Rather than waiting for scrutiny this is a good time for entities to revisit the how-tos in preparing the statement of cash flows. Latest edition: Our Q&As on the FASBs revenue and other income recognition standards in the real estate industry. However, if a debt instrument has an effective interest rate of zero, a change in the timing of cash flows will have no effect on the quantitative assessment, so should be incorporated into the qualitative assessment to ensure that its impact is considered. We intend to continue the dialogue updating our guidance to provide our insights on issues that arise. Recently, Ernst & Young sold its management-consulting business to Cap Gemini Group SA, a large and publicly traded computer services company headquartered in France. Objective third-party advisors, combining quick strategic advice on the situation 2023Copyright owned by one or more of the KPMG International entities. Software and SaaS industry overview. When the borrowing capacity increases or remains the same, all such fees or costs (including unamortized deferred costs as well as costs paid at the time of modification) are deferred and amortized over the term of the new arrangement. Todays deals require you to look at the bigger picture. 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. of Professional Practice, KPMG US +1 212-954-1723 We explain cash flow classification issues and noncash disclosure requirements in detail. If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Refer to Appendix D of the publication for a summary of the updates. IFRS 9 does not have similar guidance. Latest edition: KPMG in-depth guide to accounting for transfers and servicing of financial assets under ASC 860. Partner, Dept. In-depth guidance on ASC 848s optional relief for affected contracts and transactions. However, a borrower considers the substance of the contractual arrangements to evaluate whether fees paid to the lender represent a modification fee or a change to the cash flows (e.g. Our publication,A guide to accounting for debt modifications and restructurings, addresses the borrowers accounting for the modification, restructuring or exchange of a loan. Our new guide explains the measurement and reporting of GHG emissions through the lens of the Greenhouse Gas Protocol. An in-depth look at the accounting for investment tax credits and investments in tax credit structures. Step 5: Recognize revenue when (or as) the entity satisfies a . 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. US GAAP has specific rules for the treatment of fees and costs paid for the modification of undrawn line-of-credit or revolving debt arrangements; IFRS 9 does not. Latest edition: We explain the equity method of accounting in detail, providing examples and analysis. Delivering insights to financial reporting professionals. 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. Applicability ASC 230 All companies 6. need to be dealt with using other modification requirements in IFRS 9 (including assessing whether the change results in derecognition of the borrowing). because the modification is deemed non-substantial), any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. In-depth guide on presentation and disclosure requirements under US GAAP, plus considerations under SEC regulations. 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. Do the changes meet the definition of a troubled debt structuring? IFRS 9 qualitative assessment does not exist under US GAAP. Receive timely updates on accounting and financial reporting topics from KPMG. Extinguishment accounting: the original debt is derecognized and a new debt is recognized. Both IFRS Standards and US GAAP3use a 10% threshold in the quantitative assessment to determine if a debt modification is substantial. Overview. This content outlines initial considerations meriting further consultation with life sciences organizations, healthcare organizations, clinicians, and legal advisors to explore feasibility and risks. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. We offer hands-on assistance in analyzing options, structuring, arranging and achieving financial close across the full spectrum of debt products. Please see www.pwc.com/structure for further details. KPMG webcasts and in-person events cover the latest financial reporting standards, resources and actions needed for implementation. This handbook is a guide to accounting for investments in debt and equity securities. US GAAP treats debt modification costs paid to third parties differently from those paid to lenders; IFRS 9 does not. This is the third of a series on accounting for debt and equity related webcasts. 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. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Defining issue: FASB issues ASU for supplier finance obligations disclosures, Defining issue: FASB amends convertible debt & contracts in own equity, Hot Topic: How convertible debt will be affected by ASU 2020-06, Troubled debt restructurings (TDRs), debt modifications and extinguishments, SEC guidance on redeemable equity-classified instruments, Contracts in an entitys own equity (before adoption of ASU 2020-06), Contracts in an entitys own equity (after adoption of ASU 2020-06), Hybrid instruments with embedded features, Convertible instruments (before adoption of ASU 2020-06), Convertible instruments (after adoption of ASU 2020-06). september 15, 2017 Explore the topics at the Financial Reporting View. of Professional Practice, KPMG US. In response to feedback on its post-implementation review (PIR) of the classification and measurement requirements in IFRS 9 Financial Instruments, the International Accounting Standards Board (IASB) is proposing to amend IFRS 9 and IFRS 7 Financial Instruments: Disclosures.The proposals include guidance on the classification of financial assets, including those with ESG-linked features. Latest edition: Our in-depth guide to ASC 205-20 and held-for-sale disposal groups under ASC 360-10. Similarly, the impact to profit or loss differs based on whether the terms of the original debt have been substantially modified. Sharing our expertise and perspective. This content outlines initial considerations meriting further consultation with life sciences organizations, healthcare organizations, clinicians, and legal advisors to explore feasibility and risks. KPMG does not provide legal advice. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. <link rel="stylesheet" href="styles.942f46a3096a301aeaef.css"> For affected institutions, the amendments compel advanced planning . 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. 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. Our in-depth guide to accounting for R&D costs and R&D funding arrangements. 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. The accounting implications differ depending on whether the borrowers or lenders accounting is being considered. Deloitte's Roadmap Convertible Debt (Before Adoption of ASU 2020-06) provides a comprehensive discussion of the classification, recognition, measurement, presentation, and disclosure guidance that applies to convertible debt instruments. 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: Side-by-side comparison of IFRS Accounting Standards and US GAAP. 44 Two commenters recommended that no specific identification should be required in the summary or complete portfolio schedule of non-income producing securities, arguing that this disclosure . Hot Topic: FAQs about FASBs ASU on modified receivables, Companies that hold financial instruments in the scope of the credit losses standard. of Professional Practice, KPMG US, Executive Director, Dept. In our view, the purpose of a qualitative assessment is to identify substantial differences in terms that by their nature are not captured by a quantitative assessment. This live webcast will be converted to a CPE-eligible self-study and is available for a nominal fee through KPMG Executive Education. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Sharing our expertise and perspective. Latest edition: KPMG explains the accounting for income taxes in detail, providing examples and analysis. In-depth guidance on, and interpretation of, ASC 326. The amendments in the ASU respond to feedback receivedduring the post-implementation review of the creditimpairment standard (ASC 326). Read the full roadmap Contact us First name* Last name* Email* Company* Title* Location* How can we help you? Interpretation of changing standards . All rights reserved. Appendix F provides a summary of the . 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. Applicability CPE eligible replays now available. Our in-depth guide has been updated to reflect those changes. . of Professional Practice, KPMG US. Assuming TDR accounting does not apply, US GAAP and IFRS 9 differ on how to assess if a modification is substantial (differences #2, #3 and #4), and the accounting for substantial and non-substantial debt modifications also differs (differences #5, #6 and #7). Alternatively, a reporting entity may decide to extinguish its debt prior to maturity. 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 For income tax purposes, it is important to consider whether a modification of an existing debt constitutes a "significant modification" pursuant to Treas. In August, 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, resulting in the most substantial changes to this accounting standard in many years. Informing your decision-making. 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. Reduction in impairment models KPMG webcasts and in-person events cover the latest financial reporting standards, resources and actions needed for implementation. Generally, include in the gain or loss on extinguishment. These may include changes in principal amounts, maturities, interest rates, prepayment options and other contingent payment terms. In this article, we discuss the main differences between the two sets of standards. 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. All rights reserved. Informing your decision-making. 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. Connect with us via webcast, podcast or in person/virtual at industry conferences. For more detail about the structure of the KPMG global organization please visithttps://home.kpmg/governance. KPMGs integrated team of specialists uses game-changing technology to give you confidence across the transaction life cycle. Hedge accounting - cash flow hedges Now assume that the same company has a policy of ensuring that its interest rate risk exposure is economically a fixed rate. 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. This one focuses on accounting for debt modifications. Delivering insights to financial reporting professionals. Do the changes result in meeting the liability derecognition threshold? The adjustment to the debt carrying amount. Latest edition: Applying fair value measurement and disclosure guidance under US GAAP and IFRS Accounting Standards. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. This latest edition includes guidance on ASU 2022-02 (troubled debt restructurings and vintage disclosures), with new interpretations and examples based on experience with companies implementing ASC 326. All rights reserved. 5. KPMG webcasts and in-person events cover the latest financial reporting standards, resources and actions needed for implementation. KPMG webcasts and in-person events cover the latest financial reporting standards, resources and actions needed for implementation. 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. Eliminates the requirement for creditors to recognize and measure certain modifications as troubled debt restructurings. Latest edition: Our updated guide to applying ASC 606 to software & SaaS contracts, with comparisons to legacy US GAAP. Partner, Dept. In-depth analysis, examples and insights to give you an advantage in understanding the requirements and implications of financial reporting issues. Where a modification is non-substantial based on the quantitative assessment (see our article Loan modifications and derecognition ), Company P has an accounting policy choice, to be applied consistently, to either: Discount the new cash flows using the original effective interest rate of 7%. Handbook: Revenue recognition March 24, 2023 Under US GAAP, if the original debt or the new debt has a floating interest rate, then the variable rate in effect at the date of the modification is used to calculate the cash flows of the instrument. IFRS 3R: Impact on earnings - the crucial Q&A for decision-makers Guide aimed at finance directors, financial controllers The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Unlike IFRS 9, US GAAP does not require or permit a qualitative assessment if the 10% quantitative test is not met. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Step 4: Allocate the transaction price to the performance obligations in the contract. We walk you through available accounting options so that you can make the choice that is right for you. We provide new and updated interpretive guidance on applying ASC 230 to crypto assets, pensions, factoring, debt arrangements and cash equivalents. This content outlines initial considerations meriting further consultation with life sciences organizations, healthcare organizations, clinicians, and legal advisors to explore feasibility and risks. Both IFRS Standards and US GAAP address debt modifications. Latest edition: We highlight significant differences in accounting for asset acquisitions vs business combinations. The new debt instrument is recorded at fair value and any difference from the carrying amount of the extinguished liability, including any non-cash consideration transferred, is recorded in profit or loss. The chapters in this handbook address frequently asked questions related to the scope of ASC 320 and 321, recognition and measurement for investments in debt and equity securities, and classification of debt securities. Instruments that encompass a residual interest in the assets of an entity after deducting all of its liabilities are classified as equity. All companies with debt that could potentially be modified, Accounting for line-of-credit modifications. Use our Accounting Research Online for financial reporting resources. Deal Advisory & Strategy (DAS) Technology, Media & Telecommunications (TMT) sector Lead, KPMG LLP. Delivering insights to financial reporting professionals. Gain access to personalized content based on your interests by signing up today. For more detail about the structure of the KPMG global organization please visithttps://home.kpmg/governance. It may require significant judgment, in particular around the underlying terms, assumptions, calculations and conclusions. Our multi-disciplinary approach and deep, practical industry knowledge, skills and capabilities help our clients meet challenges and respond to opportunities. Updated: Guidance to help navigate financial statement requirements for acquired businesses. Latest edition: Our in-depth guide to the accounting and presentation requirements of ASC 250. Under IFRS 9, in our view, the following approaches may also be acceptable, as long as the selected approach is applied consistently (in each case the contractual rate is used for the remaining coupons of the original debt for which interest rate has been determined): ii. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Explore the topics at the Financial Reporting View. To thrive in today's marketplace, one must never stop learning. However, unlike IFRS 9, US GAAP has different guidance for fees paid to the lender and for third-party costs (e.g. A listing of podcasts on KPMG Advisory. The composition of cash and cash equivalents also often raises questions. Therefore, diverse presentation practices remain. Informing your decision-making. Member firms of the KPMG network of independent firms are affiliated with KPMG International. Applicability All entities Relevant dates Effective immediately Report contents For guidance on assets acquired through an asset acquisition refer to PPE 2. i. 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. Each member firm is a separate legal entity. Investment accounting is how we refer to the accounting for debt and equity securities that dont fall under other accounting models, such as the equity method or consolidation. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. When they are substantially modified (i.e. Partner, Dept. 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. 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Equity method of accounting in detail, providing examples and insights to give an... You have any questions pertaining to any of the Greenhouse Gas Protocol person/virtual at conferences... Combining quick strategic advice on the FASBs revenue and other contingent payment terms events cover the latest reporting. More detail about the structure of the KPMG International with US via webcast, podcast or in person/virtual at conferences... Presentation requirements of ASC 250 US +1 212-954-1723 we explain cash flow classification issues and noncash disclosure under. Result in meeting the liability derecognition threshold, skills and capabilities help kpmg debt modification guide clients challenges. Comparison of IFRS accounting standards and US GAAP, plus considerations under SEC regulations independent firms are affiliated with International... Rate of the particular situation related webcasts the pwc network respond to feedback receivedduring the post-implementation of! 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Gaap has different guidance for fees paid to third parties differently from those paid the... Of an entity after deducting all of its member firms of the KPMG of. 848S optional relief for affected contracts and transactions the scope of the credit losses standard 606 software! Pwc network the gain or loss on extinguishment 9 does not exist under US GAAP ASC and. That hold financial instruments in the real estate industry alternatively, a reporting entity decide. Lenders ; IFRS 9 does not require or permit a qualitative assessment does not presentation and requirements! Terms, assumptions, calculations and conclusions a qualitative assessment if the 10 % quantitative test is not to... Is not intended to address the circumstances of any fees paid and/or received2 are. Transfers and servicing of financial reporting standards, resources and actions needed for.... Statement of cash flows lens of the original debt is recognized debt products should act upon such information appropriate! Via webcast, podcast or in person/virtual at industry conferences and/or received2 are! Changes result in meeting the liability derecognition threshold topics at the accounting for investment tax credits and investments in credit... New and updated interpretive guidance on, and interpretation of, ASC 326 230 to assets... Fee through KPMG Executive Education composition of cash flows hands-on assistance in analyzing,. Presentation requirements of ASC 250 ASC 360-10, plus considerations under SEC regulations dialogue updating our guidance to help financial... Asc 326, with comparisons to legacy US GAAP has different guidance for fees paid to the US firm. Right for you and capabilities help our clients meet challenges and respond to feedback receivedduring the post-implementation of! And actions needed for implementation GAAP has different guidance for fees paid to third differently. Is available for a summary of the KPMG global organization please visithttps: //home.kpmg/governance Practice, KPMG US 212-954-1723... And actions needed for implementation contained herein is of a general nature and is not intended to address circumstances... Us us_viewpoint.support @ pwc.com plus considerations under SEC regulations you through available options. Main differences between the two sets of standards pwc refers to the lender for! ) sector Lead, KPMG US +1 212-954-1723 we explain the equity method of accounting in,. Than waiting for scrutiny this is the third of a general nature and is not intended to address circumstances...: the original debt the effective interest rate of the creditimpairment standard ( ASC 326 with via! On ASC 848s optional relief for affected contracts and transactions is the of. On the FASBs revenue and other contingent payment terms tax credit structures of IFRS accounting standards requirements in detail providing... 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