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FASB

U.S. Accounting Rulemaker Drops Project to Simplify Debt Classification Rules

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

The FASB voted 5 to 2 to drop a seven-year old project aimed at simplifying the accounting guidance for classifying debt as current or noncurrent on the balance sheet. Changes the board proposed twice over the years would be too costly and tough to apply, board members said on April 14, 2021.

“We took this on as a very narrow-scoped simplification initiative thinking that we could come up with something that didn’t conflict and butt up with all these operational questions,” FASB Vice Chair James Kroeker said.

The board in 2017 and then in 2019 proposed to replace certain industry-specific rules in Topic 470, Debt, with an overarching principle for classifying debt.

The proposed changes, however conflict with a general principle for all liabilities in U.S. GAAP.

“We thought we could narrowly constrain this to things like fixed term debt, and then we found out that people said ‘some debt’s fixed term and some debt’s convertible. What about liabilities and equity where I have a stock option that fails the criteria and I classify that as a liability? Is that debt, or is that just a general liability?’ So which one am I in?” Kroeker said. “And we can call balls and strikes on every one of those which started to do that and we’ve got internally inconsistent answers,” he said.

Avoiding an Accounting Frankenstein

The project was added to the board’s technical agenda in 2014, but only two FASB members who participated in that decision are still on the board, according to the discussions. And current board members hold diverse views on the proposals.

Each proposed issue generate several different answers among board members and “trying to figure out something that doesn’t look like Frankenstein’s monster for us to work out that would actually improve something” was not doable, FASB Chair Richard Jones observed.

“I struggle with it, given the diversity of views,” Jones said. “So for that reason coupled with the fact this is a simplification project, rightly or wrongly that’s how it was added and I certainly got a few letters criticizing the board for working on simplification initiatives. Coupled with that input, I would also be supportive of removing this from our agenda,” he said.

The first proposed Accounting Standards Update (ASU) No. 2017-200Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent), issued in January 2017, was revised during redeliberations of the 29 comment letters it generated.

Revised proposed (ASU) No. 2019-780Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current Versus Noncurrent), issued in September 2019, added requirements related to unused long-term financing arrangements, such as a line of credit and grace periods. It generated 35 comment letters. Respondents’ views were also mixed.

Swaps Complexity

Under the proposed changes companies would need to classify debt as a noncurrent liability if “the liability is contractually due to be settled more than one year or operating cycle if longer after the balance sheet date” or “ the entity has a contractual right to defer settlement of the liability for a period greater than one year or operating cycle if longer after the balance sheet date.”

“We developed a principle, I’m not sure that it’s operational, I think that there’s a lot of interactions in other areas of GAAP that make it challenging to operate,” FASB member Susan Cosper said. “And I think that the one pro to this is that it maybe was a little closer to IFRS,” she said.

Similarly, FASB member Marsha Hunt expressed concerns that the proposals would mean “swapping one complexity for another.” And outgoing FASB member Harold Schroeder said he would only support the project if were redefined and tackled using a principle. Schroeder vacates his seat in June due to term limits.

Two View it Differently

Board member Gary Buesser, who provides an analyst’s view, and board academic Christine Botosan, were in favor of continuing with the project.

Buesser conceded to dropping the project after observing that a majority of the board did not want to move forward with the proposals and each differed in viewpoint. “It’s clear that everyone is struggling with this issue, and I heard great points on both sides of the debate,” he said. There are narrow areas that could be separately addressed in the future, for example, long-term financing arrangements, Buesser said.

Botosan, who voted to advance the work, said she would have been willing to finalize the initial 2017 proposal when it was issued.

“I think the issues that have been raised are all addressable,” she said. “I think we’ve heard loud and clear from users that it would result in better information. And I think that it would achieve the objective of simplifying the guidance in a significant way.”

 

This article originally appeared in the April 16, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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