Troubled Debt Restructuring: Definition, Accounting, and Financial Reporting

Troubled Debt Restructuring (TDR) occurs when a creditor grants concessions to a debtor who is experiencing financial difficulty. These concessions may include reducing interest rates, extending repayment terms, reducing principal, or even forgiving portions of the debt.

This article explains the definition, accounting treatment, measurement, and disclosure requirements for Troubled Debt Restructuring under U.S. GAAP (ASC 310-40) and highlights key IFRS (IFRS 9) considerations, with clear examples and journal entries.

1. What Is Troubled Debt Restructuring (TDR)?

A TDR occurs when:

✦ A debtor is in financial distress, and

✦ A creditor for economic or legal reasons grants a concession that it would not otherwise consider.

TDRs reflect a situation where the creditor seeks to maximize recoveries by modifying terms rather than forcing liquidation or bankruptcy.

2. Common Types of Concessions in TDRs

Typical creditor concessions include:

✦ Reduction in interest rate

✦ Extension of maturity date

✦ Reduction of principal amount

✦ Forgiveness of accrued interest or penalties

✦ Restructuring into a different form of debt or equity instruments

3. Accounting for TDRs: Debtor Perspective (ASC 470-60)

When a debtor restructures debt under a TDR, the accounting depends on the type of modification:

A. Modification of Terms (No Principal Forgiveness)

If only the terms are modified (e.g., lower interest rate, longer term), the debtor:

✦ Does not recognize a gain, but

✦ Adjusts the carrying amount to the present value of revised cash flows, discounted at the original effective interest rate.

If the present value is less than the carrying amount:

✦ Recognize the difference as a gain.

Example – Modification Only:

• Original carrying value: $100,000

• New future cash flows discounted at original rate = $90,000

Journal Entry:

Debit: Notes Payable – $10,000

Credit: Gain on Restructuring – $10,000

B. Settlement with Transfer of Assets

If the debtor transfers assets to satisfy debt:

• Recognize a gain or loss = Difference between asset’s fair value and its book value.

• Recognize a gain on debt extinguishment = Difference between carrying amount of debt and fair value of assets transferred.

Example – Asset Transfer:

• Debt carrying value: $120,000

• Asset book value: $80,000

• Asset fair value: $90,000

Entries:

1. Record asset disposal:

Debit: Loss on Disposal of Asset – $10,000

Debit: Notes Payable – $120,000

Credit: Asset – $80,000

Credit: Gain on Debt Restructuring – $30,000

C. Settlement with Issuance of Equity Instruments

If the debtor issues shares instead of cash:

✦ Debt is settled at the fair value of the equity issued.

✦ Recognize a gain or loss on extinguishment.

4. Accounting for TDRs: Creditor Perspective (ASC 310-40)

Creditors must assess whether the restructured debt is still collectible.

A. Loan Impairment Recognition

Upon TDR:

✦ Recognize impairment if the present value of expected future cash flows (discounted at the original rate) is less than the carrying value.

The creditor measures impairment using:

✦ Present value method, or

✦ Fair value of collateral (if collateral-dependent loan)

Journal Entry Example:

Debit: Bad Debt Expense – Impairment Amount

Credit: Allowance for Credit Losses – Impairment Amount

B. Continued Recognition

The creditor continues to recognize the restructured loan at its modified terms, net of any allowance for credit losses.

Interest income is recognized based on the new effective yield.

5. IFRS Treatment of Troubled Debt Modifications (IFRS 9)

Under IFRS 9:

✦ Debt modifications are treated as either:

Substantial → Derecognize the old asset and recognize a new one

Not substantial → Adjust carrying amount and recognize a modification gain/loss immediately

Substantial modification criteria:

✦ Change in contractual terms is significant (typically measured by comparing cash flows with a 10% threshold).

6. Financial Statement Presentation and Disclosure

Both debtors and creditors must disclose:

✦ The nature of the restructuring

✦ The financial effects (gains or losses recognized)

✦ Any continuing risks (e.g., ongoing payment uncertainty)

✦ Key terms and conditions modified (interest rates, maturities)

Transparency ensures stakeholders understand liquidity issues, credit risks, and recovery strategies.

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7. Summary of Troubled Debt Restructuring Accounting

Party	Recognition and Measurement
Debtor	Recognizes gain if carrying amount exceeds PV of new cash flows
Creditor	Recognizes impairment loss if carrying amount exceeds PV of expected cash flows
Asset Transfer	Recognizes disposal gain/loss and debt extinguishment gain
Equity Issuance	Recognizes gain/loss based on fair value of shares issued