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FASB approves new debt accounting rules, aiming for clarity and cost savings

Sept. 29, 2025

The Financial Accounting Standards Board (FASB) on Sept. 3, 2025, unanimously voted to issue new accounting rules designed to bring clarity and reduce costs for companies recording certain debt transactions, addressing previously inconsistent practices. The decision finalizes Proposed Accounting Standard Update (ASU) No. 2025-ED200, Debt-Modifications and Extinguishments (Subtopic 470-50) and Liabilities-Extinguishments of Liabilities (Subtopic 405-20): Accounting for Debt Exchanges, with minor clarifications.

FASB Chair Richard Jones emphasized that companies have historically relied on various unofficial methods ("unwritten GAAP") due to a lack of clear official guidance. "I think the issue is broader than debt modifications, I think we have all kinds of issues related to continuation versus new contracts. Throughout GAAP, we don't have a single model," Jones stated, stressing that the changes are a positive step towards greater consistency and clarity.

Under the new guidance, when old debt is replaced with new debt, particularly using cash from new debt and involving different lenders, it must now be treated as a complete payoff of the old debt, rather than a mere modification. This change is expected to simplify accounting, improve transparency, and ensure financial statements better reflect the economic reality of these exchanges.

"I think investors will benefit from this project," said FASB member and analyst Joyce Joseph. "And I think that the outcome that they will favorably achieve is less diversity in practice and perhaps economically similar transactions being accounted for more comparably."

The new rules will apply prospectively to transactions involving multiple creditors for annual periods beginning after Dec. 15, 2026, with early adoption permitted. Companies will also be required to disclose the nature and reason for the accounting principle change upon adoption.

Addressing a "Tricky" Issue

The topic, brought to the board by the Emerging Issues Task Force (EITF), addresses a nuanced accounting challenge: how companies account for paying off existing debt with new debt, often involving some of the same lenders. Current rules can be complex, costly, and confusing, sometimes requiring elaborate tests that practitioners argue don't always reflect economic reality.

Specifically, the FASB's rule addresses situations where a company uses proceeds from new debt to pay off old debt, and at least one of the new lenders was also an old lender, with multiple lenders involved. If certain conditions are met-such as the old debt being paid off according to its contract or at market rates, and the new debt issued at market rates-the company would treat the old debt as "extinguished" and the new debt as a fresh start, eliminating the need for complicated comparative tests.

Stakeholder Views and Redeliberations

During the proposal's comment period, which concluded on May 30, 2025, 17 letters were received. Most commentators supported the proposed changes, citing expected simplification and cost reduction, according to a staff analysis. However, some raised concerns that the changes might obscure a company's debt history, discourage exchanges, or suggested the rules should be optional rather than mandatory.

While the full board ultimately approved the changes with certain revisions, some reservations were evident, particularly from FASB member Frederick Cannon. Cannon, an analyst, acknowledged the transparency benefits but argued the new rules would impose real costs on companies. He noted that "exchange offer" structures, currently a low-cost refinancing method allowing for "modification accounting," will likely be forced into "extinguishment accounting" under the new guidance. Cannon predicted companies might switch to more expensive refinancing structures to avoid extinguishment accounting.

Despite his concerns, Cannon did not dissent, explaining, "I'm not going to dissent on this because I do think extinguishment accounting, we heard from investors, it is more transparent. And we heard from practitioners that there is this kind of difficulty and cost associated with the 10% test in these type of transactions."

Redeliberations Included:

• Scope: The board voted 6 to 1 to adopt a required, principle-based approach for transactions with multiple creditors. They removed the original proposal's requirement for a "customary marketing process," shifting away from a prescriptive checklist.
• Accounting for Fees: The board voted 5 to 2 that companies will use existing, specific rules (paragraphs 470-50-40-17(a) and 470-50-40-18(a)) to handle fees related to these debt exchanges, drawing from established methods for similar debt transactions, even when the exchange is considered an extinguishment.
• Transition: In a 6 to 1 vote, the board agreed to allow companies to early adopt the rules at the beginning of any annual or interim reporting period. This flexibility aimed to reflect responsiveness to stakeholder feedback and aims to avoid unnecessary complexity and cost, encouraging earlier adoption.

Board members also signaled interest in pursuing a broader project on modification versus extinguishment accounting in the future.

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