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Public Company Financial Executive Briefing

Creditor Determination of Whether a

Restructured Receivable is a Troubled Debt
Restructuring
By Jim Pitrat, CPA - Practice Leader, Assurance & Advisory Practice TUESDAY, MAY 3, 2011

ASU No. 2011-02 , Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring
provides guidance for determining if a modification to a receivable is a concession granted by the creditor and whether the debtor is
experiencing financial difficulties.

Has the Creditor Granted a Concession?

A creditor may not apply the guidance in FASB ASC 470-60-55, Troubled Debt Restructurings by Debtors.
A creditor is deemed to have granted a concession when, as a result of the restructuring, the creditor does not expect to collect
all amounts due, including interest accrued at the original contract rate;

• Note: if the payment of principal at original maturity is primarily dependent on the value of collateral, the value of the
collateral is to be considered in determining whether the principal will be paid

Generally, if a restructuring is in exchange for additional collateral or guarantees, a concession is considered to have been granted
when the nature and amount of the additional collateral or the additional guarantees received as part of a restructuring does not
represent adequate compensation for other terms of the restructuring.

If a debtor does not otherwise have access to funds at a market rate for debt having similar risk characteristics as the new debt,
the restructuring is deemed to be at below a market rate, which may indicate that the creditor has granted a concession.

A temporary or a permanent increase in the contractual interest rate resulting from the restructuring does not preclude a
concession.

• The new contractual rate may still be below market rates for new debt with similar risk characteristics

Does a Restructuring Result in an Insignificant Delay in Payment?

A restructuring resulting in an insignificant delay in contractual cash flows is not a concession.

The following factors may indicate that a restructuring results in an insignificant delay:

• The amount of the restructured payments is insignificant relative to the unpaid principal due

• The delay in timing of the restructured payment period is insignificant

continued on page 2
 • The cumulative result of past restructurings should be taken into account when determining whether the delay in
payment is considered insignificant

Is the Debtor is Experiencing Financial Difficulties?

The Creditor must consider these factors in determining whether the debtor is experiencing financial:

• The debtor is currently in default

• It is probable that the debtor would be in default on any of its debt in the foreseeable future

• The debtor has declared (or is in the process of declaring) bankruptcy

• Significant doubt exists about the debtors ability to continue to be a going concern

• The debtor’s securities have been delisted, are in the process of being delisted, or are under threat of being delisted

• The debtor’s cash flows will be insufficient to service its debt in accordance with contractual terms for the foreseeable
future

• Absent the current modification, the debtor is unable to obtain funds from at an effective interest rate equal to the
current market rate for similar debt of a non-troubled debtor

Public Company Effective Dates:

For public entities, the effective date is for the first interim or annual period ending after June 15, 2011 to be applied
retrospectively to restructurings taking place on or after the beginning of the fiscal year of adoption.

Early application is allowed.

Nonpublic Entity Effective Dates:

For nonpublic entities, the effective date is for annual periods ending after December 15, 2012, including interim periods within
those annual periods.

Early adoption is permitted for any interim period of the fiscal year of adoption and applies to restructurings occurring on or after
the beginning of the fiscal year of adoption.

FOR FURTHER INFORMATION, PLEASE CONTACT ONE OF THE FOLLOWING:

Jim Pitrat:  Harmeet Singh:  Gale Moore:  
JPitrat@singerlewak.com  HSingh@singerlewak.com  GMoore@singerlewak.com 
310.477.3924 408.294.3924 949.261.8600 
Practice Leader Business Combinations Subject Matter Expert  Business Combinations Subject Matter Expert 
Assurance & Advisory Los Angeles, Silicon Valley  Orange County, San Diego