NON-CURRENT LIABILITIES

DEBT RESTRUCTURE
 Debt
Debt Restructuring
Restructuring

Debt Restructuring

Debt restructuring is a situation where the creditor, for

economic or legal reasons related to the debtor’s financial
difficulties, grants to the debtor concession that would not
otherwise be granted in a normal business relationship.
 Debt
Debt Restructuring
Restructuring

Types of Debt Restructuring

 Asset Swap

 Equity Swap

 Modification of Terms
 Asset
Asset Swap
Swap

Asset swap is the transfer by the debtor to the

creditor of any asset in full payment of the
obligation.
 Asset swap is treated as a de-recognition of a
financial liability or extinguishment of an obligation.

 The difference between the carrying amount of the

financial liability and the consideration given shall be
recognized in profit or loss.

Dacion en pago is a form of asset swap.

 Asset
Asset Swap
Swap –Sample
–Sample Problem
Problem
The entity provided the following balances at year-end:
Notes Payable 2,000,000
Accrued Interest Payable 400,000
At year-end the entity transferred to the creditor land with carrying
amount of P1.5M and fair value of P2.2M

Journal Entry:
Notes Payable 2,000,000
Accrued Interest Payable 900,000
Land 1,500,000
Gain on Extinguishment of Debt 900,000
 Dacion
Dacion en
en pago–Sample
pago–Sample Problem
Problem
A land costing P500,000 and building costing P4M with accumulated
depreciation of P800,000 were mortgaged to secure a P3M bank loan.
Face amount of the loan 3,000,000
Accrued Interest Payable 200,000
Legal fee and bank service charges 50,000
Subsequently, land and building were given to the bank in full payment of the
loan.

Journal Entry:
Mortgage Payable 3,000,000
Accrued Interest Payable 200,000
Bank service charges 50,000
Accumulated depreciation 800,000
Loss on Extinguishment of Debt 450,000 (Total liab – CA of asset)
Land 500,000
Building 4,000,000
 Equity
Equity Swap
Swap

Equity swap is the issuance of share capital by the

debtor to the creditor in full or partial payment of an
obligation.

The equity instruments issued to extinguish a financial

liability shall be measured at the following amounts in the
order of priority:

1. Fair value of equity instruments issued.

2. Fair value of liability extinguished

3. Carrying amount of liability extinguished.

 Equity
Equity Swap
Swap –Sample
–Sample Problem-P1
Problem-P1
The entity provided the following balances at year-end:
Bonds Payable 5,000,000
Accrued Interest Payable 500,000
The entity issued share capital with total par value of P2M and fair
value of P4.5M in full settlement of the bonds payable plus the interest.
Fair value of the bonds payable is P4.7M

Journal Entry:
Bonds Payable 5,000,000
Accrued Interest Payable 500,000
Share Capital 2,000,000
Share Premium 2,500,000
Gain on Extinguishment of Debt 1,000,000
 Equity
Equity Swap
Swap –Sample
–Sample Problem-
Problem- P2
P2
The entity provided the following balances at year-end:
Bonds Payable 5,000,000
Accrued Interest Payable 500,000
The entity issued share capital with total par value of P2M in full
settlement of the bonds payable plus the interest. Fair value of the
bonds payable is P4.7M

Journal Entry:
Bonds Payable 5,000,000
Accrued Interest Payable 500,000
Share Capital 2,000,000
Share Premium 2,700,000
Gain on Extinguishment of Debt 800,000
 Equity
Equity Swap
Swap –Sample
–Sample Problem-
Problem- P3
P3
The entity provided the following balances at year-end:
Bonds Payable 5,000,000
Accrued Interest Payable 500,000
The entity issued share capital with total par value of P2M in full
settlement of the bonds payable plus the interest.

Journal Entry:
Bonds Payable 5,000,000
Accrued Interest Payable 500,000
Share Capital 2,000,000
Share Premium 3,500,000
 Modification
Modification of
of Terms
Terms
 Interest concession
o reduction of interest rate,
o forgiveness of unpaid interest
o moratorium on interest payment

 Maturity Value Concession

o extension of maturity date
o reduction of the amount to be paid at maturity.
 Modification
Modification of
of Terms
Terms

Substantial Modification of Terms

Shall be accounted for as an extinguishment of the old

financial liability and the recognition of a new financial liability.

Gain or Loss on Extinguishment :

Carrying Amount of old Liability – Present Value of new or

Restructured Liability discounted using the old effective rate.

There is substantial modification of terms if the

gain or loss on extinguishment is at least 10% of the
old financial liability.
 Modification
Modification of
of Terms
Terms

No substantial Modification of Terms

If there is no substantial modification of terms, the gain is not

recognized because the modification is not an extinguishment
of the old liability.

The old liability is simply continued but with modified interest

charges.
 Substantial
Substantial Modification–Sample
Modification–Sample Problem
Problem
On January 1, 2020, the entity provided the following:
Notes Payable- due 1/1/20-14% 5,000,000
Accrued Interest Payable 1,000,000
The entity is granted by the creditor the following:
a. Accrued interest of P1M is forgiven.
b. Principal is reduced to P4M
c. New interest rate of 10% payable every Dec 31
d. New date of maturity is Dec 31, 2023.
PV of 1 at 14% for 4 periods is 0.5921 & PV of ordinary annuity is 2.9137

Journal Entry:
Notes Payable-old 5,000,000
Accrued Interest Payable 1,000,000
Discount on Notes Payable 466,120 (PV of new note – FV of new note)
Notes Payable-new 4,000,000
Gain on Extinguishment of Debt 2,466,120 (old liab – pv of new)
 Substantial
Substantial Modification–Sample
Modification–Sample Problem
Problem

Journal Entry:
12/31/2020
Interest Expense (10% x 4M) 400,000
Cash 400,000
Interest Expense 94,743
Discount on Notes Payable 94,743*

* Refer to amortization table page 313

 No
No Substantial
Substantial Modification–Sample
Modification–Sample Problem
Problem
On January 1, 2020, the entity provided the following:
Notes Payable- due 1/1/20-10% 5,000,000
Accrued Interest Payable 1,000,000
The entity is granted by the creditor the following:
a. Accrued interest of P1M is forgiven.
b. New interest rate of 14% payable every Dec 31
c. New date of maturity is Dec 31, 2022.
PV of 1 at 10% for 3 periods is 0.7513 & PV of ordinary annuity is 2.4869

Journal Entry:
Accrued Interest Payable 1,000,000
Premium on Notes Payable 497,330 (pv of new-Fv of new)
Gain on modification of terms 502,670 (old liab – pv of new)
 Substantial
Substantial Modification–Sample
Modification–Sample Problem
Problem

Journal Entry:
12/31/2020
Interest Expense (14% x 5M) 700,000
Cash 700,000

Premium on Notes Payable 150,267*

Interest Expense 150,267
* Refer to amortization table page 316