Accounting & Debt Restructuring
Accounting is the process of recording and reporting important business and financial information. Not only does accounting cover the basic everyday transactions from business operations, but also the technical financing of company assets through debt or equity investments. Companies use external financing to purchase business assets and inputs, grow current operations and enter new economic markets. Accounting for debt or equity financing transactions can be a technical process for most companies to complete.
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Facts
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Debt restructuring often occurs when a company has fallen on hard financial times. When companies are unable to meet their obligations for repaying bank loans or other lender debts, they may attempt to restructure the debt to avoid bankruptcy. Restructuring debt may also be a better alternative for the company than ceasing operations and selling business assets or declaring bankruptcy. Restructuring debt can usually be done through a few different ways using standard accounting transactions.
Types
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Accounting rules allow companies to restructure debt by reducing the stated interest rate on the loan, extending the maturity date of the loan or major balloon payments, reducing the principal amount of the loan and reducing any accrued interest declared by the bank. Companies may also be able to restructure debt using a onetime cash payment payoff that is less than the original loan balance or issue equity securities to increase private investments to pay off the original debt amount.
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Features
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When debt restructuring has occurred, accounting principles may require the company to recognize an extraordinary gain or loss on its financial statements. An extraordinary gain or loss from debt restructuring represents a non-cash transaction for company’s record on their financial statements. Restructuring debt usually impacts the company’s tax liability at year end. If the company has debt forgiven by a lender, accounting rules require companies to record this debt forgiveness as income or loss for tax purposes.
Considerations
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The ability to restructure debt also depends on whether banks or lenders actively trade business debts through economic exchanges. The sale of debt may limit a company’s ability to restructure debt since the original loan is no longer held by the originating lender. Companies may need to provide disclosures or footnotes on financial statement regarding the detail of the debt restructure. This additional information listed on the company’s financial statements can help external users of the financial statements to understand why the company needed to restructure its debt.
Expert Insight
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Companies must follow generally accepted accounting principles (GAAP) when recording debt restructuring transactions in their accounting ledgers. GAAP ensures companies treat debt restructuring in similar methods. These methods help investors understand the financial health of the company and how they have been able to repay debt over the past few years. Significant debt restructuring may limit a company’s ability to obtain new bank loans or finance operations through newly issued equity securities as investors may be leery of a company who has not repaid past debts.
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References
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