The Financial Accounting Standards Board issued a proposed standard on April 30 that would provide accounting guidance for debt exchange transactions involving multiple creditors.
The proposed Accounting Standards Update is based on a recommendation from the standard-setting board’s Emerging Issues Task Force.
The amendments in the proposed ASU would apply to transactions that involve the contemporaneous exchange of cash between the same debtor and creditor in connection with the issuance of a new debt obligation with multiple creditors and the satisfaction of an existing debt obligation, the FASB said.
Under current U.S. GAAP, when an entity modifies an existing debt instrument or exchanges debt instruments, it’s required to determine whether the transaction should be accounted for as:
- A modification of the existing debt obligation, or
- The issuance of a new debt obligation and an extinguishment of the existing debt obligation (with certain exceptions).
“Stakeholders have expressed concerns that accounting for an exchange of debt instruments as a modification of the existing debt obligation, rather than as an extinguishment, does not reflect the economics of certain exchanges of debt instruments when the issuance of the new debt instrument and the contemporaneous repayment of the existing debt instrument are independent transactions,” the FASB says in the exposure draft for the proposed standard. “In addition, stakeholders have indicated that the current guidance, particularly the requirement to perform a quantitative analysis of the change in cash flows, is challenging and costly to apply.”
The proposed ASU would specify that an exchange of debt instruments that meets certain requirements should be accounted for by the debtor as the issuance of a new debt obligation and an extinguishment of the existing debt obligation.
The FASB expects this would improve the decision usefulness of financial reporting information provided to investors by requiring that economically similar exchanges of debt instruments be accounted for similarly. It also would reduce diversity in practice in accounting for such debt instrument exchanges, the board said.
Stakeholders are asked to review and provide comments on the proposed ASU by May 30, 2025. Instructions on how to provide comments can be found in the exposure draft.
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