DEBT RESTRUCTURE

TECHNICAL KNOWLEDGE
To understand the nature and purpose of debt
restructuring.
To identify the types of debt restructuring
To know the accounting for an asset swap ,
equity swap and modification of terms of the
old liability.
DEFINITION:
Debt restructuring is a situation where the creditor, for economic
or legal reasons related to the debtors financial difficulties ,
grants to the debtor concession that would not otherwise be
granted in a normal business relationship.
The concession either stems from an agreement between the
creditor and debtor, or is imposed by law or a court.
The objective of the creditor in a debt restructuring is to make the
best of a bad situation or maximize recovery of investment.
Thus , creditor usually sustains an accounting loss on debt
restructuring and the debtor usually realizes an accounting gain.
TYPES OF DEBT RESTRUCTURING
Asset Swap
Equity Swap
Modification of Terms
ASSET SWAP
An asset swap is the transfer by the debtor to the creditor of any asset , such as real
state , inventory , receivables and investments , in full payment of an obligation.
Under PFRS 9, paragraph 3.3.1 , asset swap is treated as a derecognition of a
financial liability or extinguishment of an obligation.
Paragraph 3.3.3 provides that the difference between the carrying amount of financial
liability and the consideration given shall be recognized in profit or loss.
Under USA GAAP, asset swap is recorded as if two transactions have taken place,
namely, the sale of the asset and the extinguishment of the liability. According, two
gains or losses are recognized.
The difference between the fair value of the asset and the carrying amount is the gain
or loss on exchange
The difference between the carrying amount of the liability and the fair value of the
asset is gain or loss from restructuring.
Dacion En Pago Accounting
Dacion en pago arises when a mortgaged property is offered by the
debtor in full settlement of the debt
The transaction shall be accounted for as an asset swap form of debt
restructuring. This requires recognition of gain or loss based on the
balance of the obligation including accrued interest and other
charges.
If the balance of the obligation including accrued interest and other
charges is more than the carrying amount of the property mortgaged,
there is a gain on extinguishment of debt.
Otherwise, if the balance of the obligation is less than the carrying
amount of property mortgaged, there is a loss on extinguishment.
EQUITY SWAP
An equity swap is a transaction whereby a debtor and
creditor may renegotiate the terms of financial liability
with the result that the liability is fully or partially
extinguished by the debtor issuing equity instruments to
the creditor.
Simply stated, an equity swap is the issuance of share
capital by the debtor to the creditor in full or partial
payment of an obligation.
 How should an entity initially measure the
equity instruments issued to extinguish a
financial liability?
The accounting issue of extinguishment of a financial liability by issuing equity instruments is now
week settled under IFRIC 19

IFRIC 19 provides that when equity instruments issued to extinguish all or part of a financial liability are
recognized initially, an entity shall measure the equity instruments at the fair value of the equity
instruments issued, unless that fair value cannot be reliably measured.

If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments
shall be measured to reflect the fair value of the financial liability extinguished.

Simply stated, the equity instruments issued to extinguish a financial liability shall be measured at the
following amounts in the order of priority :
A. Fair value of equity instruments issued
B. Fair value of liability extinguished
C. Carrying amount of liability extinguished

The difference between the carrying amount of financial liability and the initial measurement of the
equity instruments issued shall be recognized in profit or loss.

The gain or loss on extinguishment shall be reported as a separate line item in the income statement.
Modification of Terms
Modification may involve either the interest, maturity
value or both.
Interest concession may involve a reduction of interest
rate, forgiveness of unpaid interest or a moratorium on
interest.
Maturity value concession may involve an extension of the
maturity date or a reduction of the principal amount.
 PFRS 9 , paragraph 3.3.2 , provides that a substantial modification of terms of an
existing financial liability shall be accounted for as an extinguishment of the old
financial liability and the recognition of a new financial liability.
Under Application Guidance B3.3.6 of PFRS 9 , there is substantial modification
of terms if the gain or loss on extinguishment is at least 10% of the old financial
liability.
The difference between the carrying amount of the old liability and the present
value of new or restructured liability shall be accounted for as gain or loss on
extinguishment of debt.
The old effective rate is used in computing the present value of the new liability
Any costs or fees incurred as a result of the substantial modification of terms
shall be recognized as part of gain or loss on extinguishment.