Debt assumption is a special form of debt refinancing, involving three parties—the creditor, the original debtor, and a new debtor who assumes the debt obligation.
A debt assumption involves two simultaneous transactions; the first transaction cancels the original debtor’s obligation, and the second transaction creates a new debt contract between the creditor and the new debtor, or assumer.
The first transaction is classified as a capital transfer (as in the case of debt forgiveness), and the second transaction involves the creditor’s acquisition of the new debt instrument issued by the assumer. Any write-down of asset value by the creditor is recorded in the revaluation account.