Debt restructurings can be classified in either of two ways:
- General debt restructuring – A debt restructuring in which a creditor modifies the terms of debt financing to a debtor to enable the debtor to recover from temporary financial difficulty such that the creditor incurs no loss; or.
- Distressed debt restructuring – A debt restructuring in which a creditor modifies the terms of debt financing to a distressed debtor and, in the process, grants a concession that it would not grant to debtors with similar risk in order to increase the probability of recovering a significant portion of the debt.
A concession is a special modification to the contractual terms and conditions of a loan granted by the lender to a borrower facing financial difficulties in order to enable the borrower to service the debt. The main characteristic of concessions is that a lender would not extend loans, grant commitments or purchase debt securities with such terms and conditions to a counterparty in normal market circumstances.
| Accounting for Concessions – US GAAP vs. IFRS | |
| US GAAP | IFRS |
| The TDR concept applies to the CECL model. | There is no “troubled debt restructuring” (TDR) concept. |
| A restructuring of a debt constitutes a TDR if a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. | If a concession is granted and the loan contractual terms are restructured, an assessment is made as to whether it should be derecognized and a new asset recognized based on the new terms. |
| Loans meeting the definition of TDR are treated as a continuation of the original loan rather than the creation of a new one. | If a new asset is recognized, a new EIR is calculated and the loss allowance is measured at 12-month ECL or lifetime ECL if credit-impaired at initial recognition. |