This self-study is also mobile-compatible. Read now. 5. The following flowchart sets out how to assess whether or not a debt modification is substantial: The role of fees in the 10% test As mentioned above, if the '10% test' is exceeded in the quantitative test, this results in a substantial modification. You can set the default content filter to expand search across territories. 2023 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. These remaining investments typically give the investor limited (if any) influence over the investee. However, unlike IFRS 9, US GAAP has different guidance for fees paid to the lender and for third-party costs (e.g. Delivering insights to financial reporting professionals. Carry out therapeutic regimens such as behavior modification and personal development programs, under the supervision of special education instructors, psychologists, or speech-language pathologists. Latest edition: The KPMG in-depth guide to ASC 815 derivatives and hedge accounting post ASU 2017-12. Sharing your preferences is optional, but it will help us personalize your site experience. All rights reserved. Connect with us via webcast, podcast or in person/virtual at industry conferences. For affected institutions, the amendments compel advanced planning . Cash flows are defined as net of any fees paid and/or received2 and are discounted using the effective interest rate of the original debt. Latest edition: Our comprehensive guide to the statement of cash flows, with Q&As and examples to explain key concepts. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. By providing your details and checking the box, you acknowledge you have read the, The following fields are not editable on this screen: First Name, Last Name, Company, and Country or Region. This Subtopic provides accounting and reporting guidance for debt (and certain preferred stock) with specific conversion features and other options as follows: Debt instruments with detachable warrants Convertible securitiesgeneral Beneficial conversion features Interest forfeiture Induced conversions However, under IFRS standards, when an equity conversion option included in the original debt is modified as part of a restructuring of the debt, judgment is applied in assessing whether the modification of the conversion option is substantial. IFRS 9 has now been applicable for over a year, but some of its changes have often been either overseen or neglectedeven when they could have a material impact on the accounts. In-depth guidance on, and interpretation of, ASC 326. Entities that have adopted the credit impairment standard (ASC 326). Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG webcasts and in-person events cover the latest financial reporting standards, resources and actions needed for implementation. Explore the topics at the Financial Reporting View. US GAAP is more prescriptive and also provides specific guidance for troubled debt restructurings. Latest edition: Our in-depth guide to ASC 205-20 and held-for-sale disposal groups under ASC 360-10. In-depth guide on presentation and disclosure requirements under US GAAP, plus considerations under SEC regulations. Is the net present value of the debt cash flows under the new terms different by at least 10% from the present value of the remaining cash flows under the original terms? Improving business performance, turning risk and compliance into opportunities, developing strategies and enhancing value are at the core of what we do for leading organizations. Yes; early adoption is permitted for an entity that has adopted ASC 326 in any interim period as of the beginning of the fiscal year that includes the interim period. KPMG International provides no client services. See FG 3.4 for information on modifications and exchanges of term loans and debt securities, and FG 3.6 for information on modifications and exchanges of loan syndications and participations. The accounting change has been particularly impactful to institutions with significant lending activities or investments in debt securities. Depending on the circumstances, and the nature and extent of the contractual changes, the carrying amount of the modified debt and the impact to profit or loss can be significantly different. Global Head of Debt Advisory, Global Lead Partner, Engage with your customers on their terms, KPMG Powered Enterprise Automation Testing, KPMG Powered Enterprise Digital Solutions, KPMG Connected Enterprise Capability Maturity Assessment, Optimizing operations with KYC Managed Services, Increasing efficiency with MRM managed services, Architecting Risk and Operational Transformation, Anti-Money Laundering and Trade Sanctions Services, Statutory Accounting & Bookkeeping Compliance, Better Business Reporting/Integrated Reporting. Our purpose with this book is to help you gain a thorough understanding of the standard information that is useful no matter where you are on the path. KPMG does not provide legal advice. revise the effective interest rate of the debt). Defining Issues: FASB amends TDR guidance and enhances disclosures, Companies that hold investments in debt and equity securities, Accounting for investments in debt securities, Accounting for investments in equity securities. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. need to be dealt with using other modification requirements in IFRS 9 (including assessing whether the change results in derecognition of the borrowing). use the relevant benchmark interest rate determined for the current interest accrual period according to the original terms of the debt instrument; or. Latest edition: Our updated guide to applying ASC 606 to software & SaaS contracts, with comparisons to legacy US GAAP. KPMG does not provide legal advice. Reduction in impairment models Both IFRS Standards and US GAAP3use a 10% threshold in the quantitative assessment to determine if a debt modification is substantial. Once this webcast has been presented, it will be available as a CPE-Eligible Self-Study. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. This was slightly down on the 2015 rate of 81%. Appendix F provides a summary of the . Latest edition: KPMG explains accounting for share-based payments. KPMG Technical Accounting Advisory Services provides on-call advice and project-based support in many areas, including: Accounting advice, interpretation, and transactional support for mergers, acquisitions, divestitures, investments, structured finance, debt and equity offerings, leasing, and derivatives. For a variety of reasons, borrowers and lenders may renegotiate the terms of existing loans or exchange an existing loan for a new loan with the same lender. Increased auditing standards, such as SAS Nos. This is even true for transactions that do not involve cash. Non-substantial debt modifications may result in a gain or loss under IFRS 9; not under US GAAP. Womble Bond Dickinson (UK) LLP's property litigation team 'provides clear and practical advice' to its roster of clients, which includes housing associations, local authorities, property developers and investors, landed estates and retailers.Senior counsel and national team leader Jen Smurthwaite splits her time between the firm's Leeds and Newcastle offices, and advises on contentious . Delivering insights to financial reporting professionals. 4. 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. Delivering KPMG's guidance, publications and insights on the application of IFRS in the United States. Under US GAAP, the first step is to determine whether a debt modification is a TDR. Do the changes increase the borrowing capacity of a line-of-credit or revolving debt arrangement. Informing your decision-making. Explore the topics at the Financial Reporting View. Partner, Dept. We use cookies to personalize content and to provide you with an improved user experience. The FASB has issued guidance deferring the effective dates for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and other private companies, including not-for-profits and employee benefit plans. In the interim, please subscribe to the Financial Reporting View for the latest insights on this topic. Step 4: Allocate the transaction price to the performance obligations in the contract. Our publication,A guide to accounting for debt modifications and restructurings, addresses the borrowers accounting for the modification, restructuring or exchange of a loan. SEC filers that are not eligible to be smaller reporting companies, Annual and interim periods in fiscal years beginning after Dec 15, 2019, Annual and interim periods in fiscal years beginning after Dec 15, 20221, All other entities, including not-for-profits and employee benefit plans, Permitted as of the beginning of the fiscal year, Permitted for an entity that has adopted ASU 2016-13 as of the beginning of the fiscal year. Latest edition: Side-by-side comparison of IFRS Accounting Standards and US GAAP. A modification of a debt instrument is generally treated as a debt-for-debt exchange if the modification is a "significant modification," which depends on whether there is a sufficient change inthe terms of the debt instrum ent, including for example a meaningful change intiming of repayment, obligor or collateral, or a change in natureof the 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. For inquiries and feedback please contact our AccountingLink mailbox. Use our Accounting Research Online for financial reporting resources. Nonbanks that have yet to adopt the guidance should (1) focus on identifying which financial instruments and other assets are subject to the CECL model and (2) evaluate whether they need to make changes to existing credit impairment models to comply with the new standard. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Each member firm is a separate legal entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. The University's total enrolments exceeded . The statement of cash flows is a central component of an entitys financial statements. In-depth analysis, examples and insights to give you an advantage in understanding the requirements and implications of financial reporting issues. This specific guidance does not exist in IFRS 9, where the assessment requires more judgment. For more detail about our structure please visithttps://kpmg.com/governance. Rather than waiting for scrutiny this is a good time for entities to revisit the how-tos in preparing the statement of cash flows. of Professional Practice, KPMG US. Applicability We walk you through available accounting options so that you can make the choice that is right for you. Our publication, A guide to accounting for debt and equity instruments in financing transactions, is intended to be a resource in understanding and analyzing some of the accounting guidance that may be relevant when accounting for debt and equity instruments issued in financing transactions. When they are substantially modified (i.e. For guidance on assets acquired through an asset acquisition refer to PPE 2. We intend to continue the dialogue updating our guidance to provide our insights on issues that arise. Select a section below and enter your search term, or to search all click David Heathcote, Global Head of Debt Advisory and Global Lead Partner. KPMGs integrated team of specialists uses game-changing technology to give you confidence across the transaction life cycle. Informing your decision-making. The ASU: Eliminates the requirement for creditors to recognize and measure certain modifications as troubled debt restructurings. The difference between the carrying amount of the original debt and the consideration paid to extinguish it, which includes the fair value of the new debt. Step 5: Recognize revenue when (or as) the entity satisfies a . Get the latest KPMG thought leadership directly to your individual personalized dashboard. US GAAP treats debt modification costs paid to third parties differently from those paid to lenders; IFRS 9 does not. Unlike IFRS 9, US GAAP does not require or permit a qualitative assessment if the 10% quantitative test is not met. This one focuses on accounting for debt modifications. IFRS 9 requires the amortised cost of the liability to be recalculated by discounting the modified contractual cash flows (excluding costs and fees) using the original effective interest rate. Any costs or fees incurred are generally included in profit or loss, too. In bringing this guidance together, we aim to help you effectively and efficiently identify the guidance that applies to different types of investments and understand the related accounting requirements. Instead, the effective interest rate of the debt is recalculated so that the present value of the modified contractual cash flows equals its amortized cost. Unlike IFRS 9 (see above table), under US GAAP, if the debt modification is non-substantial, the carrying amount of the original debt is not adjusted and therefore no gain or loss is recognized. An entity may elect to early adopt the amendments related to receivable modifications by creditors separately from the amendments related to vintage disclosures gross writeoffs. Weve organized it by transaction type, making it easier to identify the answers to the common and not so common questions that you may have. For more detail about the structure of the KPMG global organization please visithttps://home.kpmg/governance. Latest edition: We highlight significant differences in accounting for asset acquisitions vs business combinations. of Professional Practice, KPMG US, Executive Director, Dept. Please see www.pwc.com/structure for further details. Latest edition: Our comprehensive guide to managements going concern assessment. Both IFRS Standards and US GAAP address debt modifications. Sharing our expertise and perspective. Welcome to Viewpoint, the new platform that replaces Inform. Partner, Dept. We explain cash flow classification issues and noncash disclosure requirements in detail. The primary decision points considered by the borrower in accounting for the modification, restructuring or exchange of one of its loans include: The conclusion reached by a borrower in considering each of these decision points (in conjunction with the related authoritative literature) could have a significant effect on its financial statements. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. KPMG does not provide legal advice. Partner, Dept. Ind AS Implementation Guide I 26 Key principles Financial instruments that give rise to a contractual obligation to deliver cash or another financial asset are classified as financial liabilities. KPMG webcasts and in-person events cover the latest financial reporting standards, resources and actions needed for implementation. Adjust the carrying amount of the debt to the net present value of the revised cash flows discounted using the original effective interest rate (applying floating rate approach where appropriate). This complexity is compounded by the fact that every transaction recorded through the financial statements needs to be assessed for its impact on the statement of cash flows. of Professional Practice, KPMG US. Debt, warrants, and equity: Whats trending in SEC comments, Company name must be at least two characters long. legal fees) which may result in differences in practice. This complexity increases for dual preparers because of the differences between IFRS Standards and US GAAP. Sharing our expertise and perspective. Enhances the disclosures by creditors for certain modifications of receivables to debtors experiencing financial difficulty. This content outlines initial considerations meriting further consultation with life sciences organizations, healthcare organizations, clinicians, and legal advisors to explore feasibility and risks. The modification affects the terms of an embedded conversion option, causing a change in the fair value of the embedded conversion option of at least 10% of the carrying amount of the original debt immediately before the modification. Kpmg International across territories or fees incurred are generally included in profit or,... Platform that replaces Inform View for the latest financial reporting Standards, resources and actions needed for implementation the benchmark!, publications and insights on this topic involve cash debt securities ; IFRS 9 ; not under US...., ASC 326 ) intend to continue the dialogue updating our guidance provide. It will be available as a CPE-Eligible Self-Study, US GAAP the application of IFRS accounting Standards US. 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