Organizations should anticipate possible accounting complexities and avoid common mistakes to successfully navigate debt modifications in 2021.
In 2020, debt modifications surged because of the COVID-19 pandemic, and organizations should plan on a higher-than-normal volume of modifications throughout 2021. Some companies might need to modify existing loan terms to alleviate financial distress, while other companies that are on solid footing might modify their debt arrangements to procure additional financing for acquisitions or other strategic initiatives. Still others might prioritize refinancing because of uncertainty about the future direction of interest rates or upcoming reference rate reform.
Staying in the loop
The accounting rules governing debt modifications are notoriously complex. Failure to apply the rules correctly can quickly lead to material errors. “Given the complexity in the rules, accounting teams should stay informed about business plans that might involve debt modifications,” says Matthew A. Geerdes, who works in accounting advisory services at Crowe. “If accounting teams are kept in the loop, they can proactively advise executives about how proposed modifications might affect the organization’s financial statements.” In short, accounting teams should be kept in the loop as modifications to debt arrangements unfold.