FASB Interpretation No. 2

FIN 2: Imputing Interest on Debt Arrangements Made under the Federal Bankruptcy Act an interpretation of APB Opinion No. 21


1. The Financial Accounting Standards Board has been asked to clarify the application of Accounting Principles Board (APB) Opinion No. 21 with respect to debt issued in connection with arrangements made under the Federal Bankruptcy Act and Federal statutes related thereto (Federal Bankruptcy Act). APB Opinion No. 21 does not specifically address bankruptcy accounting and this Interpretation is limited in scope to clarification of the application of that Opinion in such circumstances.

2. Paragraph 12 of APB Opinion No. 21 generally requires that interest be imputed by recording either discount or premium on a note * exchanged for property, goods, or service if (1) interest is not stated, or (2) the stated interest rate is unreasonable, or (3) the stated face amount of the note is materially different from the current cash sales price for the same or similar items or from the market value of the note at the date of the transaction. Likewise, when a note is received or issued for cash and there is at the same time an exchange of rights or privileges, paragraph 11 of APB Opinion No. 21 requires that accounting recognition be given to the value of the rights or privileges exchanged by establishing a note discount or premium account.

3. Under a reorganization, arrangement, or other provisions of the Federal Bankruptcy Act, modification, alteration, or other changes of notes may be made in satisfaction of creditors’ claims. For example, this may be accomplished through a provision for a debtor to issue equity securities and/or notes having a different interest rate and/or principal amount in exchange for existing notes. Likewise, a modification, alteration, or other change may involve an agreement whereby a creditor forgives part of the existing debt or extends the payment period with interest at a rate different from the market rate for the debtor.

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