Accounting for loan term modifications under TFRS for NPAEs

The Federation of Accounting Professions (TFAC) released a clarification in March 2025 on how entities applying Thai Financial Reporting Standard for Non-Publicly Accountable Entities (TFRS for NPAEs) should account for loan term modifications— an increasingly common issue in today’s business environment. This article summarises the key principles and provides a practical example from TFAC’s Q&A document.  

For Thai entities that apply TFRS for NPAEs, there is no specific guidance on how to account for modified loan terms. Instead, entities are required to exercise judgement and apply accounting policies that are consistent with the framework’s principles on recognition, measurement, and disclosure. 

Applying judgement under TFRS for NPAEs 

Paragraph 5.5 of TFRS for NPAEs provides a hierarchy for selecting accounting policies when the standard is silent. In the case of loan modifications, entities should refer to the conceptual framework—particularly the definitions of income, expenses, assets and liabilities, and the qualitative characteristics of useful financial information.  

Where changes to loan terms result in a difference in the value of liabilities, this should generally be recognised in profit or loss on the modification date. If the revised loan terms increase the obligation, this results in an expense; if reduced, a gain may be recognised. Present value techniques should be used where relevant, unless impractical.  

Common accounting approaches 

Three commonly observed accounting methods for loan term modifications under TFRS for NPAEs are outlined below. Each method requires consistent application and disclosure in the financial statements.  

1. Present value using the original effective interest rate
   This method treats the loan as continuing under revised terms. The future cash payments (principal and interest) are discounted using the original interest rate from the initial agreement. The original rate is used because the arrangement is still considered part of the original contract. The difference between this recalculated present value and the carrying amount is recognised in profit or loss.  
   Illustration: A borrower negotiates to delay payments while keeping the same interest rate. The updated payment schedule results in a higher present value, which is recorded as a loss.  
2. Present value using a new effective interest rate  
   This approach considers the modification to be equivalent to issuing a new loan. The future payments are discounted using a new effective interest rate that reflects the market and credit conditions at the time of renegotiation. The resulting gain or loss is recognised immediately.  
   Illustration: A company renegotiates a longer repayment period and a lower interest rate. The discounted future payments under the new terms are lower than the previous carrying amount, resulting in a gain. 
3. Nominal amount without discounting  
   In certain cases—where discounting is impractical or immaterial—the revised loan is recorded at nominal value. If the total future payments increase, the difference is recognised gradually as interest expense. If they decrease, the reduction is recognised immediately in profit or loss.  
   Illustration: A lender agrees to reduce the total amount due. The liability is immediately adjusted, and the gain is recognised in other income.  
   No further interest expense is recorded if no time value of money remains. 

Practical consideration 

When applying these approaches, entities should consider the following: 

• Define future payments clearly: Include all amounts to be paid under the new agreement— such as principal, unpaid interest rolled into the loan, and any additional fees. 
• Income recognition: A gain from liability reduction may be recognised only if no further obligations remain. If conditions or milestones must still be met, the gain should be deferred and recognised later.  
• Disclosure requirements: The chosen accounting policy should be clearly disclosed, along with the nature of the modification, its financial impact, and the reasoning behind the selected method.  

Conclusion 

Loan term renegotiations are becoming increasingly common, particularly for smaller entities facing financial challenges. Under TFRS for NPAEs, there is no one-size-fits-all method, but entities must ensure their approach reflects the economic reality of the arrangement and is supported by clear, consistent disclosures in their financial statements.  

Reference (in Thai) 

• TFAC Q&A on TFRS for NPAEs, 17 March 2025. Retrieved from the Thailand Federation of Accounting Professions. Thailand Federation of Accounting Professions.