Debt modifications and extinguishments under ASC 470

Companies refinance, reprice and extend their loans all the time, and each change raises the same question: is it the same debt with new terms, or new debt? The answer decides whether a gain or loss hits earnings now and how interest is recognized later. This guide explains the ASC 470 decision path, works through the 10% test for two repricings of the same loan, and covers fees, revolving credit facilities, troubled debt restructurings, convertible debt and the differences from IFRS 9.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. Updated . 8 minute read.

Short answer

Under ASC 470-50, when a borrower and lender change the terms of a loan, or exchange it for a new one, the borrower decides whether the old debt has been modified or extinguished. The terms are substantially different, and the old debt is extinguished, if the present value of the cash flows under the new terms, including fees paid to the lender, differs by at least 10% from the present value of the remaining cash flows under the original terms, both discounted at the original effective interest rate. A change in the fair value of an embedded conversion option of at least 10% of the debt's carrying amount, or adding or removing a substantive conversion option, also counts. On extinguishment, the new debt is recorded at fair value and a gain or loss is recognized, including fees paid to the lender, while third-party costs are capitalized. On a modification, no gain or loss arises: a new effective interest rate is calculated, fees paid to the lender are amortized and third-party costs are expensed. A restructuring granted to a borrower in financial difficulty follows the troubled debt restructuring rules of ASC 470-60. In this guide's example, cutting a 6% loan to 4.5% is a modification, while cutting it to 3% is an extinguishment.

At a glance

Key test
10% cash flow test
Discount rate
Original effective rate
Extinguishment
Gain or loss now
Modification
New effective rate
Lender fees
In the 10% test
IFRS
IFRS 9, gain or loss now
Debt modifications and extinguishments under ASC 470Key test: 10% cash flow test; Discount rate: Original effective rate; Extinguishment: Gain or loss now; Modification: New effective rate; Lender fees: In the 10% test; IFRS: IFRS 9, gain or loss now.KEY FACTS AT A GLANCEDebt modifications and extinguishments under ASC470Key test10% cash flow testDiscount rateOriginal effective rateExtinguishmentGain or loss nowModificationNew effective rateLender feesIn the 10% testIFRSIFRS 9, gain or loss nowTax BakersDebt modifications and extinguishments under ASC 470Key test: 10% cash flow test; Discount rate: Original effective rate; Extinguishment: Gain or loss now; Modification: New effective rate; Lender fees: In the 10% test; IFRS: IFRS 9, gain or loss now.KEY FACTS AT A GLANCEDebt modifications andextinguishments under ASC 470Key test10% cash flow testDiscount rateOriginal effective rateExtinguishmentGain or loss nowModificationNew effective rateLender feesIn the 10% testIFRSIFRS 9, gain or loss nowTax Bakers
Key facts at a glance, as set out in this guide.

How do you decide between a modification and an extinguishment?

Modified or extinguished under ASC 470?Modified or extinguished under ASC 470?Is the borrower in financial difficultyand has the lender granted a concession?YesTroubled debtrestructuring: ASC 470-60NoIs the new or changed debt with thesame lender, directly or via an agent?NoRepay the old loan,record a new oneYesDo the cash flows change by 10% ormore in present value terms?YesExtinguishment:gain or loss nowNoModification: new effective interest rate
Each lender is tested separately, and conversion options have their own 10% test.

The analysis is done lender by lender. In a loan syndication each lender is a separate creditor, so a refinancing can be a modification for some lenders and an extinguishment for others, while a lender that leaves the syndicate is repaid and one that joins provides new debt.

How does the 10% cash flow test work?

  • Discount both sets of cash flows at the effective interest rate of the original debt.
  • Include in the new cash flows any fees paid to or received from the lender, and changes in principal and maturity.
  • For floating-rate debt, use the variable rate in effect at the date of the change.
  • If the debt was modified in the past year without being extinguished, compare with the terms that applied a year earlier.
  • Separately, test whether the change in the fair value of any embedded conversion option is at least 10% of the carrying amount, and whether a substantive conversion option is added or removed.

ASC 470 in practice: two repricings of the same loan

A company has a $10 million loan at 6%, with 5 annual interest payments left and the principal due at the end. The lender agrees either to cut the rate to 4.5% or, in a second scenario, to 3%, keeping the maturity. Either way the company pays the lender a fee of $200,000 and pays lawyers $50,000.

Present value at the original 6% ($)Rate cut to 4.5%Rate cut to 3%
Remaining cash flows under the original terms10,000,00010,000,000
New interest payments and principal9,368,1458,736,291
Fee paid to the lender200,000200,000
Cash flows under the new terms9,568,1458,936,291
Change4.3%: modification10.6%: extinguishment

In the first scenario, there is no gain or loss. The $200,000 fee reduces the loan's carrying amount to $9,800,000 and is amortized through a new effective interest rate of 4.96%, the rate that equates the remaining payments with that carrying amount, and the $50,000 of legal fees is expensed. In the second, the old loan is treated as repaid: if 3% is the market rate for this borrower, the new loan's fair value is $10 million, so the company recognizes a loss of $200,000, the fee paid to the lender, and capitalizes the $50,000 of legal fees as issuance costs of the new loan. The Effective interest calculator (Excel) runs this 10% test for your own loan.

How are fees and costs treated?

ModificationExtinguishment
Fees paid to or received from the lenderAdjust the carrying amount; amortized through the new effective rateIncluded in the gain or loss on extinguishment
Third-party costs, such as legal feesExpensed as incurredCapitalized as costs of the new debt
Unamortized costs of the old debtCarried forward and amortizedWritten off in the gain or loss

How are revolving credit facilities handled?

Changes to a revolving facility or line of credit use a borrowing capacity test instead: the product of the remaining term and the maximum available credit, before and after. If capacity increases or stays the same, unamortized costs and new fees are deferred and amortized over the new term; if it falls, unamortized costs are written off in proportion to the decrease.

What is a troubled debt restructuring for the borrower?

If the borrower is experiencing financial difficulty and the lender grants a concession it would not otherwise consider, ASC 470-60 applies instead. The borrower recognizes a gain only if the total future undiscounted cash flows under the new terms are less than the carrying amount of the debt; otherwise the carrying amount stays and a lower effective rate applies from then on. ASU 2022-02 removed troubled debt restructuring accounting for lenders, but not for borrowers.

How are convertible debt settlements treated?

An offer that induces holders to convert early is an induced conversion: the company expenses the fair value of the extra consideration and does not recognize an extinguishment gain or loss. ASU 2024-04, effective for annual periods beginning after December 15, 2025, clarifies that an offer still qualifies when it keeps at least the form and amount of consideration under the original conversion terms, including for instruments with cash conversion features. See debt or equity under IAS 32 for how IFRS splits convertibles.

How does ASC 470 compare with IFRS 9?

IFRS 9 uses the same 10% test, counting only fees between borrower and lender, but also considers qualitative factors such as a change of currency. The big difference is a modification that is not an extinguishment: IFRS 9 remeasures the liability at the present value of the modified cash flows at the original effective rate and recognizes a gain or loss immediately, while US GAAP spreads the effect through a new effective rate. Classification differs too: a covenant waiver or long-term refinancing obtained after year end, but before the statements are issued, can make debt noncurrent under US GAAP but not under IFRS. See IFRS 9 modifications, the effective interest method and IAS 10 vs ASC 855.

Keep going

Our free Excel models work through the examples in these guides, and the comparisons show where IFRS and US GAAP part ways. Every guide names the Chartered Accountant who wrote it and the one who reviewed it.

All ASC 470 guides Free Excel models

Questions people ask

What is the 10% test for debt modifications?

The borrower compares the present value of the cash flows under the new terms, including fees paid to the lender, with the present value of the remaining original cash flows, both at the original effective rate; a difference of 10% or more means the old debt is extinguished.

How is a debt modification accounted for under ASC 470?

No gain or loss is recognized; a new effective interest rate is calculated, fees paid to the lender are amortized over the remaining term and third-party costs are expensed.

How is a debt extinguishment accounted for?

The new debt is recorded at fair value and the difference from the old debt's net carrying amount, including fees paid to the lender, is a gain or loss; third-party costs are capitalized on the new debt.

Do borrowers still apply troubled debt restructuring accounting?

Yes. ASU 2022-02 removed it for lenders, but borrowers in financial difficulty that receive a concession still apply ASC 470-60.

Sources

The standards, updates and other documents this guide draws on.

  1. FASB Accounting Standards Codification: Topic 470, Debt
  2. Financial Accounting Standards Board
  3. Deloitte DART: Roadmap, debt, determining whether debt terms are substantially different
  4. Deloitte DART: Roadmap, debt, accounting for debt modifications and exchanges
  5. RSM US: Summary of ASU 2024-04, induced conversions of convertible debt

Rules and fees change. If you are reading this long after October 26, 2026, confirm the figures with the source before you rely on them.

IFRS 9Modification of financial assets and liabilities under IFRS 9IFRS 9Amortised cost and the effective interest method under IFRS 9IAS 32IAS 32: is it debt or equity?

More in ASC 470

TopicThe ASC 470 topic page

This guide is general information. It is not tax or legal advice for your situation.