Question

What are troubled debt restructuring and what does the accounting try to do? What principle about accounting (in general) is working here?

Answer 1

Troubled debt restructuring is a method in which the lender alters the terms of debt obligations, for economic or legal reasons related to a debtor’s financial difficulties. The accounting for TBR ranges a number of payment instructions including accounts payable, notes payable, and bonds. The troubled debt restructuring can contain many possible settlement solutions. So the accounting for the restructuring depends up on the nature of transaction for example, transfer of additional assets , interest rate reduction, extension of loan period etc.

According to US FASB Standard 15 (Financial Accounting Standard Board) restructuring of troubled loans (no payment made for 90 days or more) is classified as either a loan where

1. The borrower is required to pledge additional assets as collateral, or
2. The terms of the loan agreement are modifies to include

• Provision for outright foreclosure on the loan without applying to the court
• Reduction in applicable interest rate
• Extension of loan period
• Acceptance of interest only payments for a specific period acceptance
• Forgiveness of a part of the principal or accrued interest amount.