Debt restructuring is a process by which a company that is facing cash flow problems and financial distress attempts to reduce and renegotiate its delinquent debts in order to restore its productivity and financial viability.  It seeks to preserve the firm as a going concern and readjust creditor claims so that the entity can successfully meet the readjusted claims and continue to operate.  It involves compromises made by creditors as well as the debtor and benefits all parties.

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.

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