Simplifying the balance sheet classification of debt — FASB decides on approach for classifying debt as current or noncurrent

Published on: 29 Jan 2015

At its meeting yesterday, the FASB tentatively decided to propose a new, principles-oriented approach for classifying debt as either current or noncurrent in an entity’s balance sheet. The approach would replace existing requirements, which have been criticized for their complexity.

The Board tentatively decided that an entity should classify debt as noncurrent when either or both of the following conditions are met: (1) the “liability is due to be settled more than 12 months (or beyond the operating cycle)”1 — whichever is greater — “after the reporting period” or (2) “the entity has a right to defer settlement of the liability for at least 12 months (or beyond its operating cycle [whichever is greater]) after the reporting period.”2 Further, the Board decided that the meaning of “right to defer” would be based on contractual legal rights rather than on the intentions of the borrower or lender. The presentation assessment would be performed as of the reporting date.

Editor’s Note: Under existing GAAP, an entity in some cases considers transactions entered into after the balance sheet date, but before the financial statements are issued, in classifying debt as current or noncurrent. For example, an entity may exclude short-term obligations from current liabilities in certain circumstances if it has issued long-term obligations or equity securities for refinancing a short-term obligation on a long-term basis after the balance sheet date but before the financial statements are issued. Under the tentative approach, the classification would instead be made on the basis of the entity’s rights and obligations as of the balance sheet date. The proposed classification principles would more closely align U.S. GAAP with IFRSs (i.e., paragraph 69 of IAS 13).

In addition, the Board decided that all debt classification guidance would be contained in ASC 470-10-454 (i.e., ASC 210-10 would not apply). Finally, the Board tentatively decided to clarify that the following items would be within the scope of ASC 470-10:

  • Due-on-demand loan arrangements.
  • Callable debt.
  • Sales of future revenue.
  • Increasing-rate debt.
  • Debt that includes covenants.
  • Revolving credit agreements.
  • Debt with subjective acceleration clauses.
  • Indexed debt.

The Board is expected to discuss disclosure and transition guidance at a future meeting.


1 The FASB Accounting Standards Codification Master Glossary defines an operating cycle as the “average time intervening between the acquisition of materials or services and the final cash realization.”

2 Quoted text is from the Board’s meeting handout.

3 IAS 1, Presentation of Financial Statements.

4 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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