United States

Updated white paper: Fundamentals of debt classification

FINANCIAL REPORTING INSIGHTS  | 

The current economic environment is forcing many borrowers to take a fresh look at the factors that led them to classify their debt as either current or noncurrent when preparing a classified balance sheet. Seemingly straight-forward debt agreements sometimes include terms that can cause surprising classification issues. For example, the significant deterioration in economic conditions as a result of the coronavirus pandemic could result in cash flow problems and (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, with the increased frequency of covenant violations in the current economic environment, 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. To assist entities in determining the appropriate classification of debt, we have issued an updated version of our white paper, Fundamentals of debt classification.

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