Defining Issues | September 2019

FASB issues revised proposed ASU on balance sheet classification of debt

The FASB is seeking to improve guidance on classifying debt on the balance sheet by introducing an overarching principle and requiring more comprehensive disclosures. The proposed revisions would change the current/noncurrent classification of debt for many companies.  

Applicability

Companies that prepare a classified balance sheet and have debt arrangements, including convertible debt instruments, liability-classified mandatorily redeemable financial instruments, or lease liabilities (under ASC 842).

Relevant dates

  • September 12, 2019 – FASB issued proposed ASU
  • October 28, 2019 – Comments due on proposed ASU

Key impacts

  • Proposes a classification principle that would require noncurrent classification if:
    • the liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date; or
    • the entity has a contractual right as of the balance sheet date to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet date.
  • Generally would retain the current guidance for classifying debt as noncurrent if a debt covenant waiver is obtained after the balance sheet date, but before the financial statements are issued, provided certain conditions are met.
  • Would prohibit consideration of subsequent refinancing in determining debt classification at the balance sheet date.
  • Would eliminate the probability assessment for subjective acceleration clauses for most debt. Such clauses would only impact debt classification when triggered.
  • Would require separate line item presentation of debt classified as a noncurrent liability because of a waiver or forbearance obtained after the balance sheet date.
  • Proposes enhanced disclosures about events of default, triggers of a subjective acceleration clause, and grace periods.
  • Many entities that currently classify debt as noncurrent because of available sources of financing would classify debt as current.

 

 

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