ASC

ASC 470-50

Modifications and Extinguishments

470 Debt

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In brief

IntermediateDerecognitionSubsequent measurementDebt and equityFinancial instruments

ASC 470-50 governs the debtor's accounting for extinguishments of debt and for modifications or exchanges of debt instruments with the same creditor (excluding troubled debt restructurings under 470-60 and conversions pursuant to conversion privileges under 470-20). Its core rule is the "10 percent cash flow test": if the present value of cash flows under the new instrument differs by at least 10% from the PV of the remaining cash flows of the original instrument (discounted at the original instrument's effective rate), the terms are substantially different and the transaction is accounted for as an extinguishment, with the new debt recorded at fair value and gain or loss recognized currently in income. If not substantially different, no gain or loss is recognized and a new effective interest rate is computed from the original carrying amount and revised cash flows.

Key points (7)
  • Any difference between the reacquisition price of debt and its net carrying amount is recognized in income in the period of extinguishment as a separate item and is never amortized to future periods (470-50-40-2); if the fair value option was elected, net carrying amount equals fair value at the reacquisition date and instrument-specific credit risk amounts in OCI are included in net income (470-50-40-2A).
  • An exchange of debt instruments with substantially different terms, or a substantial modification of terms, is accounted for as an extinguishment under 405-20-40-1 (470-50-40-6); otherwise modifications produce gain or loss only if the 405-20-40-1 conditions are met (470-50-40-8).
  • Instruments are 'substantially different' if the PV of the new instrument's cash flows differs by at least 10 percent from the PV of the original's remaining cash flows; even if under 10 percent, extinguishment accounting applies if the change in fair value of an embedded conversion option is at least 10 percent of the original debt's carrying amount, or if a substantive conversion option is added or eliminated (470-50-40-10).
  • Mechanics of the 10 percent test: include fees paid to or received from the creditor in the new instrument's cash flows, use the variable rate in effect for floating-rate debt, test both exercise and nonexercise of call/put features and use the assumptions producing the smaller change, discount at the original instrument's effective interest rate, and use terms from a year ago if there was a prior nonsubstantial modification within the year (470-50-40-12).
  • If substantially different, the new debt is initially recorded at fair value, which determines the gain or loss and the new effective rate (470-50-40-13); if not, a new effective rate is computed from the original carrying amount adjusted for an increase (but not a decrease) in the fair value of an embedded conversion option, with the offset to additional paid-in capital (470-50-40-14 through 40-15).
  • Creditor fees are included in extinguishment gain or loss if extinguishment accounting applies, but are deferred with existing premium/discount and amortized over the modified debt's term if not; third-party costs (e.g., legal fees) are capitalized and amortized like debt issue costs under extinguishment accounting but expensed as incurred otherwise (470-50-40-17 through 40-18).
  • Line-of-credit and revolving-debt changes are tested by comparing borrowing capacity (remaining term × maximum available credit): if new capacity is greater than or equal to old, unamortized costs, creditor fees, and third-party costs are deferred over the new arrangement; if less, unamortized deferred costs are written off in proportion to the decrease in borrowing capacity (470-50-40-21); an intermediary acting as agent is looked through, while one acting as principal is treated as a creditor (470-50-40-19 through 40-20).

For students. Refinancings are ubiquitous, so the modification-versus-extinguishment analysis and the resulting fee/cost treatment is a recurring practice and exam issue. Common mistakes: discounting at the new instrument's rate instead of the original effective rate, omitting creditor fees from the new cash flows, and assuming that failing the 10 percent test ends the analysis for convertible debt, where the separate conversion-option tests in 470-50-40-10(a)-(b) still apply.

debt extinguishment10 percent cash flow testsubstantially different termsdebt modificationembedded conversion optionagent versus principal intermediaryborrowing capacitydeferred debt issuance costs

Machine-generated study aid for ASC 470-50. Check the source paragraphs below.

470-50-00Status

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470-50-05Overview and Background

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470-50-05-1
This Subtopic discusses the accounting for all extinguishments of debt instruments, except debt that is extinguished through a troubled debt restructuring(see Subtopic 470-60) or a conversion of debt to equity securities of the debtor pursuant to conversion privileges provided in terms of the debt at issuance (see Subtopic 470-20).
470-50-05-2
This Subtopic also provides guidance on whether an exchange of debt instruments with the same creditor constitutes an extinguishment and whether a modification of a debt instrument should be accounted for in the same manner as an extinguishment.
470-50-05-3
In circumstances where an exchange of debt instruments or a modification of a debt instrument does not result in extinguishment accounting, this Subtopic provides guidance on the appropriate accounting treatment.
470-50-05-4
When debtors undergo a modification or exchange of a debt instrument, the resulting cash flows can be affected by changes in principal amounts, interest rates, or maturity. They can also be affected by fees exchanged between the debtor and creditor to effect changes in any of the following:
  1. a
    Recourse or nonrecourse features
  2. b
    Priority of the obligation
  3. c
    Collateralized (including changes in collateral) or noncollateralized features
  4. d
    Debt covenants or waivers
  5. e
    The guarantor (or elimination of the guarantor)
  6. f
    Option features.

470-50-15Scope and Scope Exceptions

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Entities

470-50-15-1
The guidance in this Subtopic applies to all entities.

Transactions

470-50-15-2
The guidance in this Subtopic applies, in part, to the following transactions and activities:
  1. a
    Extinguishments of debt effected by issuance of common or preferred stock, including redeemable and fixed-maturity preferred stock, that do not represent the exercise of a conversion right contained in the terms of the debt at issuance.
470-50-15-3
The guidance in this Subtopic does not apply to the following transactions and activities:
  1. a
    Conversions of debt into equity securities of the debtor pursuant to conversion privileges provided in the terms of the debt at issuance. Additionally, the guidance in this Subtopic does not apply to conversions of convertible debt instruments pursuant to terms that reflect changes made by the debtor to the conversion privileges provided in the debt at issuance (including changes that involve the payment of consideration) for the purpose of inducing conversion. Guidance on conversions of debt instruments (including induced conversions) is contained in paragraphs 470-20-40-13 and 470-20-40-15.
  2. b
    Extinguishments of debt through a troubled debt restructuring. (See Section 470-60-15 for guidance on determining whether a modification or exchange of debt instruments is a troubled debt restructuring. If it is determined that the modification or exchange does not result in a troubled debt restructuring, the guidance in this Subtopic shall be applied.)
  3. c
    Transactions entered into between a debtor or a debtor's agent and a third party that is not the creditor.
Transition date:(P) December 16, 2025; (N) December 16, 2025Transition guidance:
470-20-65-4The guidance in this Subtopic does not apply to the following transactions and activities:
  1. a
    Conversions of debt instruments pursuant to conversion privileges provided in the terms of those instruments. Additionally, the guidance in this Subtopic does not apply to conversions of convertible debt instruments pursuant to terms that reflect changes made by the debtor to the conversion privileges provided in the existing terms of those debt instruments (including changes that involve the payment of consideration) for the purpose of inducing conversion. Guidance on conversions of debt instruments (including induced conversions) is contained in paragraphs 470-20-40-4, 470-20-40-13, and 470-20-40-15.
  2. b
    Extinguishments of debt through a troubled debt restructuring. (See Section 470-60-15 for guidance on determining whether a modification or exchange of debt instruments is a troubled debt restructuring. If it is determined that the modification or exchange does not result in a troubled debt restructuring, the guidance in this Subtopic shall be applied.)
  3. c
    Transactions entered into between a debtor or a debtor's agent and a third party that is not the creditor.

Other Considerations

470-50-15-4
The general guidance for the extinguishment of liabilities is contained in Subtopic 405-20and defines transactions that the debtor shall recognize as an extinguishment of a liability.

470-50-40Derecognition

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Extinguishments of Debt

470-50-40-1
As indicated in paragraph 470-50-15-4, the general guidance for the extinguishment of liabilities is contained in Subtopic 405-20 and defines transactions that the debtor shall recognize as an extinguishment of a liability.
470-50-40-2
A difference between the reacquisition price of debt and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains and identified as a separate item. Gains and losses shall not be amortized to future periods. If upon extinguishment of debt the parties also exchange unstated (or stated) rights or privileges, the portion of the consideration exchanged allocable to such unstated (or stated) rights or privileges shall be given appropriate accounting recognition. Moreover, extinguishment transactions between related entities may be in essence capital transactions.
470-50-40-2A
In an early extinguishment of debt for which the fair value option has been elected in accordance with Subtopic 815-15 on embedded derivatives or Subtopic 825-10 on financial instruments, the net carrying amount of the extinguished debt shall be equal to its fair value at the reacquisition date. In accordance with paragraph 825-10-45-6, upon extinguishment an entity shall include in net income the cumulative amount of the gain or loss previously recorded in other comprehensive income for the extinguished debt that resulted from changes in instrument-specific credit risk.
470-50-40-3
In an early extinguishment of debt through exchange for common or preferred stock, the reacquisition price of the extinguished debt shall be determined by the value of the common or preferred stock issued or the value of the debt—whichever is more clearly evident.

Extinguishment of Convertible Debt

470-50-40-4
The extinguishment of convertible debt does not change the character of the security as between debt and equity at that time. Therefore, a difference between the cash acquisition price of the debt and its net carrying amount shall be recognized currently in income in the period of extinguishment as losses or gains.
470-50-40-5
The guidance in this Subtopic does not apply to debt tendered to exercise detachable warrants that were originally issued with that debt if the debt is permitted to be tendered towards the exercise price of the warrants under the terms of the securities at issuance. The tendering of the debt in such a case would be accounted for in the same manner as a conversion.

Modifications and Exchanges

470-50-40-6
An exchange of debt instruments with substantially different terms is a debt extinguishment and shall be accounted for in accordance with paragraph 405-20-40-1. A debtor could achieve the same economic effect as an exchange of a debt instrument by making a substantial modification of terms of an existing debt instrument. Accordingly, a substantial modification of terms shall be accounted for like an extinguishment.
470-50-40-7
Transactions among debt holders do not result in a modification of the original debt's terms or an exchange of debt instruments between the debtor and the debt holders and do not impact the accounting by the debtor.
470-50-40-8
Transactions involving the modification or exchange of debt instruments shall only result in gain or loss recognition by the debtor if the conditions for extinguishment of debt described in paragraph 405-20-40-1 are satisfied or if the guidance in this Subtopic requires that accounting.
470-50-40-9
Transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor would only be accounted for as debt extinguishments if the debt instruments have substantially different terms, as defined in this Subtopic.
470-50-40-10
From the debtor's perspective, an exchange of debt instruments between or a modification of a debt instrument by a debtor and a creditor in a nontroubled debt situation is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. If the terms of a debt instrument are changed or modified and the cash flow effect on a present value basis is less than 10 percent, the debt instruments are not considered to be substantially different, except in the following two circumstances:
  1. a
    A modification or an exchange affects the terms of an embedded conversion option, from which the change in the fair value of the embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) is at least 10 percent of the carrying amount of the original debt instrument immediately before the modification or exchange.
  2. b
    A modification or an exchange of debt instruments adds a substantive conversion option or eliminates a conversion option that was substantive at the date of the modification or exchange. (For purposes of evaluating whether an embedded conversion option was substantive on the date it was added to or eliminated from a debt instrument, see paragraphs
    470-20-40-7 through 40-9
    .)
470-50-40-11
With respect to the conditions in (a) and (b) in the preceding paragraph, this guidance does not address modifications or exchanges of debt instruments in circumstances in which the embedded conversion option is separately accounted for as a derivative under Topic 815 before the modification, after the modification, or both before and after the modification.
470-50-40-12
The following guidance shall be used to calculate the present value of the cash flows for purposes of applying the 10 percent cash flow test described in paragraph 470-50-40-10:
  1. a
    The cash flows of the new debt instrument include all cash flows specified by the terms of the new debt instrument plus any amounts paid by the debtor to the creditor less any amounts received by the debtor from the creditor as part of the exchange or modification. For a modification or an exchange of a freestanding equity-classified written call option held by a creditor that is a part of or directly related to a modification or an exchange of an existing debt instrument held by that same creditor (see paragraphs
    815-40-35-14 through 35-15
    and 815-40-35-17(c)), an entity shall apply the guidance in paragraph 470-50-40-12A.
  2. b
    If the original debt instrument or the new debt instrument has a floating interest rate, then the variable rate in effect at the date of the exchange or modification shall be used to calculate the cash flows of the variable-rate instrument.
  3. c
    If either the new debt instrument or the original debt instrument is callable or puttable, then separate cash flow analyses shall be performed assuming exercise and nonexercise of the call or put. The cash flow assumptions that generate the smaller change would be the basis for determining whether the 10 percent threshold is met.
  4. d
    If the debt instruments contain contingent payment terms or unusual interest rate terms, judgment shall be used to determine the appropriate cash flows.
  5. e
    The discount rate to be used to calculate the present value of the cash flows is the effective interest rate, for accounting purposes, of the original debt instrument.
  6. f
    If within a year of the current transaction the debt has been exchanged or modified without being deemed to be substantially different, then the debt terms that existed a year ago shall be used to determine whether the current exchange or modification is substantially different.
  7. g
    The change in the fair value of an embedded conversion option resulting from an exchange of debt instruments or a modification in the terms of an existing debt instrument shall not be included in the 10 percent cash flow test. Rather, a separate test shall be performed by comparing the change in the fair value of the embedded conversion option to the carrying amount of the original debt instrument immediately before the modification, as specified in paragraph 470-50-40-10(a).
470-50-40-12A
If a modification or an exchange of a freestanding equity-classified written call option held by a creditor is a part of or directly related to a modification or an exchange of an existing debt instrument held by that same creditor (see paragraphs
815-40-35-14 through 35-15
and 815-40-35-17(c)), an increase or a decrease in the fair value of the freestanding equity-classified written call option held by the creditor, calculated in accordance with paragraph 815-40-35-16, shall be included in the application of the 10 percent cash flow test described in paragraph 470-50-40-10.

Subsequent Accounting for Modifications and Exchanges If Extinguishment Accounting Is Applied

470-50-40-13
If it is determined that the original and new debt instruments are substantially different, the new debt instrument shall be initially recorded at fair value, and that amount shall be used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument.

Subsequent Accounting for Modifications and Exchanges If Extinguishment Accounting Is Not Applied

470-50-40-14
If it is determined that the original and new debt instruments are not substantially different, then a new effective interest rate shall be determined based on the carrying amount of the original debt instrument, adjusted for an increase (but not a decrease) in the fair value of an embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) resulting from the modification, and the revised cash flows.
470-50-40-15
If a convertible debt instrument is modified or exchanged in a transaction that is not accounted for as an extinguishment, an increase in the fair value of the embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) shall reduce the carrying amount of the debt instrument (increasing a debt discount or reducing a debt premium) with a corresponding increase in additional paid-in capital. However, a decrease in the fair value of an embedded conversion option resulting from a modification or an exchange shall not be recognized.

Fees between Debtor and Creditor

470-50-40-17
Fees paid by the debtor to the creditor or received by the debtor from the creditor (fees may be received by the debtor from the creditor to cancel a call option held by the debtor or to extend a no-call period) as part of the exchange or modification shall be accounted for as follows:
  1. a
    If the exchange or modification is to be accounted for in the same manner as a debt extinguishment and the new debt instrument is initially recorded at fair value, then the fees paid or received shall be associated with the extinguishment of the old debt instrument and included in determining the debt extinguishment gain or loss to be recognized.
  2. b
    If the exchange or modification is not to be accounted for in the same manner as a debt extinguishment, then the fees shall be associated with the replacement or modified debt instrument and, along with any existing unamortized premium or discount, amortized as an adjustment of interest expense over the remaining term of the replacement or modified debt instrument using the interest method.
For fees between the debtor and creditor for exchanges of or modifications to line-of-credit or revolving-debt arrangements, see paragraph 470-50-40-21.
470-50-40-17A
An increase or a decrease in the fair value of a freestanding equity-classified written call option held by a creditor (calculated in accordance with paragraph 815-40-35-16) that is modified or exchanged as a part of or is directly related to a modification or an exchange of a debt instrument held by that same creditor (see paragraphs
815-40-35-14 through 35-15
and 815-40-35-17(c)) shall be accounted for in the same manner as fees between the debtor and the creditor as described in paragraph 470-50-40-17.

Third-Party Costs of Exchange or Modification

470-50-40-18
Costs incurred with third parties directly related to the exchange or modification (such as legal fees) shall be accounted for as follows:
  1. a
    If the exchange or modification is to be accounted for in the same manner as a debt extinguishment and the new debt instrument is initially recorded at fair value, then the costs shall be associated with the new debt instrument and amortized over the term of the new debt instrument using the interest method in a manner similar to debt issue costs.
  2. b
    If the exchange or modification is not to be accounted for in the same manner as a debt extinguishment, then the costs shall be expensed as incurred.
For third-party costs for exchanges of or modifications to line-of-credit or revolving-debt arrangements, see paragraph 470-50-40-21.
470-50-40-18A
An increase (but not a decrease) in the fair value of a freestanding equity-classified written call option held by a third party (calculated in accordance with paragraph 815-40-35-16) that is modified or exchanged as a part of or is directly related to a modification or an exchange of a debt instrument (see paragraphs
815-40-35-14 through 35-15
and 815-40-35-17(c)) shall be accounted for in the same manner as third-party costs incurred that are directly related to the modification or exchange of a debt instrument as described in paragraph 470-50-40-18.

Transactions Involving Third-Party Intermediaries

470-50-40-19
In transactions involving a third-party intermediary acting as agent on behalf of a debtor, the actions of the intermediary shall be viewed as those of the debtor in order to determine whether there has been an exchange of debt instruments or a modification of terms between a debtor and a creditor. Stated another way, if a third-party intermediary acts as agent, the analysis shall look through the intermediary.
470-50-40-20
In transactions involving a third-party intermediary acting as principal, the intermediary should be viewed as a third-party creditor similar to any other creditor in order to determine whether there has been an exchange of debt instruments or a modification of terms between a debtor and a creditor. Stated another way, if a third-party intermediary acts as principal, the analysis should not look through the intermediary.

Line-of-Credit or Revolving-Debt Arrangements

470-50-40-21
Modifications to or exchanges of line-of-credit or revolving-debt arrangements resulting in either a new line-of-credit or revolving-debt arrangement or resulting in a traditional term-debt arrangement shall be evaluated in the following manner:
  1. a
    The debtor shall compare the product of the remaining term and the maximum available credit of the old arrangement (this product is referred to as the borrowing capacity) with the borrowing capacity of the new arrangement.
  2. b
    If the borrowing capacity of the new arrangement is greater than or equal to the borrowing capacity of the old arrangement, then any unamortized deferred costs, any fees paid to the creditor, and any third-party costs incurred shall be associated with the new arrangement (that is, deferred and amortized over the term of the new arrangement).
  3. c
    If the borrowing capacity of the new arrangement is less than the borrowing capacity of the old arrangement, then:
    1. 1
      Any fees paid to the creditor and any third-party costs incurred shall be associated with the new arrangement (that is, deferred and amortized over the term of the new arrangement).
    2. 2
      Any unamortized deferred costs relating to the old arrangement at the time of the change shall be written off in proportion to the decrease in borrowing capacity of the old arrangement. The remaining unamortized deferred costs relating to the old arrangement shall be deferred and amortized over the term of the new arrangement.
  • Fees between the debtor and the creditor include an increase or a decrease in the fair value of a freestanding equity-classified written call option held by a creditor (calculated in accordance with paragraph 815-40-35-16) that is modified or exchanged as a part of or is directly related to a modification or an exchange of a line-of-credit or revolving-debt arrangement held by that same creditor (see paragraphs
    815-40-35-14 through 35-15
    and 815-40-35-17(c)). Third-party costs include an increase (but not a decrease) in the fair value of a freestanding equity-classified written call option held by a third party (calculated in accordance with paragraph 815-40-35-16) that is modified or exchanged as a part of or is directly related to a modification or an exchange of a line-of-credit or revolving-debt arrangement (see paragraphs
    815-40-35-14 through 35-15
    and 815-40-35-17(c)).
  • For fees between the debtor and the creditor or third-party costs not related to exchanges of or modifications to a line-of-credit or revolving-debt arrangements resulting in either a new line-of-credit or revolving-debt arrangement, see paragraphs 470-50-40-17 through 40-18A.
470-50-40-22
The guidance in this Subtopic is limited to modifications to or exchanges of line-of-credit or revolving-debt arrangements by a debtor and a creditor (the same parties that were involved in the original line-of-credit or revolving-debt arrangement) in a nontroubled situation.
470-50-40-23
See Example 1 (paragraph 470-50-55-10) for an illustration of this guidance.

470-50-45Other Presentation Matters

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470-50-50Disclosure

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470-50-50-1
If debt was considered to be extinguished by in-substance defeasance under the provisions of FASB Statement No. 76, Extinguishment of Debt, before the effective date of FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a general description of the transaction and the amount of debt that is considered extinguished at the end of each period that debt remains outstanding shall be disclosed.

470-50-55Implementation Guidance and Illustrations

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Implementation Guidance

470-50-55-1
Based on the definition of a loan participation, for purposes of applying the guidance in this Subtopic, the debt instrument would be the contract between the debtor and the lead bank. Participating banks are not direct creditors but, rather, have an interest represented by a certificate of participation. In the event of a modification or exchange between the debtor and lead bank, the debtor shall apply the guidance in this Subtopic.
470-50-55-2
Based on the definition of a loan syndication, for purposes of applying the guidance in this Subtopic, separate debt instruments exist between the debtor and the individual creditors participating in the syndication. If an exchange or modification offer is made to all members of the syndicate and only some of the creditors agree to the exchange or modification, the guidance in this Subtopic would be applied to debt instruments held by those creditors that agree to the exchange or modification. Debt instruments held by those creditors that do not agree would not be affected.
470-50-55-3
In a public debt issuance, for purposes of applying the guidance in this Subtopic, the debt instrument is the individual security held by an investor, and the creditor is the security holder. If an exchange or modification offer is made to all investors and only some agree to the exchange or modification, then the guidance in this Subtopic shall be applied to debt instruments held by those investors that agree to the exchange or modification. Debt instruments held by those investors that do not agree would not be affected.
470-50-55-4
In transactions involving a third-party investment banker acting as agent on behalf of the debtor, the activity of the investment banker is treated as if it were the activity of the debtor. Thus, if the investment banker acquires debt instruments from holders for cash, the debtor has an extinguishment even if the investment banker subsequently transfers a debt instrument with the same or different terms to the same or different investors. If the investment banker acting as agent on behalf of the debtor acquires instruments from holders by exchanging those instruments for new debt, the guidance in this Subtopic shall be applied. If the investment banker acquires debt instruments from holders for cash and contemporaneously issues new debt instruments for cash, an extinguishment has occurred only if the two debt instruments have substantially different terms, as defined in Section 470-50-40.
470-50-55-5
In transactions involving a third-party investment banker acting as principal, the investment banker is considered a debt holder like other debt holders. Thus, if the investment banker acting as principal acquires debt instruments from other parties, the acquisition by the investment banker does not impact the accounting by the debtor, and exchanges or modifications between the debtor and the investment banker shall follow the guidance in this Subtopic.
470-50-55-6
If a debt instrument is transferred from one debt holder to another in connection with a modification or exchange, including transfers from an intermediary acting as principal to another debt holder, the debtor is not impacted by the exchange as long as the funds do not pass through the debtor or its agent.
470-50-55-7
Transactions between a debtor and a third-party creditor should be analyzed based on the guidance in paragraph 405-20-40-1 and the guidance in this Subtopic to determine whether gain or loss recognition is appropriate. Application of the guidance in this Subtopic may require determination of whether a third-party intermediary is an agent or a principal and consideration of legal definitions may be helpful in making that determination. Generally, an agent acts for and on behalf of another party. Therefore, a third-party intermediary is an agent of a debtor if it acts on behalf of the debtor. In addition, an evaluation of the facts and circumstances surrounding the involvement of a third-party intermediary should be performed. The following indicators should be considered in that evaluation:
  1. a
    If the intermediary's role is restricted to placing or reacquiring debt for the debtor without placing its own funds at risk, that would indicate that the intermediary is an agent. For example, that may be the case if the intermediary's own funds are committed and those funds are not truly at risk because the intermediary is made whole by the debtor (and therefore is indemnified against loss by the debtor). If the intermediary places and reacquires debt for the debtor by committing its funds and is subject to the risk of loss of those funds, that would indicate that the intermediary is acting as principal.
  2. b
    In an arrangement where an intermediary places notes issued by the debtor, if the placement is done under a best-efforts agreement, that would indicate that the intermediary is acting as agent. Under a best-efforts agreement, an agent agrees to buy only those securities that it is able to sell to others; if the agent is unable to remarket the debt, the issuer is obligated to pay off the debt. The intermediary may be acting as principal if the placement is done on a firmly committed basis, which requires the intermediary to hold any debt that it is unable to sell to others.
  3. c
    If the debtor directs the intermediary and the intermediary cannot independently initiate an exchange or modification of the debt instrument, that would indicate that the intermediary is an agent. The intermediary may be a principal if it acquires debt from or exchanges debt with another debt holder in the market and is subject to loss as a result of the transaction.
  4. d
    If the only compensation derived by an intermediary from its arrangement with the debtor is limited to a preestablished fee, that would indicate that the intermediary is an agent. If the intermediary derives gains based on the value of the security issued by the debtor, that would indicate that the intermediary is a principal.
470-50-55-8
This Subtopic applies to transactions in which the terms of a debt instrument are modified through execution of a binding contract between the debtor and creditor that requires a debt instrument to be redeemed at a future date for a specified amount.
470-50-55-9
The following situations do not result in an extinguishment and would not result in gain or loss recognition under either paragraph 405-20-40-1 or this Subtopic:
  1. a
    An announcement of intent by the debtor to call a debt instrument at the first call date
  2. b
    In-substance defeasance
  3. c
    An agreement with a creditor that a debt instrument issued by the debtor and held by a different party will be redeemed.

Illustrations

470-50-55-10
This Example illustrates the application of the guidance in paragraphs
470-50-40-21 through 40-22
for changes in line-of-credit or revolving-debt arrangements.
470-50-55-11
Terms of original arrangement are as follows:
  1. a
    Five-year term (three years remaining)
  2. b
    $10 million commitment amount
  3. c
    The borrowing capacity under the original arrangement at the time of the change is $30 million, the product of the remaining term (3 years) and the commitment amount ($10 million).
470-50-55-12
The following situations represent changes that are made (with the same creditor) to the original terms:
  1. a
    The commitment amount is increased to $15 million, the term of the new arrangement remains at 3 years (borrowing capacity is $45 million).
  2. b
    The commitment amount is decreased to $2 million, the term of the new arrangement is 5.5 years (borrowing capacity is $11 million).
  3. c
    The original revolver is replaced with a 3-year, $7.5 million term loan, with principal due at the end of 3 years (borrowing capacity is $22.5 million).
  4. d
    The original revolver is replaced with a 3-year, $10 million term loan, with principal due at the end of 3 years (borrowing capacity is $30 million).
470-50-55-13
In all of the situations described, at the time the change is made to the original arrangement, $150,000 of unamortized costs relating to the original arrangement remain on the debtor's balance sheet; the debtor pays a fee of $100,000 to the creditor; and the debtor incurs third-party costs of $200,000.
  • The following illustrates the various situations described in this Example.
    • Case Old Borrowing Capacity New Borrowing Capacity Accounting Treatment of Unamortized Deferred Costs Accounting Treatment of Fees and Third-Party Costs Incurred A 30 million 45 million "$150,000 is amortized over 3 years." "$300,000 is deferred and amortized over 3 years." B 30 million 11 million "63 percent of the unamortized costs ($94,500) are written off; the remaining costs ($55,500) are amortized over 5.5 years." "$300,000 is deferred and amortized over 5.5 years." C 30 million 22.5 million "25 percent of the unamortized costs ($37,500) are written off; the remaining costs ($112,500) are amortized over 3 years." "$300,000 is deferred and amortized over 3 years." D 30 million 30 million "$150,000 is amortized over 3 years." "$300,000 is deferred and amortized over 3 years."

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