable 2000,000
Less: CA of Land 1500,000
Gain on Exchange 700,000 Accrued Int. Payable 400,000
Less: FV of Land 2200,000
JOURNAL ENTRY Gain on Restruct. 200,000
Note Payable
Accrued Interest Payable 2000,000
Land 400,000
Gain on Exchange 1500,000
Gain on Restructuring 700,000
200,000
*Both gains under US GAAP are both included in the gain recognized under PFRS 9 and recorded as Gain on Exting.
Dacion en Pago Accounting - debtor offers mortgage property in full settlement of the debt.
- Obligation > CA of Mortgage Property ~ Gain on Extinguishment
- Obligation < CA of Mortgage Property ~ Loss on Extinguishment

BASIC PROBLEM 2 (BP 2) *from Valix FA2 2017

Land costing P500,000 and building costing P4,000,000 with accumulated depreciation of P800,000, were
mortgaged to secure a bank loan of P 3000,000.

Face Amount of the Loan 3,000,000

Accrued Interest Payable 200,000
Legal Fee and Bank Service Charge 50,000

Subsequently, the land and building were given to the bank in full payment of the liability,

Computation
Total Liability 3,250,000
Less: CA of Land 500,000
CA od Bldg. 3200,000 3,700,000
Loss on Extinguishment 200,000

Journal Entry
Mortgage Payable 3,000,000
Accrued Interest Payable 200,000
Legal Fee and Bank Service Charge 50,000
Loss on Extinguishment 450,000
Accumulated Depreciation 800,000
Land 500,000
Building 4,000,000
EQUITY SWAP - issuance of share capital by the debtor to the creditor in full or partial payment of an
obligation.

Initial Measurement of Equity Instrument (Order of Priority)

1. FV of Equity Instrument
2. FV of Liability Extinguished
3. CA of Liability Extinguished

CA of Financial Liability xx
Initial Measurement xx
G/L on Extinguishment xx - @ P&L; Separate Line Item

BASIC PROBLEM 3 (BP 3) *from Valix FA2 2017

An entity showed the following data at year-end:
Bonds Payable 5,000,000
Accrued Int. Payable 500,000

The entity issued share capital with a total par value of P2,000,00 and fair value of P4,500,000 in full
settlement of the bonds payable and accrued interest.
On the other hand, the fair value of the bonds payable is 4,700,000.

FV of Equity Instrument is Used Journal Entry

FV of Shares Issued 4,500,000 Bonds Payable 5000,000
Par Value of Shares Is. 2,000,000 Accrued Int. Payable 500,000
Share Premium 2,500,000 Share Capital 2000,000
Share Premium 2500,000
Bonds Payable 5,000,000 Gain in Extinguishment 1000,000
AIP 500,000
CA of Liability 5,500,000

CA of Liability 5,500,000
FV of shares Issued 4,500,000
Gain on Extinguish. 1,000,000

FV of Bonds Payable is Used Journal Entry

FV of Bonds Payable 4,700,000 Bonds Payable 5000,000
Par Value of Shares Is. 2,000,000 Accrued Int. Payable 500,000
Share Premium 2,700,000 Share Capital 2000,000
Share Premium 2700,000
CA of Liability 5,500,000 Gain in Extinguishment 800,000
FV of Bonds Payable 4,700,000
Gain on Extinguish. 800,000

Carrying Amount of Bonds Payable is Used

CA of Liability 5,500,000 Journal Entry
Par Value of Shares Is. 2,000,000 Bonds Payable 5000,000
Share Premium 3,500,000 Accrued Int. Payable 500,000
Share Capital 2000,000
Share Premium 3500,000

Note: No gain or loss on extinguishment if the carrying amount of liability is used.

MODIFICATION OF TERMS -
modify interest, maturity value, or both.
- Interest Concession ~ reduction of interest rate, or forgiveness of unpaid interest.
- Maturity Value Concession ~ extension of maturity date, or reduction of principal amount
- As per PFRS 9 par 3.3.2 ~ extinguishment of the old liability and recognition of new liability.
- Under Application Guidance of B3.3.6 of PFRS 9 ~ substantial modification of terms if the gain
or loss on extinguishment is at least 10% of old financial liability.
- Difference on Carrying amount of Old Financial Liability and Present Value of New or Restructured
Liability will be equal to Gain or Loss on Extinguishment of Debt

CA of Old Liability xx ~ CA of Note at Restructuring + AIP

Less: PV of New Liability xx ~ PV of Principal + PV of Interest
Gain or Loss on Extinguishment xx ~ recognize if 10% of Old Liability

Note: Old effective rate (ER) is used in computing the PV of New Liability.
Any costs or fees incurred as a result of the substantial medication of terms shall be
recognized as part of gain or loss on extinguishment

BASIC PROBLEM 4 (BP 4) *from Valix FA2 2017

On January 1, 2017, an entity showed the following:
Note Payable - due January 1, 2017 - 14% 5,000,000
Accrued Interest Payable 1,000,000

The entity is granted by the creditor the following concessions on January 1, 2017:
1. The accrued interest of 1,000,000 is forgiven.
2. The principal obligation is reduced to 4,000,000.
3. The new interest rate is 10% payable every December 31.
4. The new date of maturity is December 31, 2020.

Note Payable - old 5,000,000

Accrued Interest Payable 1,000,000
Carrying Amount of Old Liability 6,000,000
Less: Present Value of New NP
PV of Principal (4Million x.5921) = 2,368,400
PV of Interest (4Million x 10%= 400,000x2.9137) = 1,165,480 3,533,880
Gain on Extinguishment of Debt 2,466,120 (@least 10% Old Liability)
PV of New NP 3,533,880
Less: Face Value of New NP 4,000,000
Discount on Note Payable 466,120

AMORTIZATION TABLE

Face Value Present Value = CA

Date Interest Paid (10%NR) Interest Expense(14%ER) Discount Amortization Carrying Amount
1/1/17 3,533,880
12/31/17 400,000 (JE 2) - 494,743 = 94,743 3,628,623
12/31/18 400,000 - 508,007 = 108,007 3,736,630
12/31/19 400,000 - 523,128 = 123,128 3,859,758
12/31/20 400,000 - 540,242 = 140,242 4,000,000
Journal Entry (DEBTOR) Journal Entry (CREDITOR)
Extinguishment of the old note payable

Note Payable - old 5,000,000 Note Receivable - New 4,000,000

Accrued Int. Payable 1,000,000 Loss on debt restructure 2,466,120
Discount on NP 466,120 Note Rec’l - Old 5,000,000
Note Payable - new 4,000,000 Accrued Int. Rec’l 1,000,000
Gain on Extinguishment 2,466,120 Unearned Int. Inc. 466,120

Interest Payment on New Note Payable

Interest Expense (10%x4,000,000) 400,000 Cash 400,000

Cash 400,000 Interest Income 400,000

Amortize the discount on note payable for 2017

Interest Expense 94,743 Unearned Interest Income 94,743

Discount on NP 94,743 Interest Income 94,743

US GAAP - gain or loss on restructuring is the difference between the carrying amount of the old liability and
absolute amount of the new restructure liability.

CA of Old Liability xx Note: PFRS 9 shall prevail over US GAAP under PH setting
Less: New Rest. Liability
Note Payable xx
xx
Future Int. Payment xx (Fa x % x yrs.)
Xx
Gain or Loss on Rest.

NO SUBSTANTIAL MODIFICATION
~ if the gain or loss on extinguishment of debt is less than 10% of the old financial liability.
~ Any cost incurred in modifying the terms are adjusted to CA of old liability and amortize over remaining term of old liability. ~
Old Liability is simply continued but with modified interest charges
~ New effective rate must be computed.