FASB to propose guidance on debt transactions involving multiple creditors

The FASB has taken a significant step towards resolving a complex accounting issue, voting to propose guidance on how companies should handle debt transactions involving multiple creditors.

At its meeting on Nov. 20, 2024, the board endorsed the Emerging Issues Task Force's (EITF) recommendations and agreed to issue the proposal for a 30-day comment period ending on April 11, 2025. The amendments will be proposed next year.

The proposal will aim to clarify how to account for a transaction where a company pays off an old debt to multiple creditors and, at the same time, takes on a new debt from those same creditors.

"This is an issue that's been outstanding for a very long time in practice," FASB Vice Chair Hillary Salo said. "I think one of the big benefits of taking on this project is providing an even playing field for everybody looking at the same criteria for evaluating in what cases you have something that's not really an exchange transaction but really the contemplation of a payable debt with an issuance of new debt."

Two distinct events

The board agreed with the EITF's view that these transactions should be accounted for separately as two distinct events: first, the payoff of the old debt, and second, the issuance of new debt. This approach applies when two conditions are met: the old debt is repaid according to its original terms or bought back at market value, and the new debt is issued at market value, following the company's usual process for issuing new debt.

FASB discussions also touched on the need to clarify the term "multiple creditors" and the use of "customary" instead of "normal" to describe the marketing process for new debt issuance. There were concerns about the complexity and subjectivity of defining a "normal marketing process."

FASB members supported the prospective application of the proposed changes, with early adoption permitted, and debated the necessity of transition disclosures.

"Most entities, when this becomes effective, will not have this transaction, and so five years later, when they have the transaction, are they supposed to disclose that they've now adopted this standard?" said FASB Chair Richard Jones. "That seems bizarre."

KPMG raised the issue

The proposal was prompted by a request from KPMG LLP in July, which asked the FASB to utilize the EITF to clarify the rules surrounding debt transactions involving multiple creditors.

The question at the heart of the issue is whether such transactions should be considered an "exchange" or an "extinguishment."

Currently, if a debt transaction is considered an "exchange," the company must check if the new debt is significantly different from the old debt using a 10% test. If it is, the company calculates a new interest rate and doesn't recognize any gain or loss. Any fees paid to the lender are spread out over the life of the new debt.

On the other hand, if the transaction is considered an "extinguishment," the old debt is written off and the company recognizes a gain or loss based on the difference between the old debt's value and the new debt's value. Any fees paid to the lender, as well as other costs, are included in the gain or loss calculation. Any third-party costs are spread out over the life of the new debt.

Accountants have noted that treating these transactions as exchanges under the current guidance can reduce comparability for investors and increase costs for financial statement preparers.

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