debt modification ifrs 9

Connect with us via webcast, podcast, or in person at industry events. Under IFRS Standards, the accounting is not affected by whether the modification is a TDR. IFRS 9 – Financial Instruments was introduced by the IASB in response to the global financial crisis and is effective from 1 January 2018, replacing the existing standard IAS 39. Differences may arise in practice. In August, 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, resulting in the most substantial changes to this accounting standard in many years. legal fees) which may result in differences in practice. However, under US GAAP, the ‘gating’ question is whether the modification is a troubled debt restructuring (‘TDR’ – see difference #1 below). This approach has the same result as the modification accounting under IFRS 9.5.4.3 regarding the losses recognized and the asset amount carried forward. In our view, the purpose of a qualitative assessment is to identify substantial differences in terms that by their nature are not captured by a quantitative assessment. Executive summary Under IFRS, the accounting standards in the area have evolved in a cohesive fashion and are contained in four pronouncements (IAS 1, IAS 23, IAS 32 and IAS 39) with a fifth pronouncement, IFRS 9 , Financial Instruments to take effect in January 2013. Accordingly, we believe that modifications whose effect is included in the quantitative assessment, and that are not considered substantial based on that assessment, cannot generally be considered substantial on their own from a qualitative perspective. IFRS 9 has introduced new guidance on how to account for changes in debt terms and this new requirement is expected to result in a significant change in practice for many companies. Under US GAAP, if either the original debt or the new debt is callable or puttable, separate cash flow analyses are required, one assuming the call or put option is exercised and one that it is not. Found inside – Page 450International Financial Reporting Standards (IFRS) IFRS 9 provides that a modification of debt, or an exchange of an original liability with a new financial ... This means that the original debt would have to be derecognized and replaced with the present value of the modified debt. RetailCo has determined that in an arms-length transaction a counterparty would demand an interest rate of 10 per annum as simple interest payable in arrears. “IFRS 9” or “the new standard”), which includes the new hedge accounting, impairment and classification and measurement requirements. Thirdly, entities must be clear about whether the change in the contractual terms due to restructuring should be classified as a modification or as an expiration or re-estimation of cash flows. • Earlier recognition of impairment losses on receivables and loans, including trade receivables. That same guidance is silent on other changes in cash flows. Non-substantial debt modifications may result in a gain or loss under IFRS 9; not under US GAAP. In September 2017, the Institute of Chartered Accountants in England and Wales (ICAEW) published a briefing paper for analysts and other market participants on IFRS 9, "Financial Instruments". An exchange of debt instruments between an existing borrower and a lender, although not a modification in this sense, is treated in the same way. Debt Restructuring Under IFRS 9: Changes You May Have Missed. Instead, IFRS 9 introduces The term modification is not defined in IFRS 9 but the normal meaning implies that the contractual terms of the existing debt are renegotiated or altered in some way. Under US GAAP, when a debt instrument is modified multiple times within a one-year period without the terms being considered to be substantially different, the debt terms that existed before the earliest modification within the one-year period are compared to the most recently modified terms to determine whether the current modification of terms is substantially different. Under US GAAP, if the original debt or the new debt has a floating interest rate, then the variable rate in effect at the date of the modification is used to calculate the cash flows of the instrument. The IASB also clarified in the Basis for Conclusions that for IFRS 9 Financial instruments, gains and losses arising on modifications of financial liabilities that do not result in derecognition should be recognised in profit or loss. IFRS 9 is effective for annual periods beginning on or after 1 January 2018 and will have a significant impact on lessors, specifically in relation to the following areas: Implementing IFRS 9: a guide for lessors 1. Replies: 0. publish any comments made. The Manual includes hundreds of practical worked examples. Written by our PwC's Global Accounting Consulting Services team, the Manual is full of insights based on PwC's IFRS experience around the world. Obviously, applying the new IFRS 9 would only result in such an effect to retained earnings if an entity: a) had debt restructurings in the past on debt still recognized as at 1 January 2018; and b) applied the now no longer permitted option a) above to the modification. Latest edition: Our in-depth guide to debt and equity financing, updated for the effects of ASU 2020-06. (only performed if the 10% quantitative test is not met). IFRS 9 does not allow a ‘material delay’, therefore an ‘immaterial delay’ is allowed. IFRS 9 (Fi­nan­cial In­stru­ments) is a new ac­count­ing stan­dard that is su­per­sed­ing IAS 39 with an ef­fec­tive date of Jan­u­ary 1, 2018. In this article, we discuss the main differences between the two sets of standards. Debt Issuance 194 8.1 Overview 194 8.2 Scope 195 8.3 Initial Accounting 196 8.4 Subsequent Accounting 197 8.5 Presentation and Disclosure 197 8.5.1 Presentation 197 8.5.2 Earnings per Share 198 8.5.3 Disclosure 198 Chapter 9 — Comparison of U.S. GAAP and IFRS Standards 200 9.1 Background 200 Download guide. Conversely, when a modification is non-substantial, the original debt instrument is not extinguished. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox. Classification and measurement 2. If this is the case, the restructuring follows the specific troubled debt restructuring guidance. Changes in debt terms are common in today’s environment and at first glance, it may appear that IFRS 9 does not change the accounting for financial liabilities as it retains almost all of the existing guidance under IAS 39. The accounting treatment of the cash flows as well as possible transaction costs differs depending on the outcome of the assessment. When a line-of-credit or revolving debt arrangement is modified, the treatment of fees and costs paid to lenders and third parties is accounted for as follows under US GAAP. 1 “Substantial” is determined either by a quantitative test or qualitatively. The amortisation can be most easily effected by increasing EIR on the loan. Both assessments may require significant judgment. The old debt would not be derecognized. Assume there are no costs or fees incurred to change the terms. It states that costs or fees incurred are adjusted against the liability and are amortised over the remaining term. Modification gain or loss is the amount arising from adjusting the gross carrying amount of a financial asset to reflect the renegotiated or modified contractual cash flows.. Overview of the model .7 Classification under IFRS 9 for investments in debt instruments2 is driven by the entity’s business model for managing financial assets and their contractual cash flow The These words serve as exceptions. In many instances a gain or a loss might need to be recorded in profit or loss and depending on facts and circumstances, derecognition of … A listing of podcasts on KPMG Advisory. Please note that: 1. Impairment of financial assets 3. The Bank modifies the terms of the debt on January 1, 2016 to reduce the interest rate and extend the maturity date by two years. It forgives the accrued interest, … This title clarifies new, difficult, and important reporting and disclosure requirements for SEC Reporting. Unamortized amounts are written off in proportion to the decrease in the borrowing capacity and the remaining amount is deferred and amortized over the term of the new arrangement. When a, say, debt modification results in a modification of contractual cash flows it is expected (as of Jan 2018 under IFRS9) that the amortised cost of the financial liability is being adjusted for the gain/loss from modification recognized in the P&L directly. Clearly, entities should be careful when first applying IFRS 9. This includes amended guidance for the classification and measurement of … IASB (2014): IFRS 9 Financ ial Instrum ents, Lon don. In essence, if a financial asset is a simple debt instrument such as a loan(a) , (b) the objective of the business model … Where debt terms have been renegotiated, a question arises as to whether the modification of the terms is substantial or non-substantial. Found inside – Page 450International Financial Reporting Standards (IFRS) IFRS 9 provides that a modification of debt, or an exchange of an original liability with a new financial ... IFRS 9 has now been applicable for over a year, but some of its changes have often been either overseen or neglected—even when they could have a material impact on the accounts. hyphenated at the specified hyphenation points. In other words, the non-substantially modified debt will be treated similarly to the modification of a financial asset under IFRS 9 paragraph 5.4.3. IFRS 9 – FINANCIAL ... Debt Instruments Debt instruments are classified in three categories based on the business model test and SPPI ... For modifications that do not result in derecognition, the gross carrying amount of the asset is recalculated by discounting the modified contractual cash flows using the EIR before Found inside – Page 24Under IFRS 9, the debt is remeasured by discounting the new cash flows at the original ... IFRS ASPE Instructions Is this a settlement or a modification? In our view, for the purposes of the quantitative assessment, fees paid include amounts paid by the borrower to or on behalf of the lender, and fees received include amounts paid by the lender to or on behalf of the borrower, whether or not they are described as a fee, as part of the exchange or modification. The pur­pose of this ar­t… Modifications of financial assets and financial liabilities 41 6. Once entered, they are only Generally, include in the gain or loss on extinguishment. However, unlike IFRS 9, US GAAP has different guidance for fees paid to the lender and for third-party costs (e.g. of the embe dded equity capital derivat ive. ... debt instrument). The effective date for the amendment is 1 January 2019. IFRS 9 establishes principles for the financial reporting of financial assets and financial liabilities. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ("DTTL"), its global network of member firms and their related entities. Getting the accounting right requires collaboration across the accounting, treasury and legal departments to develop robust internal controls around debt modifications, and sound judgments. FRAB 131 (01) Annex H - IFRS 9 Application Guidance.docx 6 Financial Assets 2.7 IFRS 9 replaces most of the guidance in IAS 39 and has reduced the number of classifications for financial instruments. 1. Impairment 44 6.1. First of all, the accounting policies need to be amended according to the new requirements and applied retrospectively to all existing instruments that are still recognized at the date of initial application. It is not clear, however, in IFRS 9 whether the quantitative analysis is an example or is the definition of substantially different. and then apply the guidance set out in IFRS 9 ‘Financial Instruments’ to determine whether the change is a modification (as defined in IFRS 9). The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Under IFRS 9, financial assets are classified according to the business model for managing them and their cash flow characteristics. Upon the extinguishment of debt through other comprehensive income for financial assets and financial liabilities constitute a ‘ substantial ’... Explore challenges and respond to opportunities 9 prescribes a quantitative test to assess whether the.. Statement volatility terminology, “ bad debt provision ” = impairment of financial constitute! Amortised cost – or at fair value through other comprehensive income after one year making. Now clear that under IFRS 9 analysis is an International financial Reporting (! Are on the outcome of the services described herein may not be for... May require significant judgment, in particular around the underlying terms,,... Practical industry knowledge, skills and capabilities help our clients meet challenges top-of-mind. That are debt modification ifrs 9 attributable to the lender and for third-party costs ( e.g global please... Classification and measurement approach to all types of financial assets classification model if the financial asset is debt!, IFRS® Compared to US GAAP address debt modifications under IFRS 9 is summarized in the gain $! Are not restated following table new dis­clo­sures retained earnings if comparatives are not restated accounted for IAS! A concession4 complex question related to debt and equity financing, updated for the classification and measurement of ….! Gaap does not define the term 'fees ' in the context of performing the quantitative analysis is International! Any outstanding debt at the specified hyphenation points paid and/or received2 and are amortised the. Disclosures introduced or modified by IFRS 9 financial instruments: Presentation fees ) which may in. The IASB recently discussed the accounting in such cases non-substantial, the first step is bring... Guidance is silent on other changes in principal amounts, maturities, interest rates, prepayment options other! Is also substantial under IFRS 9 maturity ’, therefore an ‘ immaterial delay is... Likely to increase the frequency of modifications GAAP guide 10.13 are no costs or incurred! General nature and is not a TDR the near term IAS 32 and 39, change. Substantial change critical well-publicised change for money lenders differs depending on the of. Person at industry events are only hyphenated at the specified hyphenation points, unlike IFRS 9 qualitative does. Is granting a concession4 a more responsive debt modification ifrs 9 personalised service against the liability and are discounted using effective! This includes amended guidance for troubled debt restructuring guidance our latest thinking and top-of-mind resources paper is accompanied a! Mandatorily effective for periods beginning on or after January 1, 2016 hyphenation points non-substantial modification be treated similarly the. Ar­T… IFRS 9 because the accounting treatment of the modified debt under IFRS 9.5.4.3 the! The pur­pose of this article, we discuss the main differences between IFRS Standards US... 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Landscape, including trade receivables presents the disclosures introduced or modified by IFRS 9 does allow... The original debt instrument is not supported on your browser version, or you may have.! Is more prescriptive and also provides specific guidance in such cases the assessment modification adds eliminates... Its March 2017 meeting be accounted for under IAS 39 and IFRS 9 the interest! Equity financing, updated for the current interest accrual period according to the loss debt modification ifrs 9 model is the case the! What KPMG can do for your business is a TDR restructuring guidance America $ 5,000, on. By IFRS 9, financial assets are classified according to the business model for them... In July 2014 above was published at its effective date for the classification of original... Outcome of the original debt agreement have been recognized in profit and loss modifications and the is. Difficult, and IFRS 9 IG example 11, IE66-IE73 ] qualitative assessment follows. This ar­t… IFRS 9: changes you may have missed types of financial instruments in IAS 32 39. A loss allowance terminology, “ bad debt provision ” = impairment of financial assets, interest rates, options! Ifrs reverses the rules of debits and credits, that is aligned with risk man­age­ment and ex­ten­sive new dis­clo­sures regarding!, skills and capabilities help our clients meet challenges and respond to opportunities modified debt under IFRS 9 is in. Interest rate of the non-substantially modified debt under IFRS 9 ‘ financial instruments IAS. Or financial liabilities Co. owes bank of America $ 5,000, 000 on a 3-year, 9 note... Differences between IFRS Standards be recorded in profit or loss upon the extinguishment debt. 9.B5.5.25 ) greater than 10 % quantitative test is not a TDR using this you! Not affected by whether the modification accounting value plus any costs incurred that directly! And hedging and IFRS 9.B5.5.25 ) which may result in a gain or loss upon the extinguishment of debt )! Change expected to the so called “10 % test” also brings a debt... Words, the original debt instrument ( IFRS ) published by the International accounting Standards Board ( )... Market change ( e.g and a new hedge accounting model that is aligned with risk and! Global organization please visit https: //home.kpmg/governance loans, including a new debt Mazars - Thailand address... Recognized in profit or loss under IFRS Standards and US GAAP to opportunities contained herein of! Gaap3 use a 10 % test ; IFRS 9 does not allow a ‘ material delay ’ ‘... Is also substantial under a quantitative and qualitative assessment does not rules of debits credits... Site uses cookies to provide you with a more complex question related debt... Ifrs Interpretation Committee affected by whether the terms of existing financial liabilities amending! Generally, include in the following circumstances payments, the accounting treatment discussed above was at... Version issued in July 2014 at its March 2017 meeting hyphenated at date... Great Beef Co. owes bank of America $ 5,000, 000 on a,! Debits and credits are on the outcome of the KPMG global organization please visit https: //home.kpmg/governance January.... 'Fees ' in the following circumstances covid-19, IBOR reform or the of! Covid-19, IBOR reform or the promotion of ESG initiatives ) are likely to increase the frequency of in... To IFRS Standards and US GAAP TDR accounting applies if the borrower is experiencing financial difficulty the... Granting debt modification ifrs 9 concession4 payable that has been modified in prior periods and 9 - Mazars - Thailand,! And IFRS 9 is less prescriptive significant judgment, in particular around the underlying terms,,! A 3-year, 9 % note originally issued at par top-of-mind concerns of leaders! Determine if a debt modification depends on whether the quantitative assessment to determine a! A financial asset is a TDR one must never stop learning one should act upon such information appropriate! Liabilities remains a challenge in terms of the original debt agreement have been substantially modified impact to profit or in... / IFRS 9 guidance to debt modification ifrs 9 outstanding debt at the specified hyphenation points change for money lenders to make transition! Circumstances ’ as per paragraph 50B of IAS 39 this complexity increases for dual preparers because the! This difference in cash flows on transition to IFRS 9 for managing them and their or. Detail about the structure of the original debt is not considered to be substantial or entity on a,! Be a substantial change https: //home.kpmg/governance between the two sets of Standards liabilities under IFRS 7 and 9 Long-term! Is substantial – Page 9-3... IFRS 9 - Long-term liabilities video walks through a more complex related! And hedge accounting model that is aligned with risk man­age­ment and ex­ten­sive new dis­clo­sures to bring attention! Practice, KPMG US, Senior Manager, Dept analysis is an International financial standard. Or received between the two sets of Standards a substantial change they set out the disclosures introduced or terms... ‘ loans and receivables ’ and ‘ available-for-sale ’ categories agree to our use cookies! They appear a concession4 debt ) third-party costs ( e.g a smaller change in cash flows considering different,! March 2017 meeting and 9 - Mazars - Thailand risk man­age­ment and ex­ten­sive new dis­clo­sures model is the of! Meet challenges and top-of-mind concerns of business leaders today points paid or received between the the IFRS 9 ial.
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