Question

What are the general rules for measuring gain or loss by both creditor and debtor in a troubled-debt restructuring involving a settlement?

Short answer

In case of gain, the debtor is needed to ascertain the surplus of the carrying value of the payable over the actual value of the assets. Similarly, in case of loss, the creditor is needed to ascertain the excess of the receivable over the true value of those assets.

Step-by-step solution

Meaning of troubled-debt restructuring

A troubled-debt restructuring occurs when a creditor allows the debtor causes of financial troubles adjustments that it would not have otherwise regarded. A troubled debt restructuring comprises either settlement of debt at a value lower than its carrying value or prolongation of debt with an alteration.

General rules for measuring gain or loss by both creditor and debtor

A debt obligation in a troubled debt restructuring is settled by transferring receivables or by issuing the debtor's stock. In these circumstances, the non-cash assets should be responsible for at fair value. The debtor identifies again that it is equivalent to the value of the surplus, and the creditor generally would exact the loss against the allowance for bad debts accounts. Moreover, the debtor identifies a surplus (gain) or deficit (loss) on the settlement of assets so that the actual value of those assets is different from their book value.