Enterprise Accounting Guidelines - Debt Restructuring (Revised)

2. For the purposes of these Guidelines, the following terms shall be defined as detailed below:

(1) "Debt restructuring" means the terms of the debt that the creditor agrees to be modified by the debtor, in accordance with an agreement reached with the debtor or a court ruling;

(2) "Contingent expenditures" means expenditures the incurring of which is dependent on the occurrence of a future event or events, where the occurrence of such event or events is uncertain.

(3) "Contingent gains" means gains the generating of which is dependent on the occurrence of a future event or events, where the occurrence of such event or events is uncertain.

(4) "Fair value" means the amount for which an asset is exchanged or a debt discharged between knowledgeable, willing parties in an arm's-length transaction;

METHODS OF DEBT RESTRUCTURING

3. Debt restructuring methods include:

(1) discharge of the debt in cash that is less than the book value of the debt;

(2) discharge of the debt with a non-cash asset;

(3) conversion of the debt to capital;

(4) modification of other terms of the debt, such as extension of the time period for repayment of debt with an increase in interest, extension of the time period for repayment of debt with a reduction of the principal of the debt or reduction of the interest on the debt, etc.; and

(5) a combination of two or more of the above methods ("mixed restructuring method").

TREATMENT OF ACCOUNTS BY THE DEBTOR

4. If a debt is discharged in cash that is less than the book value of the debt, the debtor shall recognize as capital common reserves the difference between the book value of the debt being restructured and the amount of cash paid.

5. If a debt is discharged with a non-cash asset, the debtor shall recognize as capital common reserves or loss of the current period the difference between the book value of the debt being restructured and the sum of the book value of the non-cash asset transferred plus the relevant amount of taxation.

6. If a debt is discharged through its conversion to capital, the debtor shall recognize as capital common reserves the difference between the book value of the debt being restructured and the share of equity interest held by the creditor by virtue of relinquishment of its claim.

7. If a debt is restructured through modification of other debt terms, where the book value of the debt being restructured is more than the future amount payable, the debtor shall write down the book value of the debt being restructured to the future amount payable, and the amount written down shall be recognized as capital common reserves; where the book value of the debt being restructured is equal to or less than the future amount payable, the debtor shall not handle it as an account item.

If the modified debt terms involve contingent expenditures, the debtor shall include such contingent expenditures in its future amounts payable. When a contingent expenditure is actually incurred, it shall be offset against the book value of the debt as restructured. When a contingent expenditure has not been incurred by the time the debt has been settled in full, the originally estimated amount of the contingent expenditure shall be recognized as capital common reserves.

8. A debtor shall handle a debt that is restructured by means of a mixed restructuring method by differentiating between the following circumstances:

(1) If a debt is discharged by means of a combination of cash and non-cash asset methods, the debtor shall first set off the cash paid against the book value of the debt being restructured, and then proceed in accordance with Article 5.

(2) If a debt is discharged by means of a combination of cash, non-cash asset and conversion of debt to capital methods, the debtor shall first set off the cash paid and the book value of non-cash asset against the book value of the debt being restructured, and then proceed in accordance with Article 6.

(3) If a portion of a debt is discharged by means of a combination of cash, non-cash asset and conversion of debt to capital methods and the remaining portion of the debt is restructured by means of modification of other debt terms, the debtor shall first set off the cash paid, the book value of the non-cash asset and the share of the equity interest held by the creditor against the book value of the debt being restructured, and then proceed in accordance with Article 7.

TREATMENT OF ACCOUNTS BY THE CREDITOR

9. If a debt is discharged in cash that is less than the book value of the debt, the creditor shall recognize as the loss of the current period the difference between the book value of the claim being restructured and the cash received.

10. If a debt is discharged with a non-cash asset, the creditor shall enter in its books the book value of the claim being restructured as the non-cash asset received.

If several items of non-cash asset are involved in the restructuring mentioned above, the creditor shall, in accordance with the proportion of the fair value of each item of non-cash asset in the total fair value of the non-cash assets, allocate the book value of the claim being restructured in order to determine the value of each item of non-cash asset to be entered in its book.

11. If a debt is discharged through its conversion to capital, the creditor shall enter in its books the book value of the claim being restructured as the equity interest received.

If several items of equity interest are involved in the restructuring mentioned above, the creditor shall, in accordance with the proportion of the fair value of each item of equity interest in the total fair value of the equity interest, allocate the book value of the claim being restructured in order to determine the value of each item of equity interest to be entered in its book.

12. If a debt is restructured through modification of other debt terms, where the book value of the claim being restructured is more than the future amount receivable, the creditor shall write down the book value of the claim being restructured to the future amount receivable, and the amount written down shall be recognized as the loss of the current period; where the book value of the claim being restructured is equal to or less than the future amount receivable, the creditor shall not handle it as an account item.

If the modified debt terms involve contingent gains, the creditor shall not include such contingent gains in its future amounts receivable. When a contingent gain is actually received, it shall be handled as the gain of the current period.

13. A creditor shall handle a debt that is restructured by means of a mixed restructuring method by differentiating between the following circumstances:

(1) If a debt is discharged by means of a combination of cash and non-cash asset methods, the creditor shall first set off the cash received against the book value of the claim being restructured, and then proceed in accordance with Article 10.

(2) If a debt is discharged by means of a combination of cash, non-cash asset and conversion of debt to capital methods, the creditor shall first set off the cash received against the book value of the claim being restructured, and then in accordance with the proportion of the fair value of the non-cash asset and equity interest received in its corresponding total fair value, allocate, after subtracting the cash received from the book value of the claim being restructured, the remaining sum in order to determine the value of the non-cash asset and equity interest to be entered in its book.

If several items of non-cash asset and equity interest are involved in the restructuring mentioned above, the value of each item of equity interest to be entered in its book shall, according to the category to which it belongs, be calculated and determined in accordance with the provisions of the above paragraphs, and proceed in accordance with Paragraph Two of Article 10 and Paragraph Two of Article 11 respectively.

(3) If a portion of a debt is discharged by means of a combination of cash, non-cash asset and conversion of debt to capital methods and the remaining portion of the debt is restructured by means of modification of other debt terms, the creditor shall, after subtracting the cash received from the book value of the claim being restructured, handle the remaining sum first in accordance with Item Two of Article 13, then with Article 12.

DISCLOSURE

14. The debtor shall disclose the following information concerning debt restructuring:

(1) the method of debt restructuring;

(2) the total amount of capital common reserves recognized due to debt restructuring;

(3) the increase in share capital (paid-in capital) resulting from conversion of the debt to capital; and

(4) contingent expenditures.

15. The creditor shall disclose the following information concerning debt restructuring:

(1) the method of debt restructuring;

(2) the total amount of the debt restructuring losses;

(3) the increase in long-term investment resulting from transformation of the claim to equity interest and the ratio of the long-term investment to the debtor's equity; and

(4) contingent gains.

CONNECTION METHOD

16. For cases of debt restructuring that take place before the date of implementation of these Guidelines and where the accounting treatment differs from those stipulated hereof, such treatment shall be investigated and adjusted.

SUPPLEMENTARY PROVISIONS

17. These Guidelines shall be implemented as of 1 January 2001.