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Debt Modification and Cash Flow

IFRS 9 – Debt Modifications

There can be various modifications in the terms of your debt agreements such as change in the maturity dates, change in interest rates, elimination of the conversion feature and so on. The change may be due to any financial difficulties faced by the borrower, change in market conditions, changes in the financial position of the lenders and so on. In this article we will discuss how to deal with such debt modifications in line with IFRS 9.

Debt Modification Assessment

Quantitative assessment (the 10% test) – Check if the difference between net present value of debt cash flow under the new terms and original terms 10% or more. If yes, the modification is considered Substantial Modification.

Qualitative assessment – Check the nature of modification, if the said is not covered under the quantitative assessment test, then the qualitative assessment should be carried out. Verify if the nature of modification seems significant, such as change in embedded conversion option. If yes, the modification is considered Substantial Modification.

Accounting for Substantial v/s Non-Substantial Debt Modification

Accounting for Substantial v/s Non-Substantial Debt Modification

Examples of Modification Accounting

Substantial Modification

Entity X has an loan of US$ 1,000,000 from the bank at 10% interest rate.

The original maturity date is March 31, 2022.

The loan is extended for further 2 years with an increased interest rate of interest to 12%.

The modification in the terms leads to the net present value of the future revised cash flow, discounted at the original effective interest rate to $1,153,468.

The difference is more than 10% and so the modification is considered as “Substantial Modification”.

The initial liability must be extinguished, and a new liability must be recognized at its fair value as at the date of modification.

The fair value of new liability cash flow discounted at the current market rate 15% comes up to $853,695 and the difference between this fair value of new liability and the carrying value of the liability recognized is recognized as gain upon extinguisher.

Entity X has a loan of US$ 1,000,000 from the bank at 10% interest rate.

The original maturity date is March 31, 2022.

The lender agrees to waive the interest on loan for 6 months.

The modification in the terms leads to the non-discounted cashflows after the waiver, discounted at original effective interest rate to US$ 923,533.

The difference is less than 10% and so the modification is considered as “Non-Substantial Modification”.

The liability must be restated at its fair value of US$ 923,533 as at the date of modification.

The difference of US$ 76,467 is recognized in the Profit and Loss.

HOW BKC CAN HELP YOU

Debt modifications can be complex in nature and calculation at times. The accurate impact as per IFRS is a per-requisite for your financial reporting to show a true and fair view. We at BKC have a complete set of experts to support you deal with such complex transactions so that you can focus on your business while we carry out the accounting in order to keep your financial compliant with the IFRS. You may contact us if you would like to get the accounting services.

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