Many entities are required to prepare a classified balance sheet in which assets and liabilities are presented as current or noncurrent. Current liabilities include obligations that are expected to be settled within a relatively short period of time, usually 12 months. When determining the appropriate classification of debt, seemingly straightforward debt agreements sometimes include terms that can cause surprising classification issues. For example, a significant deterioration in economic conditions could result in cash flow problems or the impairment of assets on the balance sheet, thereby increasing the likelihood that a subjective acceleration clause will be exercised by a lender. This increased likelihood has repercussions on the borrower's classification of the underlying debt. Furthermore, when dealing with covenant violations, both the terms and the form of any covenant waivers require careful analysis by borrowers to determine whether and how such waivers should affect the classification and disclosure of the related debt.
Our updated Financial Reporting Insights, Fundamentals of debt classification, is designed to assist entities in determining the appropriate classification of debt.
