CFM92490 | Debt Cap: the available amount: debt restructuring mismatches

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Debt Restructuring

A distressed UK company may restructure its debt by modifying the terms of its existing borrowing or exchanges its existing borrowing for new borrowing on different terms, in both instances the face value of the existing and replacement debt may be the same.

For example the UK company may have borrowed £40m from a Bank which is repayable at the end of 10 years and on which interest at 5% per annum is due. The company experiences poor trading conditions and cannot pay the interest due. The Bank agrees to restructure the loan so that it is repayable at the end of 15 years with 3% interest payable. Both the existing and the replacement loans have the same face value but the accounting treats the restructuring as extinguishing the original loan. The replacement loan will be initially accounted for at its fair value of, say, £3m, which is less than the face value of both the original and replacement value. The difference between the face value and fair value. £10m, is taken to the profit and loss account as a credit. Subsequently the replacement loan is accounted for on an amortised cost basis using the effective interest method over the 15 year term of the loan.

The interest payments will form part of both the UK company’s financing expenses and the financing expenses disclosed in the available amount. However, whilst the amortisation of the loan is not an ‘excluded debit’ within TIOPA10/S313(3) and accordingly is treated as a financing expense of the UK company it will not be included within the available amount,because it is not interest or discount, so a mismatch arises.

Regulations 15 and 16 of the Mismatch Regulations deal with this by including within the available amount the debit that arises because the loan is required to be measured at amortised cost. References in the regulations to IAS include a reference to accounts prepared under both IAS and UK GAAP.