The Financial Accounting Standards Board issued a proposed accounting standards update Wednesday offering guidance for debt exchange transactions involving multiple creditors.
The proposed ASU stems from a recommendation of FASB’s Emerging Issues Task Force.
Under the current rules, when an entity modifies an existing debt instrument or exchanges debt instruments, it’s required to determine whether the transaction should be accounted for as (1) a modification of the existing debt obligation or (2) the issuance of a new debt obligation and an extinguishment of the existing debt obligation (with certain exceptions).
The proposed update would specify that an exchange of debt instruments that meets certain requirements should be accounted for by the debtor as the issuance of a new debt obligation and an extinguishment of the existing debt obligation. The amendments would apply to transactions involving the contemporaneous exchange of cash between the same debtor and creditor in connection with the issuance of a new debt obligation with multiple creditors and the satisfaction of an existing debt obligation.
FASB anticipates this change would improve the decision usefulness of financial reporting information given to investors by requiring that economically similar exchanges of debt instruments be accounted for similarly. It also would decrease differences in practice in accounting for such debt instrument exchanges.
FASB is asking for comments soon on the proposed ASU by May 30, 2025.
