May 30, 2025
Daniel Martin, CPA
Chair 2025-2026
VSCPA Accounting & Auditing Advisory Committee
File Reference No. 2025-ED200, Accounting for Debt Exchanges
Sent via email to [email protected]
Dear Technical Director:
The Virginia Society of CPAs (VSCPA) Accounting & Auditing Advisory Committee has reviewed the Exposure Draft (ED) — Accounting for Debt Exchanges, issued by the Financial Accounting Standards Board (FASB or the Board). The VSCPA is the leading professional association in Virginia dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. The VSCPA membership consists of nearly 12,000 individual members who actively work in public accounting, private industry, government, and education.
FASB has invited comments on 2025-ED200, an ED that seeks to update the accounting for exchanges of debt instruments meeting certain requirements as laid out within the ED. Broadly, the ED seeks to clarify whether to apply modification or extinguishment accounting for exchanges of debt instruments with multiple lenders to better reflect the economic substance of such transactions, as requested by various stakeholders. The VSCPA broadly agrees with the ED as stated currently. Please see below for responses to the specific questions within the ED.
Question 1: The amendments in this proposed Update would apply only to transactions that involve the contemporaneous exchange of cash between the same debtor and creditor in connection with the issuance of a new debt obligation with multiple creditors and the satisfaction of an existing debt obligation. The proposed amendments would not affect an exchange of debt instruments that involves a single creditor in the new debt instrument. Do you agree with the scope of the proposed amendments, including that multiple creditors must have participated in the new debt issuance? Please explain why or why not.
Response 1: The VSCPA agrees with this proposal and also believes the Board should consider scoping in debt exchanges where the debt instrument goes from multiple lenders to a single lender, as the VSCPA believes such a debt exchange also results in a significantly different debt instrument. Most of the stakeholder concern with applying modification accounting is that 1) it leads to disparate accounting among syndicate lenders (e.g. different effective interest rates for existing and new lenders, and 2) it is costly to implement when multiple lenders are involved. The VSCPA also suggests considering scoping out conduit debt held by not-for-profit organizations and public benefit companies, as it may result in the necessary condition to keep two separate sets of books if reporting requirements for conduit debt exchanges require the reporting entity to continue applying modification accounting.
Question 2: For exchanges of debt instruments that are within the scope of the proposed amendments, a debtor would extinguish the existing debt instrument and recognize a new debt instrument without being required to assess whether the new debt instrument and existing debt instrument have substantially different terms (and, therefore, a debtor would not need to perform the 10 percent cash flow test). Would this result in decision-useful financial reporting information? Please explain why or why not. Would the proposed amendments reduce the cost of applying the guidance in Subtopic 470-50? Please explain why or why not.
Response 2: The VSCPA agrees that the resulting information would be as useful or more useful than when applying modification accounting. Specifically, the economics of significantly all debt exchange transactions performed at market terms with multiple lender participants are better reflected by applying extinguishment accounting. Likewise, the application of the “10% test” used to determine if an individual lender’s debt should be modified or extinguished is costly and burdensome for large lender syndicates, and this ED helps to alleviate the necessity of applying it.
Question 3: The proposed amendments contain the following two conditions for determining whether transactions that involve the contemporaneous exchange of cash between the same debtor and creditor in connection with the issuance of a new debt obligation with multiple creditors and the satisfaction of an existing debt obligation should be accounted for as the issuance of a new debt obligation and an extinguishment of the existing debt obligation:
a. The existing debt obligation has been repaid in accordance with its contractual terms or repurchased at market terms.
b. The new debt obligation has been issued at market terms following the issuer’s customary marketing process.
Do you agree with these two conditions? Please explain why or why not. If not, please provide alternative suggestions. Are these two conditions clear and operable? Please explain why or why not. What auditing challenges, if any, do you foresee related to these two conditions?
Response 3: The VSCPA believes that customary marketing process and market terms mentioned in item (b) will result in audit challenges and differences in practice among reporting entities and audit firms about what qualifies.
The VSCPA suggests that 1) the Board include some examples of the customary marketing process and issued at market terms; and 2) remove the criterion requiring market terms, because if the borrower reissues at above market terms, then the increase in interest rate will be readily discernible, and if at below market terms, then the debt should be evaluated under the TDR guidance. Condition (a) along with the multiple creditor condition should be sufficient in scope to apply the guidance within this ED.
Question 4: Condition (b) (see Question 3 above) includes the term customary marketing process. Is this component of the condition necessary to demonstrate that the issuance of a new debt obligation and satisfaction of an existing debt obligation are independent transactions? Please explain why or why not. If this component of condition (b) is necessary, is the term customary marketing process clear and operable? Please explain why or why not. If not, please provide alternative suggestions.
Response 4: The VSCPA believes this condition is not necessary and that the definition of what qualifies as a customary marketing process is unclear and will likely result in differences in practice. The VSCPA recommends removing this criterion from consideration.
Question 5: Should the proposed amendments be applied on a prospective basis to exchanges of debt instruments that occur on or after the date of initial application? If not, why not and what transition method would you recommend? Should early adoption be permitted for financial statements that have not yet been issued for public business entities or been made available for issuance for all other entities? Please explain why or why not.
Response 5: Application on a prospective basis achieves the overall goal of the ED to ease the burden of applying the codification to debt exchange transactions, so the VSCPA agrees that a prospective basis is best. While there may be some concern that early adoption may lead to incomparable financials between entities adopting it early and waiting to adopt it, the VSCPA believes the inconsistencies would not introduce significant difficulties or other issues among stakeholders.
Question 6: The proposed amendments would require a transition disclosure stating the nature of and reason for the change in accounting principle in the interim reporting period (if applicable) and the annual reporting period of adoption. Because this guidance is transaction-based, is that transition disclosure necessary and if so, is it clear and operable? Do you expect that it would provide decision-useful information? Please explain why or why not.
Response 6: The VSCPA believes that this transition disclosure is reasonable. Transition disclosure allows users of the financial statements to understand if and when the new guidance is applied and helps alleviate any issues with comparability between early and standard adopters of the new guidance.
Question 7: How much time would be needed to implement the proposed amendments? Should the effective date for entities other than public business entities be different from the effective date for public business entities? If so, how much additional time would you recommend for entities other than public business entities? Please explain your reasoning.
Response 7: This amendment would not likely be time-intensive to implement if done so on a prospective basis. Once implemented, it would also save significantly all reporting entities time when accounting for debt exchanges. The VSCPA believes that entities other than public business entities should have additional time to implement amendments; however, non-public entities should be allowed to early adopt. The VSCPA concludes that two years to implement the proposed amendments for public business entities, with one additional year for non-public entities, is sufficient with early adoption allowed.
Question 8: The proposed amendments would permit early adoption. If an entity elects to early adopt the proposed amendments in an interim reporting period, should the entity be required to adopt those proposed amendments as of the beginning of an annual reporting period? Please explain why or why not.
Response 8: The VSCPA does not believe the requirement to adopt at the beginning of an annual reporting period is necessary. This ED is based on transactions, so adopting during an interim reporting period is effectively the same as implementing at the beginning of an annual reporting period.
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The VSCPA appreciates the opportunity to respond to this ED. Please direct any questions or concerns to VSCPA Vice President, Advocacy & Pipeline Emily Walker, CAE, at [email protected] or (804) 612- 9428.
Sincerely,
Daniel Martin, CPA
Chair 2025-2026
VSCPA Accounting & Auditing Advisory Committee
VSCPA Accounting & Auditing Advisory Committee 2025-2026
Daniel Martin, CPA — Chair
Elisa Obillo, CPA — Vice Chair
Zach Borgerding, CPA
Scott Cohen, CPA
Jonathan Head, CPA
Joshua Keene, CPA
Nick Kinsler, CPA
John McIntosh, CPA
Brian Minor, CPA
Brook Peterson, CPA
Michael Phillips, CPA
Krisia Raya, CPA
Domenic Savini, CPA
Clara Tang, CPA
Charles Valadez, CPA
Anna Wagner, CPA
Patrick Wunderlich, CPA
Natalya Yashina, CPA