Substantial Debt restructuring - IFRS 9

[ifrs scotty]

Hi Marek,
Hope all is well.
Quick question, Say Company A has a intercompany relationship with company B.
Company B loan Company A $10M in cash interest free Jan 01, 2018 (with no payment date). In march of 2019 both companies agreed to restructure the loan with company A now needs to pay back company B in commodities to the value of $8M (The new loan is unsecured, bearing a 3% interest per annum, and matures at the march 2020).

how would we calculate the cash flows at origination as the first loan is 0% interest (present value before modification)

[nauman]

Did you calculate the present value of the loan using company’s cost of debt to determine its present value and unwinding of interest on the loan?

[ifrs scotty]

I was thinking more to use market rate interest to calculate the PV

[Marek Muc]

Hi Scotty, first of all, this is an open forum, so everyone is welcome to chime in, and I'm happy that Nauman did

When it comes to the original loan, I agree with Nauman, entity specific rate is more appropriate as fair value of this loan depends on specific situation of the borrower. You can read more in our knowledge base:
https://ifrscommunity.com/knowledge-bas ... rate-loans

When it comes to restructuring of this debt, it's not clear to me what happened and what you're asking about, can you write a bit more please

[nauman]

I was thinking more to use market rate interest to calculate the PV

You can use market discount rate as well but in my experience it is always better to use entity specific rate as determining what an appropriate market interest rate is not as easy as it sounds.

[marea]

Would this agreement(s) represent two distinct transactions; one is the loan agreement of 10M, which is subsequently modified in terms of repayment date and interest, and the other one is the delivery of goods worth 8M (IFRS 15)? But again, I think that more information is needed about what are the contractual terms.

[AQS]

Hello Members,

Keeping on the same topic but a different transaction.

We have a compound financial instrument for which we are doing split accounting, now we have amended the terms of our instrument(extension of maturity date & reduction in conversion price) & it qualifies for de-recognition (based on 10% test)

Clarifications:

1. Since it's a new trx. i am assuming i need to do split accounting again? right?

2. I am assuming new entries would be:

Dr- Old Liability $10M (assuming amendment happened on the last day of old agreement - carrying amount equal to face value)
Cr- New liability $9M (Liability portion based on new split accounting working)
Cr- Equity/Contributed surplus $ 1M

Questions

1. Would there be any gain/(loss) i need to recognize on this trx? Since the PV/FV of new liability is $9M & carrying amount of old liability is $10M in case yes, what entry i will do for equity portion.

Thanks

[Marek Muc]

Hi AQS, I personally don't have a great deal of experience here, but I have a strong feeling that you should leave the equity part as it was recognised initially. I can cite IAS 32.36 here, though it's not exactly your case

Changes in the fair value of an equity instrument are not recognised in the financial statements.

So you derecognise old financial liability, recognise new FI, and the difference goes to P/L

and if the new FI is compound, then yes - split accounting again

and what do you think?

[AQS]

Thanks a lot Marek!

I agree equity portion won't change.

Equity entry i am showing above in my JE is from new financial liability (split accounting of new financial liability after modification & de-recognition of old financial liab).

But the confusion i have is how to record P&L charge?

If you see my JE, i have Dr. Old liab (with its carrying amount, which is the face value of liab as well)
Cr. New liab (liab portion of new financial instrument based on split accounting)
Cr. Equity (equity portion of new financial instrument based on split accounting)

If i have to record P/L charge what should be the entry for that? If i take the diff of old liab ($10M) & new liab ($9M- based on split accounting) = $1M as PL charge what should be the other leg of that entry.

Thanks

[Marek Muc]

oh I see,

then you don't have any P/L charge IMO, the entry that you shown is complete

[AQS]

Thanks Marek!