13.11 Long-Term Obligations That Debtor Repays or Intends to Repay After the Balance Sheet Date

ASC 470-10 does not require an entity to classify a long-term debt obligation as a current liability on the basis that the entity expects to settle the debt within one year (or the operating cycle, if longer) after the balance sheet date (e.g., the debtor expects to exercise an early repayment option such as an embedded call option in the debt). While ASC 210-10-45-9 states that liabilities whose “ordinary liquidation is expected to occur within a relatively short period of time, usually 12 months,” are intended for inclusion in the current liability classification, noncurrent classification is appropriate when a debt obligation meets the conditions for long-term classification even if the debtor intends to repay it within one year (or the operating cycle, if longer) after the balance sheet date. That is, if the debtor controls the ability to not repay the debt obligation within one year (or the operating cycle, if longer) after the balance sheet date, the debt represents a noncurrent liability notwithstanding the debtor’s intent to repay it within one year (or the debtor’s actual repayment of the liability after the balance sheet date and before the financial statements are issued or available to be issued). This is consistent with the general principle in U.S. GAAP that a debtor should classify debt on the basis of facts known on the balance sheet date rather than on its expectations. Therefore, a debt repayment that occurs after the balance sheet date but before the financial statements are issued or available to be issued represents a nonrecognized subsequent event under ASC 855-10-25-3.

However, on the basis of observed diversity in practice, it would be acceptable for a debtor to classify a debt obligation as current that otherwise meets the conditions for noncurrent classification when both of the following conditions are met:

• The debtor either (1) has the ability and intent to repay the obligation within one year (or the operating cycle, if longer) after the balance sheet date or (2) repays the obligation after the balance sheet date but before the financial statements were issued or available to be issued.
• The repayment of the debt is made with assets that were classified as current as of the balance sheet date (e.g., the debtor did not repay the debt by refinancing it with the issuance of replacement long-term debt).

This alternative view would be considered acceptable and consistent with the nonauthoritative guidance in AICPA Technical Q&As Section 3200.12, which refers to classification of a long-term debt obligation as current on the basis of an intent to repay it within 12 months after the balance sheet date. However, if an entity applies this alternative, it should appropriately disclose the rationale for the classification of the debt as a current liability as of the balance sheet date.