FASB proposes to simplify debt classification

KPMG reports on the FASB’s proposals to simplify debt classification. It is likely that the proposed amendments to ASC 470 would result in more debt arrangements being classified as current on the balance sheet.

Applicability

Proposed ASU

• A company that presents a classified balance sheet
• A company that has debt obligations, including convertible debt instruments and liability-classified mandatorily redeemable financial instruments

Relevant dates

• January 10, 2017 - FASB issued proposed ASU
• May 5, 2017 - Comments due on proposed ASU

Key impacts

• Debt would be classified as noncurrent only when it is due more than one year (or operating cycle, if longer) after the balance sheet date, or when a company has the contractual right at the balance sheet date to defer settlement for more than one year (or operating cycle, if longer) after the balance sheet date
• As an exception, a company that obtains a debt covenant waiver after the balance sheet date, but before financial statements are issued (or available to be issued), would still classify the debt as noncurrent unless the waiver results in a debt extinguishment or a troubled debt restructuring
• The proposed ASU would likely cause more debt arrangements to be classified as current liabilities than under existing US GAAP
• Short-term debt 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), would be classified as a current liability in contrast with existing US GAAP
• Financial statement users would need to consider both the balance sheet classification and the related disclosures about post-balance sheet refinancings when evaluating a company’s liquidity position

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Report contents

• Classification of debt
• Exception for waivers obtained on debt that is callable due to a covenant violation
• Disclosure