Debt restructuring is a situation where the creditor, for economic or legal reasons related to the debtos financial difficulties,

grants to the debtor concession that would not otherwise be granted in a normal business relationship. The concessions are either items from an agreement between the creditor and debtor, or are imposed by law or a court. The objective of the creditor in a debt restructuring is to make the best of a bad situation or maximize recovery of investment. Thus, the creditor usually sustains an accounting loss on debt restructuring and the debtor realizes an accounting gain. (Valix, 2009) Common forms of debt restructuring: 1. Asset Swap Asset swap is the transfer of any asset such as real estate, inventory or investment by the debtor to the creditor in full settlement of an obligation. Under PAS 39, paragraphs 39 and 41, asset swap is treated as a derecognition of a financial liability or extinguishment of an obligation. The difference between the carrying amount of the financial liability and the consideration given shall be recognized in profit or loss. 2. Equity Swap Equity swap is the issuance of share capital by the debtor to the creditor in full payment of an obligation. In this case, no gain or loss is recognized. Thus, market value is ignored. The excess of the liability over the aggregate par or stated value of the shares issued is simply credited to additional paid in capital or share premium. This approach is in accordance with the standard which states that in case shares are issued for outstanding liability, the measure for recording is the amount of liability set off. 3. Modification of terms Modification may involve either the interest or maturity value or both. Interest concession may involve a reduction of the interest rate, forgiveness of unpaid interest or a moratorium on interest payment. Maturity value concession may involve an extension of the maturity date or reduction of the amount to paid at maturity. PAS 39 provides that a substantial modification of terms of an existing financial liability shall be accounted for as an extinguishment of the old financial liability and the recognition of a new financial liability. Under Application Guidance 62 of PAS 39, there is substantial modification of terms if the gain or loss on extinguishment is at least 10% of the old financial liability.

The difference between the old liability and the present value of new or restructured liability which is discounted using the old effective rate shall be accounted for as gain or loss on extinguishment. Any costs or fees incurred as a result of the substantial modification of terms shall be recognized as part of gain or loss on extinguishment. Under PAS 39, if the gain or loss on extinguishment of the old liability is less than 10% of the old liability, there is no substantial modification of terms. In this case, the modification is not an extinguishment of the old liability. Any costs incurred in modifying the terms are adjusted to the carrying amount of the old liability and amortized over the remaining term of the modified liability. The old liability is simply continued but with modified interest charges. Accordingly, a new effective rate must be computed to equate the carrying value of the old liability with the present value of the cash outflows of the modified liability. Sources Theory of Accounts (2009 Revised Edition) Published and Printed: GIC Enterprises & CO., INC. 2019 C.M. Recto Manila, Philippines By: Conrado T. Valix, BSC, LLB Certified Public Accountant, Lawyer CPA Review Director and CPA Reviewer CPA Review School of the Philippines Financial Accounting - Volume Two (2009 Revised Edition) Published and Printed: GIC Enterprises & CO., INC. 2017 C.M. Recto Manila, Philippines Authors: Conrado T. Valix, BSC, LLB Certified Public Accountant, Lawyer CPA Review Director and CPA Reviewer CPA Review School of the Philippines

Jose F. Peralta, BBA, MBA, DBA Certified Public Accountant President and CPA Reviewer Philippine School of Business Administration

Philippine Accounting Standards 39 as promulgated by the Philippine Financial Reporting Standards Council

The Financial Reporting Standards Council (FRSC) was established by the Board of Accountancy (BOA) in 2006 under the Implementing Rules and Regulations of the Philippine Accountancy of Act of 2004 to assist the Board in carrying out its power and function to promulgate accounting standards in the Philippines. The FRSCs main function is to establish generally accepted accounting principles in the Philippines.