FASB releases revised proposed Accounting Standards Update on Debt (Topic 470)

Financial Accounting Standards Board (“FASB”) has issued a revision of proposed Accounting Standards Update (“ASU”) “Simplifying the Classification of Debt in a Classified Balance Sheet (Current Versus Noncurrent)”.

On January 10, 2017, FASB issued first exposure draft of proposed ASU on Debt (Topic 470) which - if approved - would replace existing, fact-specific rules with an overarching, cohesive principle for debt classification that would focus on a borrower’s contractual rights and obligations that exist as of the reporting date.

On September 12, 2019, FASB issued a reproposal on the issue. Much of the reproposal is similar to the original proposal, adding proposed requirements related to unused long-term financing arrangements, such as a line of credit and grace periods.

Currently, the general principle is that an entity should classify an instrument as noncurrent if either of the following criteria is met as of the balance sheet date:

  1. The liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date.
  2. 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.

Under the proposed ASU, a borrower would continue to classify a debt arrangement as a noncurrent liability when there has been a debt covenant violation, if the entity receives a waiver of that violation that meets certain conditions before the financial statements are issued (or are available to be issued). That classification is an exception to the general principal of liability principle above, but is similar to current GAAP.

It is uncertain when the amendments would become effective. As the amendments in this proposed Update could shift classification of certain debt arrangements between noncurrent liabilities and current liabilities as compared with current guidance, entities should analyze how this change would have impact on their financials.

Click here to read the full FASB Exposure Draft.

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