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One More Public Review Is Anticipated for Planned Amendments to Debt Classification Guidance

· 5 minute read

· 5 minute read

The FASB plans to publish by the end of the summer a final version of an update to U.S. GAAP that will require businesses to more clearly distinguish between debts they must pay right away versus those for which they have more time to settle. But the board is delaying publication of the final update until it has a chance to review a set of editorial and technical changes, the so-called “sweep” issues, in the amendments to U.S. GAAP.

The FASB is delaying publication of the final version of an update to U.S. GAAP that will require businesses to more clearly distinguish between debts they must pay right away versus those for which they have more time to settle.

The accounting board plans to publish the update by the end of the summer to revise how companies report on their balance sheets current versus noncurrent debt. But it needs to meet again before the final update is released to the public, a FASB spokesperson said. The meeting date has not yet been set.

The board plans to discuss the final set of editorial and technical changes, the so-called “sweep” issues, before the update is released along with feedback from its Investor Advisory Committee (PCC) and Private Company Council (PCC). The panels are concerned about the guidance for lines of credit and whether the availability of a credit line should affect the debt’s classification. The panels recently 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.

“That should not be allowed,” said IAC member Brian Kleinhanzl, managing director at Keefe, Bruyette & Woods Inc., at a June 28, 2018 meeting with the FASB.

Kleinhanzl said a line of credit represented an option to borrow but was 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.

“Banks, typically the institutions issuing those lines of credit, can pull those at will sometimes. So that ability to actually borrow is not always there,” he said. “The ability to reclassify one item from current to noncurrent based on something not even present seemed conspicuous to us.”

PCC member Richard Reisig, shareholder and technical director, attest services, at Anderson ZurMuehlen & Co. P.C. in Great Falls, Montana, said during a June 26 meeting that letting the presence of a credit line determine whether debt can be classified as long term would confuse investors, auditors, and financial executives and make a company’s debt less transparent than before the board tried to address the debt classification problem.

The debt classification project has been a long-running effort for the FASB. The board started discussing the issue in January 2015, aiming to draw up a simple proposal to get rid of the complex, transaction-specific debt classification guidance in U.S. GAAP and make the guidance more understandable.

The FASB’s plan, based on the January 2017 Proposed Accounting Standards Update (ASU) No. 2016-200, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet — Current Versus Noncurrent, offers a general principle for classifying debt. The final update is expected to permit debt to be classified as noncurrent if it has a scheduled settlement date more than one year or operating cycle after the balance sheet date, or if the debtor has the right to defer settlement of the liability for at least one year.

In September, the FASB agreed to clarify that if, before the balance sheet date, a business has in place a third-party arrangement, such as a line of credit, that would let it avoid paying its debts within 12 months of the balance sheet date, the debt should be classified as noncurrent. The accounting board reasoned that the contractual right to defer settlement would be enough to mark the debt as long term and not short term.

Members of the PCC and the IAC said the FASB should revisit that decision.

“You really didn’t have a contractual right to defer” the debt, said PCC Chair Candace Wright, director with Postlethwaite & Netterville, a Baton Rouge, Louisiana, accounting and business advisory firm.

The project was initiated to simplify FASB ASC 470, Debt, which requires financial executives and auditors to consider specific guidance for classifying long-term and short-term debt. The requirements differ depending on the type of debt arrangement, such as a loan covenant, revolving credit, and other specialized types of loans, and the guidance does not cover all scenarios. The FASB wanted to come up with a broad principle to classify debt based on a contract’s terms and the company’s compliance with the loan or bond covenants.

The effort was controversial from the start, with companies warning that the changes the FASB was contemplating would hurt small businesses and make more of their debts look like they were due in the short term. They feared that construction companies and contractors would be forced to shift liabilities to the short-term category. If state regulators concluded that a contractor had too many current debts on its balance sheet, it could be barred from bidding on some projects and lose business.

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