Discussion:Extinguishment of Debt
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Discussion Forum Index --> Accounting Questions --> Extinguishment of Debt
| 10 January 2008 | |
| I'm experiencing a headache researching this issue. Any guidance would be greatly appreciated.
ABC, LLC has a significant balance due 3 of its members for past services (i.e. past guaranteed payments). The members agreed to defer the amount in the prior 2 years and decided to forgive the debt this year. The question is whether or not the partnership should recognize an extraordinary income as a result of the COD or treat the COD as additional contribution from members under U.S. GAAP. | |
| January 10, 2008 | |
| Generally when debt is forgiven, the result is forgiveness of debt income. (It is not considered extraordinary but may be classified as other income.) | |
| 10 January 2008 | |
| if no deduction was taken by the business for the GP, why would it be income to the LLC now that the member chose not to take it? | |
| 10 January 2008 | |
| Mochadaw, you are WAY far ahead of the curve on this issue. I was wondering when folks would start figuring out that a GP was a GP. As in "I'll just manipulate this number to arrive at what we'll pay SE tax on. We'll play around with the figure, it means nothing." Whoa. Take a look at your liabilities on the balance sheet, and see if they're listed to begin with. Also, please give your profile because I think we will all have an interest in this post going forward. | |
| January 10, 2008 | |
| Kevin, the tax side of this is another consideration. On the GAAP side, however, if there is a liability, then there would have (or should have) been an expense. In that case, income would be necessary, unless a prior period adjustment were booked. | |
| 14 January 2008 | |
| Natalie,
Expense was booked the year the expense was incurred. My concern with recognizing income is that this gives the members a way to control the bottom line. I'm leaning toward booking the revenue but wanted to see if there is anything in GAAP that would prohibit me from doing so. | |
| January 14, 2008 | |
| Good point about manipulation of the numbers. Is the amount significant? Why is it being forgiven? Perhaps a prior period adjustment should be recorded. At least that way they wouldn't be able to increase the bottom line just by saying we're not going to pay ourselves. | |
| 14 January 2008 | |
| The liability is being written off as a result of a reorganization of the partnership. The members agreed to waive it. I don't recall if the member interest would be different without the waiver. If so, it seems to be a quid pro quo demand to me. Thus it would justify treatment of COD as additional capital contributions. What's your thoughts on this? | |
| January 14, 2008 | |
| Given that the partnership is going through reorganization, it does not seem that manipulation of the numbers was the intent here. Is this issue addressed in the reorganization documents? | |
| 14 January 2008 | |
| Mochadaw - If you are looking at this from a GAAP perspective, then I believe your authority can be found in FASB 15 - Accounting for Creditors and Debtors in Toubled Debt Restructurings. When the debt it is forgiven it is considered a gain on debt restructuring and is presented in the "other gains and losses" category of the income statement. | |
| January 17, 2008 | |
| Further research in Current Text shows that equity treatment is appropriate per APB Opinion 26. Thank you all for your valuable input. | |
