Concept Introduction:
The debt restructuring is the process by which a company may delay its bankruptcy. It is done by extending the dates of liability payments or by procuring the loan at lower interest rates.
To define:The way by which gain will be determined as per modified terms under bankruptcy law and if there is no bankruptcy law.
Explanation of Solution
Debt restructuring can be done in various ways. One of the ways of debt restructuring is the modification of terms. In this method, gain on restructuring is recognized when the future payment of cash flows is less than the previous debt. For instance, the interest paid is lower than the previous interest paid.
In a bankruptcy organization, the principles set under FASB ASC 470 is not applied. In this case, gain or loss is measured by using a different approach. The gain can be measured by differentiating the present value of the fair value of restructured gain and the previous carrying basis of debt.
Under this law, there will be no gain, if the carrying basis of debt being restructured and the total of interest amount and principal amount after debt restructured (considering the discounted present value as per market rates) is similar.
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