Trueblood: US GAAP - Case 15-5

ASC470-60-20 states that a “a restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.” Although the “Restructuring” was done due to the debtor’s financial difficulty, there was no concession made by any of the creditors. The effective borrowing rate when considering all the terms of the “Modified Debt” is greater than the effective borrowing rate immediately prior to the “Restructuring”. All of the characteristics of the debtor’s situation should be considered when determining whether a modification constitutes troubled debt. The model and criteria discussed in ASC 470-60-55-4 through 55-14 should be followed. Since the circumstance do not warrant a “Troubled Debt” classification, the rules of 470-50 would be followed as either a Modification or Extinguishment.

Resort Co. is extinguished from their liability, according to ASC 405, if either the debtor pays the creditor or the debtor is relieved of the obligation. If debt is extinguished before the scheduled and maturity date, a gain or loss may arise that amounts to the difference between the carrying value(including issuance costs) and the amount paid to settle the liability(including premium). The general rule for ASC 470-50-40-2 is a gain or loss must be recognized between the carrying value and fair value of assets transferred. Resort Co. should not apply extinguishment accounting to the loan from Bank A because they only delivered a partial payment of the debt and they were never released from obligation by the creditor. Resort Co. also should not apply extinguishment accounting to the loan from Bank B, because they are also never released from the creditor. The equity shares acquired by Bank