10 percent cash flow test for modification versus extinguishment

Liabilities13

1. 470-10Overall470 Debt

   ASC 470-10 is the Overall subtopic of the Debt topic and governs a borrower's balance sheet classification (current vs. noncurrent) of specific obligations: short-term obligations expected to be refinanced, due-on-demand loans, callable debt and covenant violations, revolving credit agreements with lock-box arrangements and subjective acceleration clauses, increasing-rate debt, sales of future revenue, and indexed debt. Core rules: callable and demand obligations are current unless a waiver/cure exception applies (470-10-45-10 through 45-11), and a short-term obligation may be excluded from current liabilities only if the entity intends to refinance long term and demonstrates ability via post-balance-sheet issuance of long-term debt/equity or a qualifying financing agreement (470-10-45-14). It also sets debt-versus-deferred-income classification for proceeds from sales of future revenue and disclosure requirements for maturities, unused lines of credit, and refinancings.

2. 470-20Debt with Conversion and Other Options470 Debt

   ASC 470-20 governs the issuer's accounting for debt with detachable warrants, convertible debt instruments, interest forfeited on conversion, induced conversions, conversions triggered by the issuer's call, and own-share lending arrangements entered into in contemplation of a convertible debt offering. After ASU 2020-06 eliminated the cash conversion and beneficial conversion feature models, the default rule is that convertible debt is accounted for in its entirety as a liability with no proceeds allocated to the conversion feature (470-20-25-12), unless the feature must be bifurcated as a derivative under 815-15 or the debt was issued at a substantial premium (470-20-25-13). Proceeds of debt issued with detachable warrants, by contrast, are allocated between the debt and the warrants based on relative fair values (470-20-25-2).

3. 470-30Participating Mortgage Loans470 Debt

   ASC 470-30 governs how a *borrower* accounts for a participating mortgage loan — a mortgage in which the lender is entitled to share in appreciation in the fair value of the mortgaged real estate project, in its results of operations, or both. If the lender participates in fair value appreciation, the borrower recognizes a participation liability at the fair value of the participation feature at loan inception with an offsetting debt discount, remeasures the liability to current fair value each reporting period (adjusting the discount), and amortizes the discount to interest expense using the interest method. Participations in results of operations are charged to interest expense in the period incurred with a credit to the participation liability.

4. 470-40Product Financing Arrangements470 Debt

   ASC 470-40 governs product financing arrangements — transactions in which a "sponsor" arranges for another entity to buy and hold inventory on its behalf (or controls the disposition of such product) with a related commitment to buy it back at specified prices covering the other entity's financing and holding costs. Because the sponsor is in substance the owner of the product, the arrangement is accounted for as a borrowing rather than a sale: the sponsor records the inventory as an asset and a corresponding liability when the other entity buys the product (470-40-25-1 through 25-2). After ASU 2014-09, sale-and-repurchase legs are handled under Topic 606, leaving this Subtopic focused on purchases made by another entity on the sponsor's behalf.

5. 470-50Modifications and Extinguishments470 Debt

   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.

6. 470-60Troubled Debt Restructurings by Debtors470 Debt

   ASC 470-60 governs how a debtor accounts for a troubled debt restructuring (TDR) — a restructuring in which the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession it would not otherwise consider (470-60-15-5). Settlements by transfer of assets or grant of an equity interest are measured at fair value, with a gain on restructuring equal to the excess of the payable's carrying amount over that fair value (470-60-35-2, 35-4). Pure modifications of terms are accounted for prospectively with no change in carrying amount and a new effective interest rate, unless total future cash payments (including contingent amounts) are less than the carrying amount, in which case the debtor writes down the payable and recognizes a gain (470-60-35-5 through 35-7).

7. 470-932Extractive Activities—Oil and Gas470 Debt

   This Subtopic governs how oil and gas entities account for certain "conveyance" transactions that are, in substance, borrowings repayable in cash or its equivalent. Under 470-932-25-1, such arrangements must be recorded as a payable by the operator receiving the funds and a receivable by the party advancing the funds, rather than as a sale or conveyance of mineral interests.

8. 470-942Financial Services—Depository and Lending470 Debt

   This Subtopic gives industry-specific presentation and disclosure rules for the borrowings and long-term obligations of depository and lending institutions. Significant categories of borrowings must appear as separate balance sheet line items (or one line with note detail of components), mortgage transfers treated as secured borrowings under Topic 860 must be shown as debt separately from advances, other notes payable and subordinated debt, and notes must describe the principal terms of each debt agreement. Fair value estimates of deposit liabilities must exclude core deposit intangibles.

9. 470-944Financial Services—Insurance470 Debt

   This subtopic governs how an insurance entity that issues surplus notes (also called certificates of contribution, surplus debentures, or capital notes) accounts for them under GAAP. The core rule is that surplus notes are debt, not equity: they are presented as liabilities and interest is accrued over the note's life even though the domiciliary state insurance commissioner must approve each principal and interest payment (470-944-25-1, 35-1, 45-1).

10. 470-954Health Care Entities470 Debt

    This Subtopic gives health care entity-specific debt guidance, principally for tax-exempt bond financings. Bonds issued by a financing authority for a health care entity's benefit are recorded as a liability (or lease liability) only if the entity is responsible for repayment; otherwise the proceeds are reported as contributions from the sponsoring entity. It also addresses arbitrage rebate liabilities owed to the U.S. Treasury and the accounting for crossover refundings.

11. 470-958Not-for-Profit Entities470 Debt

    This subtopic addresses how a not-for-profit entity accounts for debt, in particular conduit financing obtained through state and local financing authorities. The core rule is that because the NFP is responsible for repaying tax-exempt bonds or other obligations issued on its behalf, the NFP recognizes that financing as a liability on its statement of financial position (470-958-25-1). Scope follows the NFP Overall Subtopic scope in Section 958-10-15.

12. 470-970Real Estate—General470 Debt

    This subtopic tells a real estate developer when it must record a liability for infrastructure debt issued by a municipality (special assessments) or by a tax increment financing (TIF) entity. The core rule is a presumption of liability recognition when the assessment levied on each individual property owner is a fixed or determinable amount for a fixed or determinable period (470-970-25-1); if the assessment is not fixed or determinable, no obligation is recorded, but credit support features (shortfall make-up, pledged assets, letters of credit) must be evaluated as contingencies under Topic 450 and possibly as guarantees under Topic 460.

13. 470-980Regulated Operations470 Debt

    This Subtopic modifies the general rule that gains and losses on early extinguishment of debt hit income immediately (Subtopic 470-50) for entities whose rates are set by a regulator. If the regulator will recover a reacquisition loss through future rates, the regulated entity capitalizes the excess of reacquisition price over net carrying amount as a regulatory asset; if the regulator will reduce future rates for a gain, the entity records a regulatory liability. Either amount is amortized as an adjustment of interest expense over the period reflected in rate-making.