1

Baker / Lembke / King

Corporations
in Financial IFRS Adapted
Difficulty

Irwin/McGraw-Hill Edited by Taufik Hidayat © The McGraw-Hill Companies, Inc., 1999

 Outline 2

Corporation in
Financial Difficulty

Courses of Impairment Nonjudicial Judicial

Action of Loan Action Action

Nonjudicial Debt
Reorganization
Action Restructuring

Judicial Transfer of
Action Liquidation
Assets

Edited by Taufik Hidayat

Irwin/McGraw-Hill
 Nonjudicial Actions
3

Formal arrangement between the company

and its creditors are legally binding but are
not administered by a court.

 Debt restructuring arrangements

 Creditors’ committee management
 Transfer of assets

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Debt Restructuring Arrangements
4

 Arrangement between a debtor and one or

more its creditors in temporary financial
difficulty.
 Debtor: may solicit an extension of due
date of its debt, ask to decrease of the
interest rate on debt, or ask for a
modification of other terms of debt
contract.

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Debt Restructuring Arrangements
5

 Creditors:
 willing to extent concessions to a debtor
rather than risk the legal expense and ill will
from legal action.
 agree to accept less than the face amount of
their claim (composition agreement). Creditors
receive an immediate cash payment and
ussually negotiate the timing of the remaining
cash payment.

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Judicial Actions
6

 In the case of bankrupcy

 A judicial action is administered by

bankrupcy court and bankrupcy judge.

 Indonesia Bankrupcy Law No 37/2004

is the guidance for bankrupcy case.

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Judicial Actions
7

 Bankrupcy Law provide two major alternatives

under the protection of the bankcrupcy:

 Suspension of payment: the debtor is provided

judicial protection for a rehabilitation period during

which it can eliminate unprofitable operation,
obtain new credit, develop a new company
structure with sustainable operation, and work out
arrangement with creditors.

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Judicial Actions
8

 Bankrupcy Law provide two major alternatives

under the protection of the bankcrupcy:

 State of bankrupcy and liquidation: is
administered by a trustee appointed by the court.
The debtor’s asset are sold and its liabilities
extinguished as the business is liquidated.

Irwin/McGraw-Hill Edited by Taufik Hidayat

 9

ACCOUNTING FOR
CREDITOR

Edited by Taufik Hidayat

Irwin/McGraw-Hill
 10
Impairment of Loans
• Requirements for impairment testing under IAS 39
– Required for all financial instruments except those measured at fair
value through profit and Loss (FVTPL).
– Only when there is objective evidence as a result of “loss event(s)”
• Example of “loss event(s)” include:
– Issuer encounters significant financial difficulties;
– Default of payments
– Lender has to grant special concession to the borrower
– Borrower faces probable bankruptcy
– Disappearance of an active market
– Objective evidence on a decrease of estimated cash flows of the
issuer
• Accounting treatment depends on how financial asset is
measured
Irwin/McGraw-Hill Edited by Taufik Hidayat
 11
Impairment of Loans
• Accounting treatment depends on how financial asset is
measured:
 Amortized Cost : Difference between carrying amount
and the present value of expected future cash flow,
discounted using original discount rate. Reversal of
impairment is allowed.
 Fair Value (AFS) : Different between acquisition cost
(net of amortization) and current fair value, less any
impairment loss previously recognized in P/L. Reversal of
impairment is not allowed for equity instrument.
 Cost : Difference between carrying amount and the
present value of expected future cash flow, discounted
using current market rate of similar instrument. Reversal
of impairment is not allowed.
Irwin/McGraw-Hill Edited by Taufik Hidayat
 12
Impairment of Loans
Procedures for assessing impairment (IAS 39: 63-65)
Test for impairment for
Financial Assets

Individually Significant Not Individually Significant

Individually Individually Collectively

Fail Pass Fail Pass

Collectively tested
with similar credit
risk

Carrying PV of estimated
Impairment loss = -
amount future cash flows

Irwin/McGraw-Hill Edited by Taufik Hidayat

 13
Impairment of Loans
Procedures for assessing impairment (IAS 39: 63-65)

Test for impairment for

Financial Assets
$100

Individually Significant Not Individually Significant

$30 $70

Individually Individually Collectively

$15 $55

Fail Pass
Fail Pass
$10 $20
$0 $15

Collectively tested with

similar credit risk
$10
Total Collectively
$65
Irwin/McGraw-Hill Edited by Taufik Hidayat
 14
Creditor Accounting for Impaired Loans

On December 31, 20X5, Creditor Company holds an

unsecured 10 percent note receivable for $30,000
from Peerless Products Corporation due on
December 31, 20X6. The interest of $3,000 is
currently in default.

Creditor Company determines as of December 31,

20X5, that is it probable that the loan from Peerless
Products will not be collected in full. The best
estimate of the amount that will collected on
December 31, 20X6, is $23,000.

Irwin/McGraw-Hill Edited by Taufik Hidayat

 15
Creditor Accounting for Impaired Loans

Step 1: Determine if the loan is impaired by

comparing its carrying value with the
present value of the estimated future cash
flows (effective interest rate, 10 percent).

Carrying value of the loan:

Principal $ 30,000
Accrued interest 3,000
Carrying amount $33,000
Present value of total future cash flows:
Estimated total future cash flows $ 23,000
Present value factor for 10%, 1 year x .90909 20,909
Creditor loss on impaired loan $12,091

Irwin/McGraw-Hill Edited by Taufik Hidayat

 16
Creditor Accounting for Impaired Loans

Step 2: On December 31, 20X5, make entries to

recognize the impaired loan receivable.
Bad Debt Expense 12,091
Allowance for Impaired Loans 12,091
Impaired Notes Receivable 30,000
Notes Receivable 30,000

The December 31, 20X5 balance sheet

Impaired Note Receivable, including
interest of $3,000 $33,000
Less: Allowance for Impaired Loan -12,091
Present Value of Impaired Loan $20,909

Irwin/McGraw-Hill Edited by Taufik Hidayat

 17
Creditor Accounting for Impaired Loans
It is important to note that
Debtor will not make any
entries for the impaired loan.

If secured by collateral,
consedered in PV EFCF
amout to estimated
proceed less cost to sell.

Interest income is
thereafter recognized
using the same rate for
PV EFCF.
Irwin/McGraw-Hill Edited by Taufik Hidayat
 18
Creditor Accounting for Impaired Loans
On December 31, 20X6, Creditor Company will recognize
interest revenue using the effective interest method.
Accrued Interest Receivable ($30,000 x .10) 3,000
Allowance for Impaired Loans 909
Interest Revenue ($20,909 PV x .10) 2,091

The balance in the valuation account is now

$13,000 ($12,091 plus $909). Creditor Company
receives only the $23,000 it had estimated.
Cash 23,000
Allowance for Impaired Loans 13,000
Impaired Notes Receivable 30,000
Accrued Interest Receivable 6,000

Irwin/McGraw-Hill Edited by Taufik Hidayat

 19

TROUBLED DEBT
RESTRUCTURING

Edited by Taufik Hidayat

Irwin/McGraw-Hill
 Troubled Debt Restructuring 20

On December 31, 20X6, the company has an unsecured

current liability of $30,000 to Creditor Company, on
which $3,000 interest has been accrued and is unpaid.

Peerless Products Corporation has been negotiating with

Creditor Company to restructure the current debt of
$33,000 ($30,000 + $3,000).

Irwin/McGraw-Hill Edited by Taufik Hidayat

 21
Troubled Debt Restructuring
Alternative 1: Transfer of cash in full settlement

Carrying value of the debt:

Principal $30,000
Accrued interest (10% for 1 year) 3,000 $33,000
Cash flows (27,000)
Restructuring difference (debtor = creditor) $ 6,000

The entry on Peerless Products books--

Notes Payable 30,000
Accrued Interest Payable 3,000
Cash 27,000
Gain on Restructure of Debt 6,000
IAS 39 par 58

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Troubled Debt Restructuring
22

The entry required for Creditor Company--

Cash 27,000
Allowance for Doubtful Accounts 6,000
Notes Receivable 30,000
Accrued Interest Receivable 3,000

If creditor company had not provided

adequately for uncollectible receivables, the
bad debts expense account is debited instead
of allowance for doubtful accounts.

Irwin/McGraw-Hill Edited by Taufik Hidayat

 23
Troubled Debt Restructuring
Alternative 2: Transfer of noncash assets in
settlement of debt

Peerless Products agrees to transfer

inventory with a book value of $45,000 and
a fair value of 26,000 to Creditor Company
in full settlement of the $33,000 debt.

Carrying value of the debt:

Principal $30,000
Accrued interest (10% for 1 year) 3,000 $33,000
Fair value of assets transferred (26,000)
Restructuring difference (debtor = creditor) $ 7,000

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Troubled Debt Restructuring
24

The entry on Peerless Products’ books--

Notes Payable 30,000
Accrued Interest Payable 3,000
Loss on Disposal of Inventory 19,000
Inventory 45,000
Gain on Restructuring of Debt 7,000
IAS 39 par 41

The entry on the creditor’s books--

Inventory 26,000
Allowance for Uncollectibles 7,000
Notes Receivable 30,000
Accrued Interest Receivable 3,000
Irwin/McGraw-Hill Edited by Taufik Hidayat
Troubled Debt Restructuring
25

Alternative 3: Modification of terms

 Reduction of the stated interest rate for the

remainder of the original debt.
 Extension of the maturity date of the original
debt at the lower rate of interest.
 Reduction of part of the face amount of the
original debt.
 Reduction in the accrued interest.

Irwin/McGraw-Hill Edited by Taufik Hidayat

 26
Troubled Debt Restructuring
Alternative 3: Modification of terms

 A substantial modification of terms of existing

financial liability or part of it should be accounted
for an extinguishment of the original financial
liability and recognized a new financial liability.
 If the different between PV EFCF under new term
(including any fees paid & received) and PV of
remaining cash flow of the original financial
liability (current carrying amount) is <10%, the
modification is not accounted for as
extinguishment. (IAS 39 par AG 62)

Irwin/McGraw-Hill Edited by Taufik Hidayat

 27
Troubled Debt Restructuring
Alternative 3: Modification of terms
 If exchange of debt or modification of terms is
accounted for as extinguishment, the difference
between carrying amount and PV EFCF is
recognized immediately in P/L. Any cost or fees
incurred are recognized as part of gain or loss.
 If exchange of debt or modification of terms is not
accounted for as extinguishment, the difference is
recognized as adjustment of effective interest
rate. Any cost or fees incurred are recognized as
adjustment of liability’s carrying amount. (IAS 39
par AG 62)
Irwin/McGraw-Hill Edited by Taufik Hidayat
 28
Troubled Debt Restructuring
Peerless Products Corporation, the debtor, owes
$30,000 principal plus $3,000 accrued interest to
Creditor. On December 31, 20X6, the two entities
agree to the following modification of terms:

1. Forgive accrued interest of $3,000.

2. Reduce the interest rate from 10 percent to 5 percent.
3. Extend the maturity date for one additional year to
December 31, 20X7.

Irwin/McGraw-Hill Edited by Taufik Hidayat

 29
Troubled Debt Restructuring
Debtor & Creditor
Carrying value of the debt:
Principal $ 30,000
Interest 3,000
Carrying value of the debt $ 33,000 $33,000
Total future estimated cash flows:
Total future principal $ 30,000
Total future contractual interest 1,500
Total future estimated cash flows $ 31,500
Present value factor, 10%, 1 year x .90909
Present value of future cash flows $ 28,636 (28,636)
Restructuring difference $ 4,364

Original effective rate >10% of $33,000

Irwin/McGraw-Hill Edited by Taufik Hidayat
 Troubled Debt Restructuring 30

The modification of terms is accounted for as

extinguishment:

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Troubled Debt Restructuring 31

The entry on debtor’ books--

Accrued Interest Payable 3,000
Notes Payable (10%) 30,000
Notes Payable - new (5%) 28,636
Gain on Extinguishment of Debt 4,364

The entries on the creditor’s books--

Allowance for Uncollectibles 4,364
Accrued Interest Receivable 3,000
Allowance for Impaired Loans 1,364
Impaired Notes Receivable (5%) 30,000
Notes Receivable (10%) 30,000

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Troubled Debt Restructuring 32

Assume that the modification of terms is not

accounted for as extinguishment:

Notes Payable (10%) 4,364

Gain on Restructuring of Debt 4,364

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Troubled Debt Restructuring 33

Assume that the modification of terms is not

accounted for as extinguishment and accrued interest
of $3,000 is still payable at maturity, the alternative
accounting treatment:

New effective interest Repayment of 30.000

rate of 4,54%. + 3.000.

Irwin/McGraw-Hill Edited by Taufik Hidayat

 Reorganization & Liquidation
34

 Reorganization: the debtor continues a

business after reorganization.
– Fresh start accounting
– Creditors become stockholders
– Previous stockholders become minority (NCI)

 Liquidation: the business does not

survive in a liquidation.
– Sale the assets at liquidation value.
– Pay the liabilities in certain order.
Irwin/McGraw-Hill Edited by Taufik Hidayat
 35
Latihan
Pada tanggal 31 Desember 2009, PT Kreditur memiliki piutang dengan
nominal Rp 800.000.000 kepada PT Debitur. Atas piutang tersebut
dikenakan bunga 12%per tahun yang diterima tiap akhir tahun. PT
Debitur menyatakan tidak mampu melunasi bunga yang jatuh tempo
akhir tahun 2009. Piutang akan jatuh tempo pada akhir tahun 2011.
Oleh karena itu PT Kreditur mempertimbangkan untuk melakukan
penurunan nilai atas piutangnya. PT kreditur memperkirakan bahwa:
• Bunga terpiutang tahun 2009 tidak akan tertagih dan dihapus akhir
tahun 2010.
• Bunga akhir tahun 2010 yang dapat ditagih hanya sebesar
Rp.60.000.000
• Bunga akhir tahun 2011 yang dapat ditagih hanya sebesar
Rp.50.000.000
• Pelunasan pokok akhir tahun 2011 yang dapat ditagih hanya sebesar
Rp.600.000.000

Edited by Taufik Hidayat

Irwin/McGraw-Hill
 36

Soal
PV single sum n=1 i=12  0.89286, PV single sum n=2 i=12 
0.79719

Diminta :
1.Hitunglah rugi penurunan nilai yang diakui PT Kreditur tahun 2009.
Sertakan perhitungannya. (10%)
2.Buatlah jurnal yang dicatat PT Kreditur tahun 2010 dan 2011 serta
penyajian piutang di neraca 31 Desember 2010 dan 2011. (10%)

Edited by Taufik Hidayat

Irwin/McGraw-Hill
 37

Principle 800,000,000
Interest 12%
Years to maturity 2
Interest default 96,000,000
Total receivable 896,000,000

Estimated Future Cash Flow PV

Default interest - -
2010 interest 60,000,000 53,571,429
2011 interest 50,000,000 39,859,694
Principal 600,000,000 478,316,327
710,000,000 571,747,449

Carrying Amount:
Principle 800,000,000
Interest default 96,000,000 896,000,000
Estimated Future CF: 710,000,000
PV Est Future CF 571,747,449
Loss on Impairment 324,252,551
Value of loan in B/S 31/12/09 571,747,449

Edited by Taufik Hidayat

Irwin/McGraw-Hill
 38

31/12/09 31/12/11
Loss on impairment 324,252,551 Interest receivable 96,000,000
Allowance 324,252,551 Allowance 26,357,143
Interest revenue 69,642,857
Impaired N/R 800,000,000
N/R 800,000,000 Cash 650,000,000
Allowance 246,000,000
Presentation: Impaired N/R 800,000,000
N/R + Interest 896,000,000 Interest Receivable 96,000,000
- Allowance (324,252,551)
571,747,449

31/12/10
Interest receivable 96,000,000
Allowance 27,390,306
Interest revenue 68,609,694

Cash 60,000,000
Allowance 132,000,000
Interest Receivable 192,000,000

Presentation:
N/R 800,000,000
- Allowance (219,642,857)
580,357,143

Edited by Taufik Hidayat

Irwin/McGraw-Hill
 39
Chapter Twenty-Two

The
End

Irwin/McGraw-Hill Edited by Taufik Hidayat