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FASB

Debt Classification Guidance Moves Closer to Final Status

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The FASB plans to settle some of the lingering issues on its upcoming guidance for classifying debt before publishing the guidance later this year. The accounting board is working on an amendment to U.S. GAAP that is expected to require businesses to more clearly distinguish between debts they must pay right away versus those for which they have more time to settle.

The FASB at its August 22, 2018, meeting plans to settle some of the lingering issues on its upcoming guidance for classifying debt.

The accounting board is working on an amendment to U.S. GAAP that is expected to require businesses to more clearly distinguish between debts they must pay right away versus those for which they have more time to settle.

“We have one sweep issue to finalize; we’re very, very close to finishing,” FASB member Christine Botosan said on August 6 at the American Accounting Association’s annual meeting in National Harbor, Maryland. The aim of the project is to replace the reams of rules-based, contract-specific guidance in U.S. GAAP for classifying debt as short-term or long-term. The planned update is expected to erase the rules-based guidance and establish a broad principle for determining how to classify a debt as current or noncurrent.

The FASB’s plan, outlined in January 2017 via Proposed Accounting Standards Update(ASU) No. 2016-200, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet — Current Versus Noncurrent, calls for debt to be classified as noncurrent if it is due to be settled more than one year from the date of the business’s balance sheet. A debt would also be noncurrent if the business has the right to defer its settlement for at least a year after the balance sheet date.

The FASB had largely finalized the plan by September 2017, but publication of the final update was delayed after the Tax Cuts and Jobs Act was enacted last December. The FASB had to address some financial reporting questions that were raised by the new law. By July 2018, the FASB said it would not be ready to publish the final set of amendments until it reviewed the feedback from its Investor Advisory Committee (PCC) and Private Company Council (PCC). The panels were concerned about how the planned update addressed lines of credit and whether the availability of a credit line should affect the debt’s classification. Members of the advisory groups told the FASB that businesses should not be permitted to classify debt as long term solely based on the support of a line of credit.

A line of credit represents an option to borrow, but is not an obligation to use the credit. In addition, while a business may have the ability to borrow against a line of credit, a lender may have the right to block the credit when the borrower most needs it, the advisory panels said.

The FASB is planning to release the final update to simplify aspects of FASB ASC 470, Debt, which requires financial executives and auditors to consider specific rules to determine whether debt is current or noncurrent. The guidance differs depending on the type of debt arrangement, such as a loan covenant, revolving credit, or other specialized type of loan, but ASC 470 does not cover all scenarios. The FASB wanted to come up with a simple principle to classify debt based on a contract’s terms and the company’s compliance with the loan or bond covenants.

Also on August 22, the FASB plans to continue discussing its effort to update the definitions of key financial reporting terms in its Conceptual Framework.

The board plans to focus its discussions on distinguishing liabilities from equity as it looks to revise Concepts Statement (CON) No. 6, Elements of Financial Statements.

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