United States

Proposal: Balance sheet classification of debt

FINANCIAL REPORTING INSIGHTS  | 

The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent). This proposed ASU introduces an overarching principle for determining whether debt should be classified as current or noncurrent in a classified balance sheet, which, if finalized, would replace the current, fact-specific guidance. Per the proposed ASU, an entity would classify debt as noncurrent if either of the following criteria is met as of the balance sheet date:

  • The liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date
  • The entity has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date

One exception to this principle is that the borrower would continue to classify its debt as noncurrent when a debt covenant violation has been waived, if the borrower receives a waiver of that violation before the financial statements are issued (or are available to be issued) and the waiver meets certain conditions. This exception would apply to all waivers except those that result in a troubled debt restructuring (as defined in the Master Glossary of the FASB’s Accounting Standards Codification) or those that are accounted for as a debt extinguishment in Subtopic 470-50, Debt—Modifications and Extinguishments. The FASB also decided to retain and clarify the probability assessment related to subsequent covenant violations. The proposed ASU would require an entity to separately present in the balance sheet liabilities that are classified as noncurrent as a result of this exception.

The proposed ASU could shift classification of certain debt arrangements between noncurrent liabilities and current liabilities as compared with current guidance. For example:

  • Short-term debt that is refinanced on a long-term basis after the balance sheet date but before the financial statements are issued no longer would be classified as a noncurrent liability.
  • A subsequent refinancing of short-term debt with the issuance of equity securities would no longer affect the classification of debt as of the balance sheet date. Therefore, those debt arrangements would be classified as current liabilities.
  • Entities with debt that contains subjective acceleration clauses no longer would be required to assess the likelihood of acceleration of the due date when determining whether the debt is a noncurrent or current liability. Under the proposed ASU, the subjective acceleration clause would impact classification of debt only when it is triggered.

The FASB will determine the effective date of the proposed ASU after considering stakeholder feedback. In the first set of interim and annual financial statements following the effective date, an entity would apply the proposed ASU on a prospective basis to debt that exists at that date and after that date. Early adoption would be permitted.

The proposed ASU is available for comment until May 5, 2017.