Debt Restructuring Explained
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EANNA15Debt Restructuring Explained
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EANNA15CHAPTER 11
1. 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.
2. Three types of debt restructuring
a. Asset swap
b. Equity swap
c. Modification of terms
3. Asset swap-the transfer by the debtor to the creditor of any asset.
4. Dacion en pago- arises when a mortgaged property is offered by the debtor in full settlement of
the debt.
5. The accounting procedure of dacion en pago:
The dacion en pago transaction is accounted for as an asset swap form of debt
restructuring which requires the 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 interest and other charges more than the carrying amount of the property ,
there is a gain on extinguishment of debt.
6. Equity swap-is a transaction whereby the debtor and creditor may negotiate the terms of the
financial liability with the result that the liability is fully or partially extinguished by the debtor
issuing entity instruments to the creditor.
7. The initial measurement of the equity instruments issued in an equity swap:
Its initial measurement is at fair value of the equity instrument issued , unless that fair
value cannot be reliably measured.
8. Modifications of terms
It is the extinguishment of the old financial liability and the recognition of a new
financial liability.
9. The accounting for substantial modification of terms
The substantial modification of terms of an existingfinancial liability shall be accounted
for as an extinguishment of the old financialliability.There is substantial modificationof
terms if the gain or loss is at least 10% of the carrying amount of the liability'The
difference between the present value of the new liability over the carrying amount of
the liability is treated as gain or loss on extinguishment.
10. The accounting for nonsubstantial modification of terms:
Even if there is no modification of terms the gain or loss on modification should be
recognized in profit or loss.
