The Classification of Debt (Topic 740) Is Changing

In September 2019, FASB released a revised exposure draft related to a proposed accounting standard update for simplifying the classification of debt in a classified balance sheet. The new deadline for further comment is October 28, 2019. The FASB originally issued a proposed update back in 2017. It received extensive comments and resulted in the need for additional research before finalizing a standard.

The latest proposed updates would replace the current, overly complex, fact-specific guidance contained in Topic 470, Debt with an overarching, cohesive debt classification principle. The primary change from the original proposal includes specific preclusion of the consideration of unused long-term financing arrangements in classifying current debt on the balance sheet (even if the unused financing could be used to refinance current debt on a long-term basis). However, the latest proposal does explicitly permit the consideration of grace periods in evaluating noncompliance with debt covenants. No other significant changes to the original proposal were made.

A debt arrangement provides a borrower with a contractual obligation to pay consideration on demand or on fixed or determinable dates. This includes lease liabilities, convertible debt instruments and liability-classified mandatorily redeemable financial instruments.

Debt may only be classified 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 a year (or operating cycle, if longer) after the balance sheet date.
  2. The entity has the contractual right to defer settlement of the liability for a period greater than a year (or operating cycle, if longer) after the balance sheet date.

The update would apply to all entities that enter into a debt arrangement and present a classified balance sheet, while a classified balance sheet is still not a requirement.

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Jennifer Louis has over 25 years of experience in designing and instructing high-quality training programs in a wide variety of technical and “soft-skills” topics needed for professional and organization success. In 2003, she founded Emergent Solutions Group, LLC, where she focuses her energy on designing and delivering practical and engaging accounting and auditing training. Jennifer started her career in Audit for Deloitte & Touche LLP. Jennifer graduated summa cum laude from Marymount University with a B.B.A. in Accounting.