Financial Accounting and Reporting-CPA Practice Exam

What is a significant condition for a concession related to troubled debt?

1. Improved cash flow projections without any concessions

2. Improved likelihood of collection under normal circumstances

3. Concessions granted to improve the chance of debt collection

4. Concessions that only benefit the creditor

The correct answer is: Concessions granted to improve the chance of debt collection

In the context of troubled debt restructuring, a significant condition is that concessions are granted to improve the likelihood of debt collection. This is particularly relevant for loans that a borrower is struggling to pay back. When a lender makes concessions—such as reducing the interest rate, extending the repayment period, or forgiving part of the debt—they aim to provide the borrower with a more manageable debt obligation. This process is essential because it shows that the lender is willing to compromise under the existing adverse circumstances to help the borrower meet their obligations. The ultimate goal of these concessions is to increase the chances of recovering a portion of the loan that may otherwise be lost if strict repayment terms are enforced. Other options do not capture the essence of why concessions are significant in troubled debt situations. For instance, improved cash flow projections without concessions fail to consider the relationship between the lender and borrower during difficult financial times. Similarly, the likelihood of collection under normal circumstances doesn’t apply when dealing with troubled debts, as it is not representative of the heightened risk involved. Finally, concessions that only benefit the creditor do not align with the fundamental purpose of restructuring in such contexts, which prioritizes the borrower's ability to repay.