What is Debt Restructuring Accounting?
Debt restructuring accounting addresses the financial reporting impact of changes to the terms of an existing financial liability, such as extending maturity, reducing interest or settling debt with assets or equity. Under IFRS 9, a substantial modification triggers derecognition of the original liability and recognition of a new one.
How It Works
- Compare the new cash flows to the original at the original effective interest rate.
- If the difference exceeds 10 percent, treat as substantial: derecognize and recognize new liability at fair value.
- If not substantial, adjust the carrying amount and recognize a modification gain or loss.
- Recognize gains or losses from any debt-for-equity swap separately.
Saudi Context
Saudi banks restructuring SME loans during the post-COVID era and SIDF debt rescheduling apply IFRS 9 modification analysis to determine accounting treatment.
Example
If a SAR 50 million loan is restructured with a longer maturity and lower rate, and the present value of new cash flows differs from the old by more than 10 percent, the borrower derecognizes the original loan and books a new liability.