FASB proposes guidance on accounting for debt exchanges

FASB on Wednesday published a proposed Accounting Standards Update (ASU) on debt exchange transactions involving multiple creditors.

The proposed ASU, based on a recommendation of FASB’s Emerging Issues Task Force, is meant to address guidance in Subtopic 470-50, Debt — Modifications and Extinguishments, and Subtopic 405-20, Liabilities — Extinguishments of Liabilities.

FASB is accepting public comments on the proposed ASU through May 30.

According to a news release, the ASU specifies 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.

Under current GAAP, when an entity modifies an existing debt instrument or exchanges debt instruments, it is required to determine whether the transaction should be accounted for as:

1. A modification of the existing debt obligation; or
2. The issuance of a new debt obligation and an extinguishment of the existing debt obligation (with certain exceptions).

The ASU, according to the release, aims to reduce diversity in practice and improve the decision usefulness of financial reporting information by requiring that economically similar exchanges of debt instruments be accounted for similarly.

— To comment on this article or to suggest an idea for another article, contact Kevin Brewer at Kevin.Brewer@aicpa-cima.com.