Mini Case

Mini Cases

MINI CASE #1

Issue Identified

How to account for the expected loss resulted from redemption of the debt obligations in the period that it announces its intent to call the debt for redemption?

ASC References

ASC 470-50-40-2 states that “ a difference between the reacquisition price of debt and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains and identified as a separate item.Gains and losses shall not be amortized to future periods. “

ASC 405-20-40 states that “a debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if either of the following conditions is met:

The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes the following:

Delivery of cash

Delivery of other financial assets

Delivery of goods or services

Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds.

The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor.

ASC 470-50-55-9 specifies that “the following situations do not result in an extinguishment and would not result in gain or loss recognition under either paragraph 405-20-40-1 or this Subtopic:

An announcement of intent by the debtor to call a debt instrument at the first call date

In-substance defeasance

An agreement with a creditor that a debt instrument issued by the debtor and held by a different party will be redeemed.

Conclusion

The expected loss resulted from redemption of the debt obligations in the period that it announces its intent to call the debt for redemption shall be recognized currently in income of the period of extinguishment as losses or gains and identified as a separate item. Additionally, losses shall not be amortized to future periods.

MINI CASE...