Accounting for debt restructuring under IFRS starts with a single question: has the renegotiated debt changed enough that the old liability should come off the books, or is it still the same liability with new numbers? IFRS 9 answers that question with a quantitative “10 per cent test,” and the answer drives everything else: whether gains and losses hit profit or loss immediately, whether fees are expensed or amortized, and whether a new effective interest rate gets calculated. Settling debt with shares follows a different standard (IFRIC 19), and the costs of a wider restructuring program sit under IAS 37.
The 10 Per Cent Test
When a borrower and lender renegotiate the terms of a financial liability, IFRS 9 requires a comparison of the old deal against the new one. Discount the remaining cash flows of the original liability and the cash flows under the new terms, both using the original effective interest rate. If the present values differ by 10 per cent or more, the modification is substantial and the original liability is treated as extinguished. If the gap is less than 10 per cent, the original liability stays on the books with an adjusted carrying amount.1IFRS Foundation. IFRS 9 Financial Instruments
The cash flows under the new terms must include any fees exchanged between borrower and lender, including fees that one party pays on behalf of the other. Third-party costs such as legal fees or advisory fees paid to outside firms are not part of this calculation.2IFRS Foundation. Fees Included in the 10 Per Cent Test for Derecognition of Financial Liabilities
If the Test Says Substantial: Extinguishment
When the test produces a difference of 10 per cent or more, the accounting mirrors a payoff and a new borrowing. The entity removes the old liability from its balance sheet and recognizes a brand-new liability at fair value on the modification date.3IFRS Foundation. IFRS 9 – Modification/Exchange of Financial Liabilities That Do Not Result in Derecognition The gap between the carrying amount of the old debt and the fair value of the new debt flows straight to profit or loss as a gain or loss on extinguishment.1IFRS Foundation. IFRS 9 Financial Instruments
Fees and transaction costs in an extinguishment scenario are also recognized immediately in profit or loss. They do not get folded into the new liability’s carrying amount, and they are not amortized. The result can be a visible hit to the income statement in the period of restructuring, which catches some preparers off guard if they assumed those costs would spread over the new loan’s life.3IFRS Foundation. IFRS 9 – Modification/Exchange of Financial Liabilities That Do Not Result in Derecognition
If the Test Says Non-Substantial: Modification
When the present value difference falls below 10 per cent, the original liability remains on the balance sheet. Its carrying amount is recalculated as the present value of the modified cash flows, discounted at the original effective interest rate. The difference between the old carrying amount and the new one is recognized immediately in profit or loss as a modification gain or loss.2IFRS Foundation. Fees Included in the 10 Per Cent Test for Derecognition of Financial Liabilities
After the adjustment, the entity recalculates the effective interest rate prospectively so that the revised carrying amount amortizes correctly over the remaining term. Any fees or costs incurred in the renegotiation adjust the carrying amount of the liability and are amortized over that remaining term rather than expensed upfront.2IFRS Foundation. Fees Included in the 10 Per Cent Test for Derecognition of Financial Liabilities
The contrast with extinguishment is stark. Same restructuring event, but fees get amortized instead of expensed, and the income statement impact tends to be smaller and more gradual. That is why the 10 per cent boundary gets so much attention in practice.
When Qualitative Factors Override the Numbers
The 10 per cent test is not the only route to an extinguishment conclusion. IASB staff have confirmed that when the quantitative test is met, the modification is substantial, but that does not mean the test must be the exclusive basis for the assessment. Certain changes to a liability’s terms may be so fundamental that derecognition is appropriate even if the discounted cash flow difference is less than 10 per cent.4IFRS Foundation. Post-implementation Review of IFRS 9 – Modification of Financial Assets and Financial Liabilities
IFRS 9 does not list specific qualitative triggers, and the IASB has acknowledged that the assessment depends on the facts and circumstances of each case. In practice, changes like converting a floating-rate loan to fixed rate, switching the currency of denomination, or adding a conversion feature could all warrant qualitative scrutiny. The reason for the modification also matters. If a lender renegotiates because the borrower is in financial distress, that context feeds into the overall assessment of whether the economics of the arrangement have fundamentally changed.4IFRS Foundation. Post-implementation Review of IFRS 9 – Modification of Financial Assets and Financial Liabilities
Settling Debt With Shares
A debt-to-equity swap settles a financial liability by issuing the entity’s own shares to the creditor. IFRIC 19 provides the framework. The liability is derecognized, and the equity instruments issued are measured at their fair value. If the fair value of the shares cannot be reliably measured, the entity uses the fair value of the liability being extinguished instead.5IFRS Foundation. IFRIC 19 – Extinguishing Financial Liabilities with Equity Instruments
The difference between the carrying amount of the extinguished liability and the measurement of the equity issued is recognized in profit or loss. This frequently produces a gain for the debtor because distressed debt often has a carrying amount that exceeds the fair value of the equity handed over. That gain is real under IFRS, not a reclassification within equity.5IFRS Foundation. IFRIC 19 – Extinguishing Financial Liabilities with Equity Instruments
Not every swap eliminates the entire liability. When only part of the debt is settled with equity, the entity allocates the consideration between the portion extinguished and the portion that remains outstanding. The allocation requires judgment and should reflect all relevant facts and circumstances of the transaction.5IFRS Foundation. IFRIC 19 – Extinguishing Financial Liabilities with Equity Instruments
The consideration allocated to the remaining liability then feeds into a separate assessment of whether that portion’s terms have been substantially modified. If they have, the entity treats the remaining liability as extinguished and recognizes a new one, applying the same IFRS 9 framework described above.5IFRS Foundation. IFRIC 19 – Extinguishing Financial Liabilities with Equity Instruments
Costs of a Broader Restructuring Program
Debt restructuring often sits inside a wider corporate restructuring: a plant closes, a division is wound down, staff are let go. Those program costs are not accounted for under IFRS 9. They sit under IAS 37, which defines a restructuring as a program that is planned and controlled by management and materially changes either the scope of the business or the manner in which it is conducted.6IFRS Foundation. IAS 37 Provisions, Contingent Liabilities and Contingent Assets
A provision for those costs can only be recognized when a constructive obligation exists. That obligation arises when two conditions are met simultaneously: the entity has a detailed formal plan identifying the business affected, the principal locations, the approximate number of employees to be terminated, the expenditures involved, and the implementation timeline; and the entity has raised a valid expectation among those affected by starting to implement the plan or announcing its main features publicly. A board decision alone is not enough.6IFRS Foundation. IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Even then, the provision covers only direct expenditures necessarily caused by the restructuring and not tied to ongoing activities. Severance and lease termination penalties typically qualify. Retraining staff who stay, marketing the new business, and investing in new systems do not. Expected future operating losses leading up to the restructuring date are excluded unless they relate to an onerous contract.6IFRS Foundation. IAS 37 Provisions, Contingent Liabilities and Contingent Assets
When the Restructuring Is Really a Disposal
If the restructuring involves disposing of a whole business line or geographic segment, IFRS 5 may apply on top of everything else. The standard requires separate presentation on the balance sheet and income statement when assets are classified as held for sale and when operations qualify as discontinued.7IFRS Foundation. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
A component qualifies as a discontinued operation when it has been disposed of or is classified as held for sale and it represents a separate major line of business or geographic area, is part of a coordinated plan to dispose of such a line, or is a subsidiary acquired solely for resale.8IFRS Foundation. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations A pure debt renegotiation, with no sale of a business, does not trigger IFRS 5.
What To Disclose
IFRS 7 covers disclosures for financial instruments and requires entities to provide information that lets users evaluate the significance of instruments to the entity’s financial position and the nature and extent of associated risks.9IFRS Foundation. IFRS 7 Financial Instruments: Disclosures For a debt restructuring specifically, the notes should explain the nature and reason for the modification, the gain or loss recognized on extinguishment or modification, the terms of any new instruments, and the impact on future cash flows.
Where a restructuring provision has been recognized under IAS 37, the entity must disclose the nature of the obligation, the expected timing of any resulting outflows, and an indication of the uncertainties around the amount or timing.6IFRS Foundation. IAS 37 Provisions, Contingent Liabilities and Contingent Assets For a debt-to-equity swap, the notes should clearly explain the transaction, the measurement basis for the equity instruments issued, and how the gain or loss was determined.