January 20, 2017
FASB Proposes to Simplify the Classification of Debt
By Linda Marie Pearson, CPA, CFE
On January 10, 2017, FASB issued an exposure draft to simplify the classification of debt in a classified balance sheet (current versus noncurrent). The amendments in this proposed Update will replace the current, fact-specific guidance with “an overarching, cohesive principle” – the intent, of which, is to reduce the cost and complexity for preparers and auditors. The proposed main provision requires an entity to classify an instrument 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 after the balance sheet date.
The entity has a contractual right to defer settlement of the liability for at least one year after the balance sheet date.
How does this affect the current guidance?
Current guidance requires short-term debt (at the balance sheet date) that is refinanced on a long-term basis (after the balance sheet date but before the financial statements are issued or available to be issued) to be classified as a noncurrent liability. This proposed change requires such debt to be classified as current.
Current guidance requires the consideration of the likelihood of triggering a clause to accelerate the due date. This proposed change removes the requirement of “consideration” – the classification of the debt would only be impacted when a triggering event occurs.
Requires a separate line item presentation in a classified balance sheet for debt that is classified as a noncurrent liability because of a waiver of a debt covenant violation received after the reporting date but before the financial statements are issued.