New accounting rules issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are changing the way companies account for debt restructurings. These new standards aim to provide more transparency into a company’s financial health by requiring earlier recognition of losses on debt.
The key impact is that companies will have to record losses earlier in the process, reducing net income and regulatory capital.
The new rules aim to address some shortcomings of past standards that allowed companies to delay recognizing losses on debt. For example:
By requiring earlier loss recognition, regulators believe the new standards will provide investors and others with better insight into a company’s financial health. Companies will have to be more transparent about their likelihood of restructuring debt and the impact on cash flows.
Complying with the new debt restructuring rules poses some key challenges for companies:
The new standards will impact many industries, but particularly:
Oil & Gas – Many oil and gas companies have large debt loads and have already restructured or are likely to in the future. Early loss recognition will accelerate write-downs.
Retail – Struggling retailers have restructured debt or leased stores amidst industry disruption. The new rules will likely trigger large writedowns sooner.
Telecom – Competitive and capital intensive telecom companies often restructure debt. The new standards will prompt faster recognition of losses.
Healthcare – Hospital groups facing regulatory changes may have to restructure debt, booking losses faster under the new guidance.
Some actual corporate debt restructurings that may have played out differently under the new rules include:
JC Penney – Restructured $4 billion of debt in 2018 to alleviate liquidity concerns. Losses may have hit sooner.
California Resources Corp – The oil & gas producer restructured $5 billion of debt in 2020 after a Chapter 11 filing. Earlier loss recognition seems likely.
Neiman Marcus – The high-end retailer filed for bankruptcy in 2020 and restructured nearly $5 billion in debt. The new standards could have accelerated losses.
In summary, new accounting rules are now requiring companies to record losses on debt restructurings much sooner than in the past. This aims to provide more transparency but also introduces new complexity and volatility. Heavily leveraged companies in sectors like retail, energy, and healthcare seem most likely to be impacted. But the impact of early loss recognition under the new guidance could ripple more broadly, as investors become aware of deteriorating financial positions sooner. Companies will have to closely monitor their debt and probability of restructuring to comply with the standards.
Please fill out the form below to receive a free consultation, we will respond to
your inquiry within 24-hours guaranteed.