Knowing the rules can help maximize the value of your deal
As the economic ramifications of the COVID-19 pandemic continue to reverberate through the economy, many businesses are working with their lenders to modify their debt. Often, businesses negotiate these deals quickly because they are under cash flow and liquidity pressure. But businesses often fail to understand all of the accounting and tax ramifications of debt modifications—ramifications that can erode the very benefits the business is trying to realize. What do companies need to understand?
- Thus far in the COVID crisis, many lenders have been “playing nice,” but now they are looking harder at how businesses have adjusted their business plans. With infection rates spiking again as winter approaches, we could also see an increase in companies seeking debt modifications.
- Companies should look at debt modifications holistically. What is the impact on the income statement? Will the deal require greater disclosures? Does the deal qualify as a troubled debt restructuring or as an extinguishment? Are you exchanging debt for equity—and will that lead to a change in control? Will your deal require a valuation?
- Tax consequences can directly affect the liquidity of a restructuring. Will the deal result in a significant modification for tax purposes? That could lead to taxable cancellation of debt income. Planning ahead can minimize or eliminate potential tax consequences.
Listen to our podcast as Grant Thornton’s Bill Fasel, Matt Esposito and Brian Angstadt discuss the current debt modification environment and the accounting and tax implications of these often complex deals.