What Is A Debt Modification Agreement

Unsurprisingly, contract changes have become more common in the COVID-19 environment. One of the forms of change that became commonplace during the pandemic was the modification of debt contracts. Given the operating interruptions caused by COVID-19, a borrower and a lender may agree to defer or cancel certain principal and interest payments, reduce the indicated interest rate or, among other things, change the bonds or guarantee premiums. When a borrower is approved, the authorization contains an offer with new conditions for the credit change. Some traditional lenders have their own credit change programs. Some of these programs have matured, but public credit modification assistance remains available to some borrowers. These include: if the unsettled cash flows required for the restructured liabilities are greater than the net book value of the initial debt prior to the restructuring, no profit or loss is recorded and there is no adjustment to the book value of the debt. A new effective interest rate is based on the book value of the initial debt and revised cash flows. When the unsettled future cash flows required for restructured debt are less than the net book value of the initial debt prior to the restructuring, the debtor reports a profit equal to the book value of the debt through future cash payments. Subsequently, all cash receipts and payments made under the restructured debt contract, whether interest or face value, reduce the book value of the debt and no interest expense is recorded. If the present value of cash flows under the new debt instrument differs by at least 10% of the present value of the remaining cash flows under the terms of the original debt instrument, the debtor will account for the transaction as a debt repayment.

The initial liability is not accounted for and the new debt is recorded at fair value, the difference being recorded as a gain or loss of erasure.