United States

Proposed guidance related to classifying debt as current or noncurrent

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 reflects revisions to the original proposed ASU issued on the topic in January 2017. If finalized, the revised proposed ASU would replace the existing guidance on debt classification in the FASB’s Accounting Standards Codification (ASC) with an overall principle that would result in noncurrent classification of debt in either of the following situations: (a) the debt is contractually due more than one year (or the entity’s operating cycle, if longer) from the balance-sheet date or (b) the contractual terms of the debt provide the entity with the ability to defer settlement of the debt for more than one year (or the entity’s operating cycle, if longer) from the balance-sheet date. The only exception to this principle would be when an entity violates a debt covenant as of the balance-sheet date (which would otherwise result in current classification of the debt), but obtains a waiver or forbearance agreement from the lender (that meets certain conditions) before the financial statements are issued or made available for issuance (as applicable). Under this exception, the related debt would be classified as noncurrent and separately presented in the balance sheet. This exception would not apply when the waiver or forbearance agreement would result in the application of either: (a) the troubled debt restructuring accounting model in ASC 470-60, Debt – Troubled Debt Restructurings, or (b) the extinguishment accounting model in ASC 470-50, Debt – Modifications and Extinguishments.

One of the most significant changes that would be made by the revised proposed ASU if it is finalized would be the elimination of guidance currently in the ASC that requires an entity to classify what would otherwise be current debt as noncurrent debt when that debt has been refinanced on a long-term basis after the balance-sheet date, but before the financial statements are issued or available to be issued (as applicable). 

Any final guidance issued by the FASB would be applied on a prospective basis after the effective date, which the FASB will discuss during its redeliberations.

The revised proposed ASU is available for comment until October 28, 2019.