ASC 470: Debt Modifications and Extinguishments for Real Estate Entities

In the normal course of business, real estate entities may choose to refinance their outstanding debt for a variety of reasons. While the reason might be of little consequence, the proper accounting for this is important and sometimes overlooked.  

What is ASC 470? 

A real estate entity’s debt structure is generally not complex (e.g., no discounts, premiums, call/put/conversion options, and so forth). When preparing financial statements in accordance with Generally Accepted Accounting Principles (GAAP) and when a refinancing has occurred, a determination must be made as to whether the refinancing was a modification or extinguishment of the original debt. One should look to Accounting Standards Codification (ASC) 470 as it outlines the complex rules to aid in the process. There is a similar calculation for those entities reporting on an income tax basis, but for purposes of this discussion, the focus is on the required accounting in accordance with GAAP. The following is a simple guide assuming standard mortgage refinancing activities for real estate entities. 

Understanding Debt Modifications vs. Extinguishments 

Debt is often refinanced with a new lender, and the rules are quite simple. This refinance is deemed to be an extinguishment; all prior debt issuance costs should be written off, and any new costs incurred in connection with such refinancing should be capitalized and amortized over the new loan’s term. Unamortized debt issuance costs related to the original debt are written off and any loan prepayment penalty incurred should be presented separately in the financial statements as a loss on debt extinguishment. 

In the case where debt is refinanced with the same lender, the entity must determine whether the refinanced debt is substantially different from the original debt. This is accomplished by comparing the present value of the cash flows of the outstanding original debt to the present value of the cash flows of the new debt (including fees paid to the lender), discounted at the effective interest rate of the original loan. A change of 10% or more is deemed to be an extinguishment. 

Practical Guide of ASC 470 Application 

The following table sets forth the treatment of new and previously incurred costs of financing activities with the same lender: 

For purposes of this example, we did not consider financing transactions with multiple lenders, put or call options (i.e. prepayment options), discounts or premiums, or troubled debt restructuring, etc. This is meant to serve as a simple guide for basic financing transactions relative to real estate entities (e.g., refinancing of a mortgage loan). In all instances, the real estate owner and the auditors should refer back to ASC 470 for proper treatment. 

Key Considerations for Real Estate Entities under ASC 470 

• Debt that is refinanced at or near maturity will generally not require assessment because unamortized costs associated with such debt would likely be immaterial, however this should be carefully considered.
• Practically speaking, an extinguishment will usually result in a loss representing the write-off of unamortized debt issuance costs and prepayment penalties, if any.
• The features of a mortgage loan can vary significantly, and these feature may require consideration when assessing modification vs. extinguishment. 

For any questions or for more information on how to navigate your real estate entity under ASC 470, contact an EisnerAmper professional today.