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履行不能負債再編成의 會計處理에 관한 硏究 : 債務者를 중심으로
I. INTRODUCTION Restructuring of troubled-debt which is related to granting a concession to a debtor due to the debtor's significant financial difficulties stems from an agreement between the creditor and debtor. Alternatively, it may imposed by law or by a court. It raises the following accounting issues : (1) How should the carrying amount of the restructured debt be valued at the time of restructuring? (2) How should future cash payments as either interest or principal amount be designated in future periods? (3) How should the gain on restructuring of debt be taxed and how interest expense should be recognized for tax purposes at the time of restructuring and in future periods? Present accounting practice dealing with the above issues does not necessarily reflect their economic substance. Consequently, it significantly misleads the debtor's financial position and the results of its operations. The primary purpose of this study is to suggest a reasonable basis of accounting for the troubled-debt restructuring in order that the accounting treatment reflects the economic substance of the accounting event more adequately . II. NATURE OF DEBT-RESTRUCTURING Debt restructuring in the form of a modification of terms includes not only a reduction of face amount of the debt but also changes in payment terms or interest rate. Debt restructuring, in essence, aggregately constitutes a concession to the debtor to facilitate the repayment of the troubled-debt and to enhance the continuation and rehabilitation of the debtor. With respect to the nature of the debt restructuring, four different views have been suggested in current literature. They are : (1) Repayment of the creditor's investment at face amount, (2) Repayment of the creditor's investment at total future cash flow, (3) Reduction and continuation of existing debt, and (4) Reduction but refinancing by new debt. III. ACCOUNTING MODELS FOR DEBT RESTRUCTURING This author has developed and presents in this study four alternative accounting models based on each of the above four different views. Specifically, · The first accounting model, which is presently followed in Korea, is based on the view that the nature of debt restructuring is to repay the creditor's investment at face amount. This model is labelled in this study as the "Face Amount Model". · The second accounting model, which is currently followed in the United States, is based on the view that the nature of debt restructuring is to repay the creditor's investment based on total future cash flow. This model is labelled in this study as the "Total Future Cash Flow Model". · The third accounting model is based on the view that existing debt is reduced by debt restructuring but its effective interest rate remains the same as before. This model is labelled in this study as the "Unchanged Interest Rate Model". · The fourth accounting model is based on the view that existing debt is reduced by debt restructuring and at the same time it is refinanced by new debt. This model is labelled in this study as the "Fair Value Model" Under the Face Amount Model, the amount of gain on debt restructuring is recognized only to the extent that the face amount (principal debt and interest accrued at the time of restructuring) of the original debt is reduced. Interest expense for the future periods is reported in the period when it is actually due. Furthermore, the amount of interest expense is calculate by applying the new rate specified in the debt restructuring. Under the Total Future Cash Flow Model, a gain on debt restructuring is recognized only when the face amount of the original debt is higher than total future cash flow. No future cash payments made in future periods are designated as either interest or face amounts, except that a portion of the future cash payments which exceeds the face amount of the original debt is amortized over future periods as interest expense using the interest method. Under the Unchanged Interest Rate Model, restructured debt is valued at total future cash flow discounted by the original rate of interest. The excess of the face amount of the original debt over the above discounted value is recognized as a gain on debt restructuring at the time of restructuring. Using the original rate of interest, future cash payments are segregated between face amount and interest expense. Under the Fair Value Model, the accounting treatment is essentially the same as in the Unchanged Interest Rate Model except that the interest rate to be used is not the original rate of interest but is a market interest rate prevailed at the time of debt restructuring. IV. SIMULATION OF ACCOUNTING MODELS THROUGH CASE STUDY Three cases have been developed to simulate the four accounting models as presented. The simulations compare how the financial position and results of operations would result in each of the four accounting models as at the time of debt restructuring, and at the end of and for each fiscal year for future periods. Furthermore, in order to demonstrate the accounting consequences in the debtor's ability to improve their financial position for future periods, net cash flows related to the tax effect that arise from application of each of the four accounting models have been analyzed. V. ASSESSMENT OF EACH OF THE ACCOUNTING MODELS Based on the simulations performed in Chapter 4, each of the four accounting models are evaluated on the grounds of (1) fair presentation of financial positions and results of operations of the debtor and (2) degree of achieving the objectives of debt restructuring. The objectives of debt restructuring are principally evaluated by the extent of how utilization of tax incentives could be maximized and how profits available for cash dividends could be minimized. An extensive analysis of net cash f1ow arising from the tax effect on interest expenses, which do not require outlays of cash for each of the specific fiscal years, has been conducted in order to assess the utilization of tax incentives. VI. SUMMARY OF MAJOR PROBLEMS ENCOUNTERED IN PRESENT ACCOUNTING PRACTICES AND SUGGESTIONS TO IMPROVE THEM This study discusses the following issues : (1) Specific rules as to the accounting for troubled debt restructurings do not exist presently in Korea. Therefore, a separate pronouncement on accounting standards for troubled-debt restructurings should be provided by the authoritative accounting body. (2) Valuation of restructured troubled-debt by debtors does not reflect the economic substance of the liability. It is the writer's opinion that the restructured troubled-debt should be valued at present value of total future cash payments in accordance with generally accepted accounting standards applicable to valuing monetary long-term liabilities. (3) Since the time value of money is not accounted for, financial position and results of operations for each of the fiscal years during the maturity periods of the restructured debt are misstated. Therefore, interest implicit in the restructured debt should be properly accounted for as periodic expenses over the maturity of the debt using the interest method. (4) Tax incentives provided to troubled-debt restructurings should be structured toward the above improvement in accounting standards. VII. CONCLUSION The major conclusions of this study are summarized below : (1) Restructuring of troubled-debt should be valued at the fair value of the loan at the time of restructuring. The difference between the carrying amount of the original debt and this fair value should be credited to shareholders' equity. (2) Future cash payments should be accounted for as interest expense and the repayment of the face amount of the restructured debt using on the interest method. Implications of and suggested solutions thereof in application of the above accounting method are as follows : (1) A specific guideline on how to determine the proper market interest rate should be provided. (2) Tax laws should be revised to provide the debtor with tax incentives not only on the reduction of the face amount of the debt but also on all of the other concessions such as changes in payment terms or interest rate. The results of the above study are also applicable to the accounting for troubled-loan restructurings by creditors. Specifically ; (1) Restructured troubled-loans should be valued at fair value of the loan at the time of restructuring. This value would be determined by discounting total cash receipts based on the revised terms of the loan using the market interest rate prevailing at the time of the restructuring. The difference between the carrying amount of the original loan and the above fair value should be charged to bad-debt expense or allowance for doubtful accounts. (2) Future cash receipts should be accounted for as interest income and the repayment of the face amount of the restructured loan using the interest method. The implications of and solutions thereof in application of the above accounting method are the same as those for the debtors, as mentioned above. This study recommends that an additional study using an other research approach, such as an empirical study, be conducted in the future. However, this type of study requires that sufficient accounting data on debt restructurings be accumulated in order to substantiate empirically the conclusions of the study. Further, an extentive study on disclosure requirements, transitional measures and other related matters is also needed.
리스에 관한 會計處理上의 問題點과 改善方案에 관한 硏究 : 리스會社의 立場을 中心으로
I. INTRODUCTION Since its introduction to Korea, the leasing industry has achieved remarkable progress and has diversified into various fields in terms of both its forms and substance. As a lease generally assumes the segregation of ownership from the economic right of use, the need to establish a body of financial accounting standards governing leasing transactions, which will presumably be different from the financial accounting standards for other industries, has long been the subject of discussions. The existing financial accounting standards appear to be unable to respond to the ever changing leasing industry because of the inherent peculiarities of the industry. This vacuum of authoritative accounting guidelines has been temporarily supplemented by regulations, and interpretations by the concerned authorities, but the various opinions were found to be lacking interrelation and comprehensiveness, causing a high degree of confusion on the part of the leasing industry. Even though a company accounts for leasing transactions in a method which it considers appropriate in the circumstances, there still exists fear that its accounting method might be challenged by the tax authorities at a later date. In this connection we believe that the establishment of comprehensive and coherent standards of financial accounting and reporting for leasing transactions is imperative to resolve currently pending matters and to assure sound development and cultivation of the leasing industry. The purpose of this study is to develop standards of financial accounting and reporting for leasing transactions which can prove sufficient to resolve the currently pending issues and which better fit the present situation, by means of analyzing the current status and pending issues with regard to leasing transactions. Our attempt to seek various alternatives as a way to establish these standards included study of and reference to accounting and tax practices in other countries. II. Summary of General Theory of Leases: Leasing Transactions involve a leasing company (hereinafter referred to as a "lessor") which purchases or borrows certain properties on behalf of the user of leasing (hereinafter referred to as a "lessee") and then conveyes to the lessee the right to use specific property for a specific period of time in return for stipulated cash payments. The lease arrangement is a physical financing arrangement with advantages and disadvantages over other forms of financing. As lease is designed to directly connect financing with actual investment, many countries widely use it as a means of fiscal policy in efficiently distributing limited resources. Therefore the development of the leasing industry is attributable to the simpleness of financing and the efficiency in promoting industrial investment from the viewpoint of a lessee. Because of the inherent nature of separating legal ownership from the right to use, the leasing transaction has been the subject of many controversies, and the issues have centered on whose balance sheet the cost of the leasing property should be recorded. This controvery, commonly referred to as on-balance sheet vs off-balance sheet, entered a new era when the International Accounting Standards Committee (IASC) released International Accounting Standard #17 stating that leased property which falls within certain criteria should be recorded on the balance sheet of the lessee. III. Current Standards in Korea: III-1 The Current Regulations - Leasing transactions in Korea demonstrate some characteristics not found in other countries, primarily due to her economic situation and industrial structure, as well as the advantages of leases and the intention of governmental policies. Leasing transactions are widely subject to restrictions as stipulated in the provisions of the Leasing Industry Promotion Law. While the operation of the leasing industry is governed by various regulations, financial accounting to measure and report operational result and related tax treatment are not under comprehensive guidelines except for some regulations and rulings in fragments. III-2 Points at Issue in the Current Tax and Financial Accounting of Leasing Transactions in Korea: The following is a summary of the issues currently existing in tax and financial accounting practices. (Financial Accounting) (1) There are no comprehensive guidelines and some provisions lack consistency. (2) As a consequence, the accounting by the lessor and the lessee is not strictly controlled. (3) Most leasing transactions are accounted for as operating leases resulting in distortion of economic substance. (4) Since the term "lease" is not clearly defined, the leasing transaction is often confused with other similar transactions. (5) The concepts of operating lease and capital lease are not clearly defined. (6) The nonexistence of financial accounting standards for leasing transactions allows the precedence of tax provisions over financial accounting. (Tax Accounting) (1) The contents of the tax provisions are generally not clear-cut and are overlapped in many instances. (2) It is inappropriate to treat transfer of ownership as the same as renewal of the lease. (3) The investment tax credit is inappropriately limited to a financing lease. All types of lease should be made eligible for the investment tax credit. IV. Accounting Practices Prevailing in Other Countries: The scope of our study on accounting practices pre vailing in other countries was confined to reviewing standards and methods in both financial and tax accounting. Countries which we studied included U.S.A., England, West Germany, and Japan. The following summarizes accounting practices prevailing in these four countries: IV-1 U.S.A. The accounting practice in U.S.A. for leasing transactions stems from Statement of Financial Accounting Standard (SFAS) #13. SFAS #13 classifies leasing transactions into operating leases and capital leases on the part of a lessee, and operating leases, direct financing leases, sales-type leases and leveraged leases on the part of a lessor. The classification of a lease is made according to the transferability of benefits and risks of ownership. In this way SFAS #13 provides detailed guidelines on leasing transactions and has received favorable comments as it focuses more on economic substance. The viewpoint of the tax authority of the U.S.A. (IRS) takes several different forms. Comparing the IRS's position with financial accounting standards, it is noticed that the IRS does not allow capital lease as a lease eligible for tax purposes, except for some special types of capital leases meeting the test of economic useful life. Rather the IRS treats these capital leases as sales-type or financing-type transactions. In this sense the IRS based its views toward leasing transactions on the concept of the operating lease. It is worthwhile to note that the IRS has managed to retain flexibility in dealing with leasing transactions in conjunction with the federal economic policy and economic conditions. IV-2 West Germany - As widely known, Germany is the home of the Continent Laws with a strong color of law precedence. German people place emphasis on ownership as far as dealing with lease transactions. On the basis of the beneficial ownership concept, German tax laws permit the lessor to report an operating lease in case the lessor holds the beneficial ownership of the property. In contrast, the leasing transaction is accounted for as a hire purchase similar to a financing lease if beneficial ownership is held by the lessee. At present, financial accounting standards do not provide comprehensive guidelines as to leasing transactions, but efforts are being made to change this situation. Given the conceptual limitation of the law, the popular approach leans towards presenting related information as footnotes rather than capitalizing financing leases. Hence financial accounting practice follows the methods prevailing in tax accounting. IV-3 England - England's early effort to produce financial accounting standards for leasing transactions has not been successful, except for exposure draft #27 released in 1981. Various accounting methods are seen in practice as leasing transactions are allowed to be treated one way on the tax return while maintaining books of account in accordance with the company's accounting policy. A panel discussion has revealed that footnote disclosure, rather than capitalization, is preferred. To be eligible for treatment as a lease, the lessor shall not transfer ownership of the property to the lessee. If ownership is transferred, the leasing transaction is regarded as a hire purchase to the extent that the lease payment is below a certain amount. In England, though the leasing transaction is in economic substance a financing lease, the lessor usually adopts the accounting method of recording depreciation costs and presenting depreciable assets on the balance sheet, instead of recording rental receivables. The final outcome of this accounting method produces the same result as if rental receivables were recorded on the balance sheet. The accounting treatment of this kind is made possible due to permitting a tax reconciling adjustment on the tax return. IV-4 Japan - In Japan, financial accounting standards do not provide guidelines as to leasing transactions, and a number of companies follow the method specified in the tax law. Through regulation 2-19, Japan's tax authority defines leasing transactions as a rental agreement with the provisions of noncancellability and the full recovery of the initial investment, and it classifies leasing transactions under certain criteria into sales-type lease, prepayment-type lease, and rental lease. In this connection it seems that Japanese tax authority takes the position of acknowledging the company's accounting method, if there is no evidence that a lease transaction is equivalent to the ownership-transferred transactions such as install-ment payments and the company circumvents the tax law through accerlerated depreciation by shortening lease term. Furthermore the tax authority supplements financial accounting by providing clauses of exceptions in the tax laws. For a sales-leaseback the tax authority requires accounting by the lessee as borrowings, and by the lessor as loans on the basis that such a transaction is simply a borrowing of funds rather than a transfer transaction. IV-5 IAS No.17 - The International Accounting Standards (IAS) No.17, "Accounting for Leases" basically follows SFAS No.13 in classification of leases between operating and financing leases. However, as the IAS No.17 is for many accounties, and recognizes different applications of the standards among the member bodies, it provides only a few fundamental basis of accounting for leases, leaving detailed provisions be reasonably arranged by respective countries to fit local circumstances. V. Recommendations: V-1 General - In order to resolve the issues enumerated in this study, separate financial accounting standards for leasing transactions is recommended to be established in accordance with Article 131 of the Financial Accounting Standards. In this connection, the accounting treatment made prior to the issuance of this specialized financial accounting standards should be regarded as acceptable on a temporary basis and the existing tax laws and rulings on leasing transactions should be amended to follow the financial accounting standards. V-2 The Basic Goals in Establishing Financial Accounting Standards Applicable for Leasing Transactions: The following concepts should be incorporated in establishing financial accounting standards applicable for leasing transactions. (1) The term "lease" shall refer to those described in the Leasing Industry Promotion Law, and methods of accounting and reporting of the lease referred to in the Leasing Industry Promotion Law will be formulated. (2) The peculiarities and economic substance of leasing transactions will be appropriately reflected. (3) A leasing transaction should be treated in the same manner by the lessor and the lessee who are the parties both related to the same lease. (4) Accounting practices prevailing in other countries will be considered in the process. (5) Financial accounting standards for leasing transactions will retain their special features while keeping abreast with the Financial Accounting Standards for general industries. (6) The two different accounting bases, financial accounting and tax accounting, shall be drawn closer as much as possible. (7) The conflict of interests among related parties will be appropriately coordinated. (8) The complexity inherent in the leasing transaction will be reduced to a minimum without hurting the interests of the lessor and the lessee, compared to the previous methods. V-3 The Major Features of the recommended Standards of Financial Accounting and Reporting for Leasing Transactions: There are a number of issues which may be enumerated as the classification of leases and the criteria thereof, the concept of rental payment, the determination of the acquisition cost and the depreciation method under an operating lease, the determination of the amount to be shown on the balance sheet under the financing lease on the parts of both the lessor and the lessee, the method of recognizing revenue and expense, the accounting method in case of lease agreement renewal, the accounting treatment at the early termination of the lease agreement, the method of disclosure, and transition clauses. The summary of the recommended solutions on the major issues follow: (1) The Classification of a Lease - If the lease transfers to the lessee substantially all of the risks and benefits incident to ownership of a leased property, the lease is classified as a financing lease. If not, the lease is classified as an operating lease. (2) The Criteria of Classifying Leases - The determination of whether the lease transfers to the lessee substantially all of the risks and benefits incident to ownership of a leased property calls for a high degree of judgment. The financing lease be defined as a noncancellable lease agreement including provisions such as ownership transfer or a bargain purchase option, or lease term which exceeds the useful life of the lease property. All other leases which do not possess the above attributes are classified as operating leases. (3) The Acquisition Cost of the Leased Property Under an Operating Lease - Under operating leases the acquisition cost of the leased property by the lessor shall be determined in accordance with Financial Accounting Standards. Since the commencement of the lease is designated as the date of consummating acquisition of the leased property, the period of accruing interest on acquisition is clearly provided. (4) Depreciation of Leased Property Under the Operating Lease - Under the operating lease the lessor shall depreciate the leased property using the straight line method over the term of the lease agreement. (5) Determination of the Carrying Amount on the Balance Sheet Under a Financing Lease - Under a financing lease the concept of present value by discounting is not to be used in computing the carrying amount on the balance sheet on the parts of both the lessor and the lessee. The carrying amount in preceding paragraph shall be defined directly as the acquisition cost of the leased property under financing lease to eliminate the subjective bias in deciding the discount rate. (6) Recognition of Revenue and Expense - Under the operating lease the lessor and the lessee shall account for rental revenue and expense at the time when the rental becomes receivable or payble. In contrast, under the financing lease the lessor and the lessee shall account for basic lease rentals by the interest method, and account for contingent rentals when incurred. (7) Accounting Treatment at Renewal - The renewed lease agreement shall be treated separately from the original lease agreement. Rentals under the renewed lease agreement shall be charged to the year when the rentals become receivable or payable. (8) Accounting Methods Upon Early Termination of the Lease Agreement. If an operating lease is terminated prior to the expiration date stipulated in the lease agreement, the amount received from the lessee, the guarantor, or any other party as indemnification for termination should be recorded as deferred income and should be amortized in proportion to depreciation expense until the leased property is re-leased to a third party or disposed of. If a financing lease is terminated prior to the expiration date, the proceeds in preceding paragraph and the proceeds from the disposition of assets concerned should be deducted from the financing lease receivable. If the leased property from the terminated lease agreement is re-leased to a third party, the lease agreement is treated as a new lease.