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Journal entry — FASB concludes redeliberations on simplifying the balance sheet classification of debt (current versus noncurrent)

Published on: Sep 15, 2017

On September 13, 2017, the FASB concluded its redeliberations on its January 2017 proposed Accounting Standards Update (ASU) Simplifying the Classification of Debt in a Classified Balance Sheet (Current Versus Noncurrent). The Board discussed and voted on the following proposed amendments.

Classification Principle

The FASB affirmed the proposed classification principle and clarified the following:

  1. “The issuance of equity instruments does not constitute settlement when determining whether debt should be classified as current or noncurrent.”
  2. To the extent that any arrangement is in place with a third party (for example, an unused line of credit) that permits the entity to avoid “the transfer of current assets within 12 months from the balance sheet date," short-term debt should be classified as noncurrent.

Scope

The Board affirmed that the scope of the amendments should include debt arrangements as well as “(a) liability-classified mandatorily redeemable financial instruments within the scope of [ASC 480]1 and (b) debt with conversion and other options that are within the scope of [ASC 470-20].” In addition, the Board decided to clarify that the classification principle also should apply to lease liabilities under ASC 842.

Waivers of Debt Covenant Violations

The FASB affirmed that the amendments should provide an exception to the classification principle for waivers of debt covenant violations received after the reporting date but before the financial statements are issued. In addition, the Board clarified the following:

  1. The waiver must be for more than one year (i.e., at least “12 months plus one day”) after the balance sheet date.
  2. It cannot be probable that a debt covenant within the same debt arrangement will be violated within one year of the balance sheet date. This probability assessment would also consider the likelihood of violating any covenants other than the covenant waived.
  3. At the time the waiver is granted, if the waiver results in a modification that is either an extinguishment of debt accounted for in accordance with the guidance in ASC 470-50, or a troubled debt restructuring accounted for in accordance with ASC 470-60, such a waiver does not qualify for the waiver exception.

Separate Presentation in a Classified Balance Sheet

The Board affirmed that an entity should separately present in a classified balance sheet "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.” The Board specifically considered whether parenthetical or footnote disclosure would be acceptable alternatives and rejected such alternatives.

Refinancing After the Balance Sheet Date

The FASB affirmed that a refinancing of debt subsequent to the balance sheet date is considered a nonrecognized subsequent event. That is, entities will be precluded from classifying a debt arrangement as noncurrent as of the balance sheet date solely on the basis of it being refinanced after the balance sheet date but before the financial statements are issued. 

Disclosures

With the exception of replacing the use of the term “deficiency” with “default,” the Board affirmed the proposed requirement to disclose certain information about any events of default (e.g., violations of a loan covenant or triggers of a subjective acceleration clause).

Implementation Guidance and Illustrative Examples

The Board affirmed the proposed implementation guidance and illustrative examples.

Transition and Transition Disclosures

The Board affirmed the proposed transition guidance, which would require an entity to apply a prospective method of transition and would be applied to all debt arrangements and other instruments within the scope that exist at the date of initial adoption and after that date. The Board also affirmed the proposed transition disclosures.

Effective Date

The FASB decided that the final ASU will be effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those years. In addition, the final ASU will be effective for all other entities beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted.

Cost Benefit

The Board concluded that the benefits of the proposed amendments justify the perceived costs and directed the FASB staff to draft a final ASU for vote by written ballot.

Next Steps

The FASB expects to issue a final ASU during the first quarter of 2018.

Refer to the summary of tentative Board decisions for additional information.

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1 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

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