Observations from the front lines

November 2013
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Observations from the front lines

At a glance

The economic business environment continues to improve and interest rates in the most recent year remain low, although there is concern that they may rise in the near term. Companies who have seen their credit outlook recover, and/or want to take advantage of the current lower interest rate environment, may consider refinancing their existing debt. Companies have found that the financial reporting outcomes of such negotiations may not reflect the entire expected economic benefit.

Observations from the front lines provides PwC's insight on current economic issues, our perspective regarding the business impacts, and actions we have seen companies taking to effectively address those issues.

Debt refinancing in an uncertain rate environment

The recent interest rate environment and relatively inexpensive cost of debt financing has been referred to by some as a “free money” period. The Federal Reserve’s easing of interest rates coupled with the recovering economy and improved creditworthiness of borrowers has decreased the yields demanded by investors, leading to lower borrowing costs.

Companies are making an effort to capitalize on this “free money” period before impending interest rate increases by the Federal Reserve. In order for borrowers with existing debt to take advantage of this favorable borrowing market, many companies have negotiated with lenders to modify the terms of existing debt. Successful negotiations allow companies to recognize tighter credit spreads and lower cash interest costs while maintaining the lenders’ desired exposure to the borrowers.

The practice of renegotiating the terms of existing debt is commonly referred to as a “debt modification” and can raise complex financial reporting issues when accounting for the terms of the revised debt

Highlights in this issue:

  • Many companies are negotiating lower rates on debt to capitalize on a favorable borrowing market
  • Be aware that lender structures and optionality in the new and/or original debt may present financial reporting complexities
  • Be cognizant that the accounting treatment does not always follow the legal form of the negotiated transaction
  • The financial reporting outcome may not reflect the full economic benefit achieved

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