[Federal Register Volume 60, Number 78 (Monday, April 24, 1995)]
[Rules and Regulations]
[Pages 20022-20023]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9981]



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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 211

[Release No. SAB 94]


Staff Accounting Bulletin No. 94

AGENCY: Securities and Exchange Commission.

ACTION: Publication of staff accounting bulletin.

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SUMMARY: The interpretations in this staff accounting bulletin express 
the views of the staff regarding the period in which a gain or loss is 
recognized on the early extinguishment of debt.

EFFECTIVE DATE: April 18, 1995.

FOR FURTHER INFORMATION CONTACT:
Tracey Barber, Office of Chief Accountant (202) 942-4400, or Douglas 
Tanner, Division of Corporation Finance (202) 942-2960, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The statements in staff accounting bulletins 
are not rules or interpretations of the Commission nor are they 
published as bearing the Commission's official approval. They represent 
interpretations and practices followed by the Division of Corporation 
Finance and the Office of the Chief Accountant in administering the 
disclosure requirements of the Federal securities laws.
Margaret H. McFarland,
Deputy Secretary.

PART 211--[AMENDED]

    Accordingly, Part 211 of Title 17 of the Code of Federal 
Regulations is amended by adding Staff Accounting Bulletin No. 94 to 
the table found in Subpart B.

Staff Accounting Bulletin No. 94

    The staff hereby adds Section AA to Topic 5 of the Staff Accounting 
Bulletin Series. Topic 5-AA provides guidance regarding the period in 
which a gain or loss is recognized on the early extinguishment of debt.

Topic 5: Miscellaneous Accounting

* * * * *

AA. Recognition of a Gain or Loss on Early Extinguishment of Debt

    Facts: In the fourth quarter of its fiscal year, a registrant 
announces its intent to call for redemption certain of its 
outstanding debt obligations. By their terms, the debt obligations 
are not callable until the third quarter of the subsequent fiscal 
year. The obligations will be redeemed for an amount that exceeds 
the net amount at which they are carried on the registrant's balance 
sheet. The debt extinguishment would not be deemed a troubled debt 
restructuring addressed by Statement of Financial Accounting 
Standards No. 15, ``Accounting by Debtors and Creditors for Troubled 
Debt Restructurings.''
    Question: Would the staff object if the registrant recorded the 
loss expected to result from redemption of the debt obligations (the 
excess of the reacquisition cost over the net carrying amount of the 
extinguished debt) in the period that it announces its intent to 
call the debt for redemption?
    Interpretive Response: Yes. Accounting Principles Board Opinion 
No. 26, ``Early Extinguishment of Debt,'' (APB 26) and its 
amendments, including, among others, Statement of Financial 
Accounting Standards No. 76, ``Extinguishment of Debt,'' (SFAS 76) 
govern the accounting and disclosure for extinguishment of debt. 
Pursuant to APB 26, the gain or loss from an extinguishment of debt 
``should be recognized currently in income of the period of 
extinguishment.'' Paragraph 3 of SFAS 76 identifies the 
circumstances under which a debt obligation would be considered 
extinguished.\1\ The staff would object to recognition of a gain or 
loss from a debt extinguishment in a period other than the period in 
which the debt is considered extinguished.\2\ Disclosure regarding a 
planned extinguishment and its likely effects would be required in 
footnotes to the financial statements and in Management's Discussion 
and Analysis to the extent material. In periods preceding 
extinguishment, interest expense and other carrying costs of the 
debt should be recognized in accordance with the terms of the 
instrument. Deferred debt issue costs and debt discount or premium 
would continue to be amortized based on the life of the debt that 
was assumed when the obligation initially was recorded.

    \1\Paragraph 3 of SFAS 76 states that ``[a] debtor shall 
consider debt to be extinguished for financial reporting purposes in 
the following circumstances:
    a. The debtor pays for creditor and is relieved of all of its 
obligations with respect to the debt. This includes the debtor's 
reacquisition of its outstanding securities in the public securities 
markets, regardless of whether the securities are cancelled or held 
as so-called treasury bonds.
    b. The debtor is legally released from being the primary obligor 
under the debt either judicially or by the creditor and its is 
probable that the debtor will not be required to make future 
payments with respect to that debt under any guarantees. (footnotes 
omitted)
    c. The debtor irrevocably places cash or other assets in a trust 
to be used solely for satisfying scheduled payments of both the 
interest and principal of a specific obligation and the possibility 
that the debtor will be required to make future payments with 
respect to the debt is remote. In this circumstance, debt is 
extinguished even though the debtor is not legally released from 
being the primary obligor under the debt obligations.''
    \2\The extinguishment of a debt obligation subsequent to the 
balance sheet date but prior to the issuance of financial statements 
reporting as of and for the period ended on the balance sheet date 
should not result in adjustment to those financial statements.
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    Some registrants have suggested that Statement of Financial 
Accounting Standards No. 5, ``Accounting for Contingencies,'' (SFAS 
5) requires recognition of an estimated loss on extinguishment when 
the extinguishment becomes probable, such as upon an issuer's 
announcement of a plan to call the debt. The staff does not believe 
that SFAS 5 supersedes or conflicts with other authoritative 
literature providing specific guidance concerning the accounting for 
debt extinguishment. A probable and estimable loss is recognized 
under SFAS 5 if, and only if, an asset has been impaired or a 
liability had been incurred at the balance sheet date. The staff 
believes that announcement of an intent to extinguish a liability in 
the future does not, by itself, result in a requirement to recognize 
a loss. Further, the staff believes that an issuer's irrevocable 
offer to repurchase a debt obligation is not sufficient to result in 
the debt's extinguishment for accounting purposes. A debt holder's 
acceptance of that offer at or prior to the balance sheet date by 
means of tendering the security and surrendering all rights under 
the instrument's terms, however, would be considered an 
extinguishment of that debt. In the case of an issuer's call of a 
debt obligation (including an original issue discount obligation), 
extinguishment is not considered to have occurred before interest 
ceases to accrue or accrete under the terms of the obligation as a 
result of the call. In any case, loss recognition is not elective 
under SFAS 5. The accounting consequence for an issuer that 
[[Page 20023]] enters into a binding contract with a holder of the 
issuer's debt obligation to exchange that security at a future date 
for specified amount may be subject to conflicting literature. The 
staff intends to request that the Emerging Issues Task Force address 
that issue.

[FR Doc. 95-9981 Filed 4-21-95; 8:45 am]
BILLING CODE 8010-01-M