(BQ) Part 2 book "Intermediate accounting" has contents: Stockholders’ equity, revenue recognition, accounting for income taxes, accounting for pensions and postretirement benefits, accounting for leases, full disclosure in financial reporting, statement of cash flows,.and other contents. | IFRS Insights 771 Extinguishment with Modification of Terms Practically every day, the Wall Street Journal or the Financial Times runs a story about some company in financial difficulty. Notable recent examples are Nakheel, Parmalat, and General Motors. In many of these situations, the creditor may grant a borrower concessions with respect to settlement. The creditor offers these concessions to ensure the highest possible collection on the loan. For example, a creditor may offer one or a combination of the following modifications: 1. 2. 3. 4. Reduction of the stated interest rate. Extension of the maturity date of the face amount of the debt. Reduction of the face amount of the debt. Reduction or deferral of any accrued interest. As with other extinguishments, when a creditor grants favorable concessions on the terms of a loan, the debtor has an economic gain. Thus, the accounting for debt modifications is similar to that for other extinguishments. That is, the original obligation is extinguished, the new payable is recorded at fair value, and a gain is recognized for the difference in the fair value of the new obligation and the carrying value of the old obligation. Thus, under IFRS, debt modifications are similar to troubled-debt restructurings in GAAP. In general, IFRS treats debt modifications as debt extinguishments. An exception to the general rule is when the modification of terms is not substantial. A substantial modification is defined as one in which the discounted cash flows under the terms of the new debt (using the historical effective-interest rate) differ by at least 10 percent of the carrying value of the original debt. If a modification is not substantial, the difference (gain) is deferred and amortized over the remaining life of the debt at the historical effectiveinterest rate. In the case of a non-substantial modification, in essence, the new loan is a continuation of the old loan. Therefore, the debtor should record .
