On April 30, 2025, at the recommendation of the Emerging Issues Task Force (EITF), the Financial Accounting Standards Board (FASB) issued a proposed standard update: Accounting for Debt Exchanges, that affects the FASB Accounting Standards Codification section titled Debt—Modifications and Extinguishments (Subtopic 470-50) and Liabilities— Extinguishments of Liabilities (Subtopic 405-20).
The development of standards for debt goes back for decades, In the early 1970’s, the Accounting Principles Board (predecessor to FASB) issued APB 26 on the early extinguishment of debt, which revised even earlier pronouncements. Since then, further adjustments have occurred, with now this latest proposal recommending changes to the criteria to clarify and simplify the process.
Current guidance necessitates a cash flow test to establish if new debt significantly differs from old debt, and if conversion factors have an impact. Such testing may not be practical and could result in the consideration of totally unrelated transactions as having a connection.
The new criteria states that a new debt has been issued and old debt replaced if the existing and multiple creditors take part and:
(1) “the existing debt obligation has been repaid in accordance with its contractual terms or repurchased at market terms and
(2) the new debt obligation has been issued at market terms following the issuer’s customary marketing process.”
With the issuance of this new pronouncement, the expectation is that more debt exchanges will be reported as new debt issuances and old debt terminations.
Comments are due by May 30, 2025. Thus far there have been a couple comment letters encouraging broader application to all forms of debt exchanges, and traceability between old and new debt agreements.
Further details can be found at Accounting for Debt Exchanges.
