Debt Modification Accounting Complexities for Real Estate

The accounting rules governing debt modifications are notoriously complex, and failure to apply the rules correctly can lead to material errors. Notably, an entity’s accounting for a debt modification often relies heavily on specific facts and circumstances of the transaction. That is, certain scenarios are inherently more difficult to account for than others. The following complexities of debt modification accounting are prone to error:

1. Debt modifications involving multiple lenders

When a borrowing arrangement involves multiple lenders, accounting for the modification is done on a lender-by-lender basis (for example, in a syndicated loan scenario). Frequently, commercial real estate loans are structured as syndicated loans; consequently, entities need to be aware of the loan structure and lender parties of the old and revised debt when accounting for a debt modification in order to avoid inadvertently analyzing the debt modification in the aggregate instead of on a lender-by-lender basis.

2. Debt modifications involving multiple instrument types

Modifications of borrowing arrangements that involve multiple instruments – such as term loans, revolving lines of credit, and warrants – can require a complex assessment of the correct unit of analysis and the appropriate accounting framework.

3. Debt modifications involving related-party creditors

These modifications require careful analysis to determine whether a restructuring or extinguishment gain that otherwise would affect the income statement is, in substance, a capital transaction.

4. Identification of lender fees and third-party costs

Fees paid to a syndication or administrative agent in a debt modification or debt issuance can be significant. When the syndication agent also is a lender in the debt arrangement, careful analysis is required to assess if some or all of the fees paid to the syndication agent might represent a third-party cost.

5. Determination of the accounting scope

U.S. GAAP guidance covering debt modifications is located in two places. Subtopic 470-60 covers TDRs, and Subtopic 470-50 covers modifications that aren’t of a troubled nature. Getting the accounting scope right can help entities avoid errors in reporting gains or losses that otherwise might not be permitted. However, determining the scope can be complex.

• TDRs – “financial difficulty” criterion. To determine if a debt modification is a TDR, it is important to understand the underlying reasons for the modification, including whether the borrower is experiencing financial difficulty. Accounting teams should avoid overreliance on a single factor to assert that the debtor is or is not experiencing financial difficulty. That is, significant judgment might be needed to make this determination based on the facts and circumstances that existed at the restructuring date.
• TDRs – “concession” criterion. Determining if a concession was granted in a possible TDR is not as simple as comparing the coupon rate of the debt before and after the restructuring. The concession criterion requires accounting teams to compare the effective borrowing rate based on the terms of the restructured debt to the effective borrowing rate of the old debt immediately before the restructuring. The effective borrowing rate could be influenced by premiums or discounts, such as those caused by proceeds allocated to bifurcated derivatives or other freestanding financial instruments (for example, warrants), or by fees paid to the creditor.

6. Multiple modifications within a 12-month period

Accounting teams should review the totality of changes to the debt arrangement over the preceding 12 months rather than individually analyzing each incremental modification in order to properly assess the substance of those changes.

7. 10% cash flow test for non-TDR modifications of term loans

The accounting for non-TDR modifications of term loans requires an entity to determine whether the revised terms are substantially different (that is, greater than a 10% difference in cash flows) from the original debt terms and, therefore, represent an extinguishment of the original debt. In an extinguishment, the debtor recognizes a gain or loss upon derecognition of the old debt and initial recognition of the revised debt. In contrast, an exchange or modification that is not accounted for as an extinguishment is accounted for prospectively, with no gain or loss recognized, by adjusting the effective interest rate through the remaining term of the debt. Performing the 10% cash flow test can be difficult. Some complexities might include:

• Fees exchanged between the borrower and lender. In addition to capturing changes to future principal and interest payments, an entity should verify that its analysis captures any fees exchanged between the borrower and lender attributable to changes in debt covenants, collateralization requirements, and recourse features, among other things. These fees generally would be considered up-front cash flows in the 10% test.
• Changes in principal amount. Additional borrowings resulting from the modification should be treated as a cash inflow in the 10% test, while repayments made in connection with the modification are treated as a cash outflow.
• Rights to prepay the debt. If the original or modified debt instrument is callable or prepayable, then the borrower should prepare separate cash flow analyses assuming both exercise and nonexercise of the options, regardless of the entity’s ability to prepay the debt. The borrower would then use the analysis that generates the smallest change for purposes of the 10% test.
• Variable interest rates. If the original or modified debt instrument has a variable interest rate, then the variable interest rate in effect at the date of the modification should be used to forecast future interest payments.
• Exchanges of noncash consideration. In some modifications, the borrower might issue noncash consideration to the lender as part of the modification (for example, either shares or warrants on the borrower’s shares). When a borrower exchanges noncash consideration to the lender as part of a modification, the fair value of the noncash consideration should be treated as an up-front cash flow in the 10% test.

All applicable changes in cash flows exchanged between the lender and debtor should be included in the analysis, including fees paid to the lender (as well as those related to covenant waivers), changes in principal on the modification date, revised interest payments, revised principal payments, and the fair value of any warrants or sweeteners granted to the lender.

8. Line-of-credit or revolving debt arrangements

Modifications of these debt instruments follow an accounting analysis different from that for term debt. A modification of a line-of-credit or revolving debt arrangement requires a comparison of the borrowing capacity under the old and new terms. This assessment is prone to error if the borrowing capacity (the product of the remaining term and maximum available credit) is miscalculated. 

Accounting for debt modifications is heavily dependent on the facts and circumstances of the transaction, and knowing where to start can be difficult. Real estate organizations might find it helpful to turn to a team of specialists to help them understand how guidance in Subtopics 470-50 and 470-60 applies to strategic changes in their debt arrangements.

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FASB materials reprinted with permission. Copyright 2025 by Financial Accounting Foundation, Norwalk, Connecticut. Copyright 1974-1980 by American Institute of Certified Public Accountants.

Originally published on Dec. 15, 2023.
Reviewed and updated Oct. 16, 2025.