13.3 General
13.3.1 Background
To determine whether debt should be classified as current or
noncurrent, an entity must apply the guidance in ASC 470-10 and ASC 210-10.
13.3.2 Debt Classification Guidance in ASC 470-10
ASC 470-10 does not establish a uniform principle for classifying debt as current
or noncurrent; instead, it consists of a patchwork of rules and exceptions. One
requirement, which is subject to exceptions, is that liabilities that are
scheduled to mature or that the creditor could force the debtor to repay within
one year (or the operating cycle, if longer) after the balance sheet date should
be treated as short-term obligations even if they are not expected to be settled
within that period.
Accordingly, the following types of debt must be classified as current
liabilities unless (1) their settlement will not require the use of current
assets or the creation of other current liabilities (see Section
13.3.3.4) or (2) a specific exception applies:
-
Debt that is contractually scheduled to mature within one year (or the operating cycle, if longer) after the balance sheet date (see Section 13.3.4.2).
-
Any portion of long-term debt that is contractually scheduled to mature within one year (or the operating cycle, if longer) after the balance sheet date, such as the current portion of an amortizing loan for which the principal is paid down over the loan’s life (see Section 13.3.3.4).
- Debt that contractually is due on demand as of the balance sheet date or that will become payable on demand within one year (or the operating cycle, if longer) after the balance sheet date, including puttable debt (see Section 13.4) and debt that has become payable on demand because of a covenant violation (see Section 13.5).
However, short-term obligations are classified as noncurrent liabilities if:
-
A debtor has violated an objectively verifiable debt covenant as of the balance sheet date that makes an otherwise long-term obligation due on demand or payable on demand within one year of the balance sheet date and the creditor grants a waiver before the financial statements are issued (or available to be issued) or a grace period applies (see Section 13.5.3).
-
A debtor has the intent and ability to refinance a short-term obligation on a long-term basis (see Section 13.7).
In some scenarios, a debtor is required to consider expectations about whether
the creditor will accelerate a debt’s due date. If long-term debt contains a SAC
and is not payable on demand or within one year (or the operating cycle, if
longer) after the balance sheet date, the debtor must evaluate whether the SAC
is likely to be invoked to determine whether the debt is classified as current
or noncurrent (see Section 13.6). Further,
special guidance applies to revolving debt with a lockbox arrangement (see
Section 13.8) and to increasing-rate
debt (see Section 13.9), and there are
some unique issues associated with the treatment of convertible debt (see
Section 13.10). For a discussion of
the classification of long-term obligations that are repaid or that the debtor
intends to repay after the balance sheet date, see Section 13.11.
Debt that is contractually scheduled to mature beyond one year after the balance
sheet date is presented as noncurrent unless any of the following exceptions
apply:
-
The debt is due on demand or will become due on demand within one year of the balance sheet date (see Section 13.4) unless the debtor has the intent and ability to refinance the debt on a long-term basis (see Section 13.7).
-
A covenant violation has occurred that causes the debt to become repayable within one year of the balance sheet date (see Sections 13.3.4.5 and 13.5) unless (1) the creditor grants a waiver before the financial statements are issued (or available to be issued), (2) a grace period applies (see Section 13.5.3), or (3) the debtor has the intent and ability to refinance the debt on a long-term basis (see Section 13.7).
-
The debt contains a subjective acceleration clause that is likely to be triggered (see Sections 13.3.4.6 and 13.6) unless the debtor has the intent and ability to refinance the debt on a long-term basis (see Section 13.7).
-
Other facts and circumstances suggest that the debt should be classified as current (see Section 13.5.2.2).
The table below provides an
overview of the classification of different types of debt as current or
noncurrent under ASC 210-10 and ASC 470-10. Note, however, that the appropriate
classification depends on the application of GAAP to the specific facts and
circumstances.
|
Noncurrent
|
Current1
|
|---|---|
|
|
13.3.3 Classification Guidance in ASC 210-10
13.3.3.1 Background
ASC 210-10
05-4 The Overall Subtopic
provides general guidance on the classification of
current assets and current liabilities and discusses
the determination of working capital. The balance
sheets of most entities show separate
classifications of current assets and current
liabilities (commonly referred to as classified
balance sheets) permitting ready determination of
working capital.
The sections below briefly summarize the various definitions
and guidance in ASC 210-10 that could be relevant to the classification of
debt as current or noncurrent.
13.3.3.2 Working Capital
ASC Master Glossary
Working Capital
Working capital (also called net working capital) is
represented by the excess of current assets over
current liabilities and identifies the relatively
liquid portion of total entity capital that
constitutes a margin or buffer for meeting
obligations within the ordinary operating cycle of
the entity.
ASC 210-10
05-5 Financial position,
as it is reflected by the records and accounts from
which the statement is prepared, is revealed in a
presentation of the assets and liabilities of the
entity. In the statements of manufacturing, trading,
and service entities, these assets and liabilities
are generally classified and segregated; if they are
classified logically, summations or totals of the
current or circulating or working assets (referred
to as current assets) and of obligations currently
payable (designated as current liabilities) will
permit the ready determination of working
capital.
The classification of assets and liabilities as current is intended to permit
a financial statement user to readily determine an entity’s working capital.
In practice, metrics and ratios that are computed on the basis of balance
sheet measures of working capital or components thereof are often used in
financial statement analysis and referenced in debt covenants.
13.3.3.3 Operating Cycle
ASC Master Glossary
Operating Cycle
The average time intervening between the acquisition
of materials or services and the final cash
realization constitutes an operating cycle.
ASC 210-10
05-6 The ordinary
operations of an entity involve a circulation of
capital within the current asset group. Cash is
expended for materials, finished parts, operating
supplies, labor, and other factory services, and
such expenditures are accumulated as inventory cost.
Inventory costs, upon sale of the products to which
such costs attach, are converted into trade
receivables and ultimately into cash again.
45-3 A one-year time
period shall be used as a basis for the segregation
of current assets in cases where there are several
operating cycles occurring within a year. However,
if the period of the operating cycle is more than 12
months, as in, for instance, the tobacco,
distillery, and lumber businesses, the longer period
shall be used. If a particular entity has no clearly
defined operating cycle, the one-year rule shall
govern.
Most entities use a one-year period as the basis for distinguishing between
current and noncurrent items. Under ASC 210-10-45-3, an entity that has no
clearly defined operating cycle or more than one operating cycle within a
year must use the one-year time frame. However, if the entity’s operating
cycle is greater than one year, it should base the distinction on the
operating cycle. ASC 210-10-45-3 suggests that a period longer than a year
may be appropriate, for example, in the tobacco, distillery, and lumber
businesses. The operating cycle is the average amount of time it takes an
entity to acquire materials or services, convert those items into finished
goods or services, and collect cash from the sale of those goods or
services.
13.3.3.4 Current Assets and Current Liabilities
ASC Master Glossary
Current Assets
Current assets is used to designate cash and other
assets or resources commonly identified as those
that are reasonably expected to be realized in cash
or sold or consumed during the normal operating
cycle of the business. See paragraphs 210-10-45-1
through 45-4.
Current Liabilities
Current liabilities is used principally to designate
obligations whose liquidation is reasonably expected
to require the use of existing resources properly
classifiable as current assets, or the creation of
other current liabilities. See paragraphs
210-10-45-5 through 45-12.
ASC 210-10
Obligations in the Operating Cycle
45-8 As a balance sheet
category, the classification of current liabilities
generally includes obligations for items that have
entered into the operating cycle, such as the
following:
-
Payables incurred in the acquisition of materials and supplies to be used in the production of goods or in providing services to be offered for sale.
-
Collections received in advance of the delivery of goods or performance of services. Examples of such current liabilities are obligations resulting from advance collections on ticket sales, which will normally be liquidated in the ordinary course of business by the delivery of services. On the contrary, obligations representing long-term deferments of the delivery of goods or services would not be shown as current liabilities. Examples of the latter are the issuance of a long-term warranty or the advance receipt by a lessor of rental for the final period of a 10 year lease as a condition to execution of the lease agreement.
-
Debts that arise from operations directly related to the operating cycle, such as accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes.
Other Liabilities
45-9 Other liabilities
whose regular and ordinary liquidation is expected
to occur within a relatively short period of time,
usually 12 months, are also generally included, such
as the following:
-
Short-term debts arising from the acquisition of capital assets
-
Serial maturities of long-term obligations
-
Amounts required to be expended within one year under sinking fund provisions
-
Agency obligations arising from the collection or acceptance of cash or other assets for the account of third persons. Loans accompanied by pledge of life insurance policies would be classified as current liabilities if, by their terms or by intent, they are to be repaid within 12 months. The pledging of life insurance policies does not affect the classification of the asset any more than does the pledging of receivables, inventories, real estate, or other assets as collateral for a short-term loan. However, when a loan on a life insurance policy is obtained from the insurance entity with the intent that it will not be paid but will be liquidated by deduction from the proceeds of the policy upon maturity or cancellation, the obligation shall be excluded from current liabilities.
Because the definition of working capital (see Section 13.3.3.2) refers to an entity’s operating cycle (see
Section 13.3.3.3), current assets
are limited to those assets that are “reasonably expected to be realized in
cash or sold or consumed during the normal operating cycle of the business.”
Similarly, current liabilities are limited to those obligations “that have
entered into the operating cycle,” such as payables for goods or services
that are used in the entity’s production process (see ASC 210-10-45-8), or
“whose regular and ordinary liquidation is expected to occur within a
relatively short period of time,” such as short-term debt and the current
portion of long-term obligations (see ASC 210-10-45-9).
In the application of this guidance to debt obligations, a debtor must comply
with the more specific requirements in ASC 470-10. As discussed in Section 13.3.2, debt that is scheduled to
mature or that the creditor could force the debtor to repay within one year
(or the operating cycle, if longer) after the balance sheet date is
generally classified as a current liability under ASC 470-10 even if it is
not expected to be settled within a relatively short period.
Current liabilities are limited to obligations whose settlement is
“reasonably expected to require the use of existing resources properly
classifiable as current assets, or the creation of other current
liabilities.” Accordingly, short-term obligations that must be settled in
the debtor’s nonredeemable equity shares (e.g., certain mandatorily
convertible shares) do not meet the definition of current liabilities.
13.3.3.5 Funds Set Aside for the Liquidation of Long-Term Debt
ASC 210-10
45-4 The concept of the
nature of current assets contemplates the exclusion
from that classification of such resources as the
following:
- Cash and claims to cash that are restricted as to withdrawal or use for other than current operations, are designated for expenditure in the acquisition or construction of noncurrent assets, or are segregated for the liquidation of long-term debts. Even though not actually set aside in special accounts, funds that are clearly to be used in the near future for the liquidation of long-term debts, payments to sinking funds, or for similar purposes shall also, under this concept, be excluded from current assets. However, if such funds are considered to offset maturing debt that has properly been set up as a current liability, they may be included within the current asset classification. . . .
45-12 The current
liability classification is not intended to include
debts to be liquidated by funds that have been
accumulated in accounts of a type not properly
classified as current assets, or long-term
obligations incurred to provide increased amounts of
working capital for long periods.
If a debtor segregates funds for the purpose of settling long-term debt, those funds should be classified as noncurrent assets in accordance with ASC 470-10-45-4(a). Footnote 1 of FASB Statement 6 (not codified) indicates that
“funds obtained on a long-term basis prior to the balance sheet date would
be excluded from current assets if the obligation to be liquidated is
excluded from current liabilities.” However, funds that are set aside to pay
a current liability would be classified as current assets.
13.3.4 Other Key Terms
13.3.4.1 Background
This section discusses key terms in ASC 470-10 that are used to determine the
appropriate classification of debt as current or noncurrent.
13.3.4.2 Short-Term Obligations
ASC Master Glossary
Short-Term Obligations
Short-term obligations are those that are scheduled
to mature within one year after the date of an
entity’s balance sheet or, for those entities that
use the operating cycle concept of working capital
described in paragraphs 210-10-45-3 and 210-10-45-7,
within an entity’s operating cycle that is longer
than one year.
A short-term obligation is one that is “scheduled to mature within one year”
(or the operating cycle, if longer) after the balance sheet date. It also
includes any portion of long-term debt that is contractually scheduled to
mature within one year (or the operating cycle, if longer) after the balance
sheet date, such as the current portion of an amortizing loan for which the
principal is paid down over the loan’s life (see Section 13.3.3.4). Under ASC 470-10-45-14, an obligation
that is repayable on demand or within one year (or the operating cycle, if
longer) after the balance sheet date would also be a short-term obligation
(see Section 13.4). Similarly, an
obligation that has become repayable on demand or within one year (or the
operating cycle, if longer) after the balance sheet date because of a
covenant violation would be a short-term obligation under that guidance (see
Section 13.5). The term
“short-term obligation” does not have the same meaning as “current
liability” because some short-term obligations qualify as noncurrent
liabilities in accordance with the guidance on refinancing arrangements and
covenant waivers.
13.3.4.3 Long-Term Obligations
ASC Master Glossary
Long-Term Obligations
Long-term obligations are those scheduled to mature
beyond one year (or the operating cycle, if
applicable) from the date of an entity’s balance
sheet.
Under ASC 470-10, a long-term obligation is one that is “scheduled to mature
beyond one year” (or the operating cycle, if longer) after the balance sheet
date. It excludes any portion of long-term debt that is contractually
scheduled to mature within one year (or the operating cycle, if longer)
after the balance sheet date, such as the current portion of an amortizing
loan for which the principal is paid down over the loan’s life (see
Section 13.3.3.4). Under ASC
470-10-45-2, an obligation that is repayable on demand or within one year
(or the operating cycle, if longer) after the balance sheet date would not
be considered a long-term obligation (see Section
13.4). Similarly, an obligation that has become repayable on
demand or within one year of the balance sheet date (or the operating cycle,
if longer) because of a covenant violation would not be considered a
long-term obligation (see Section
13.5). The term “long-term obligation” does not have the same
meaning as “noncurrent liability” because some long-term obligations must be
classified as current liabilities (see Section
13.6).
13.3.4.4 Callable Obligations
ASC Master Glossary
Callable Obligation
An obligation is callable at a given date if the
creditor has the right at that date to demand, or to
give notice of its intention to demand, repayment of
the obligation owed to it by the debtor.
ASC 470-10 describes an obligation as “callable” if “the creditor has the
right at that date to demand, or to give notice of its intention to demand,
repayment.” In practice, such debt is often described as debt with an
embedded put option or a demand or acceleration feature. Further, ASC 815
describes such a feature as a put option, not as a call option (see, for
example, ASC 815-15-55-26 through 55-53). Under ASC 815, an embedded call
option is an option held by the debtor, not the creditor (see, for example,
ASC 815-15-25-37 and 25-38, and ASC 815-15-25-43). To reduce the potential
for confusion related to the terminological inconsistency between ASC 470-10
and ASC 815-15, this Roadmap generally refers to debt that is described as
callable under ASC 470-10 as debt with a demand or put feature (see also
Section 13.4.2).
13.3.4.5 Violation of a Provision
ASC Master Glossary
Violation of a Provision
The failure to meet a condition in a debt agreement
or a breach of a provision in the agreement for
which compliance is objectively determinable,
whether or not a grace period is allowed or the
creditor is required to give notice of its intention
to demand repayment.
ASC 470-10
45-12 Drawing a
distinction between significant violations of
critical conditions and technical violations is not
practicable. A violation that a debtor considers to
be technical may be considered critical by the
creditor. Furthermore, a creditor may choose to use
a technical violation as a means to withdraw from
its lending relationship with the debtor. If the
violation is considered insignificant by the
creditor, then the debtor should be able to obtain a
waiver as discussed in the preceding paragraph.
ASC 470-10-45-11 provides two exceptions to the requirements related to
current classification (see Section 13.5.3). The
reference in that guidance to a debtor’s “violation of a provision” includes
any objectively determinable provision that accelerates the debt’s maturity
date or otherwise makes the debt payable on demand (or will make the debt
payable on demand unless cured within a specified grace period) to protect
the creditor from an adverse issuer-specific credit event. In practice, the
contractual terms of debt arrangements often describe such covenant
violations as events of default. Examples of debt covenants that, if
violated, may cause debt to be repayable on demand include those related to:
-
Working capital requirements.
-
Minimum current ratios.
-
Maximum debt-to-equity ratios.
-
The issuance of an unqualified audit opinion (e.g., within 90 days of year-end).
-
Bankruptcy prohibitions.
Whether a credit deterioration occurs in connection with a
specific provision that was violated is not relevant. For example, an event
of default may not actually be related to a deterioration in the debtor’s
credit. That is, to apply the exceptions in ASC 470-10-45-11, a debtor does
not have to establish that an event that results in the debt’s becoming
payable on demand is associated with a decline in the debtor’s credit
standing. However, the provision that was violated must be related to
credit. For example, the exceptions in ASC 470-10-45-11 would not apply to
provisions under which (1) debt becomes callable solely on the basis of
passage of time or (2) cash-settleable convertible debt becomes convertible
if a stock price target is triggered because both provisions are unrelated
to the borrower’s credit risk. In those situations, debt that is payable on
demand on the balance sheet date would be classified as a current liability
regardless of whether the redemption provision lapses before the financial
statements are issued or available to be issued unless the debtor meets the
exception for certain refinancing arrangements (see Section 13.7).
ASC 470-10-45-11 does not distinguish between significant
covenant violations and minor technical violations that can be easily
corrected. In accordance with ASC 470-10-45-12, distinguishing between those
two types of violations is not practicable.
Example 13-1
Debt Callable as a Result of a Change in
Control
On December 15, 20X2, Company ABC issued a 10-year
debt instrument that contains a change-in-control
provision. Under the terms of the debt instrument,
the lender has the ability to demand repayment of
the debt upon the occurrence of a change-in-control
event. However, the lender’s ability to demand
repayment of the debt expires 45 days from the date
of the change-in-control event. The debt agreement
does not define a change-in-control event as an
event of default.
On December 16, 20X4, Company XYZ acquires ABC,
triggering a change-in-control event. As a result,
on that date and as of ABC’s December 31, 20X4,
balance sheet date, the debt was repayable on
demand. However, as of February 1, 20X5 (46 days
later), the lender had not requested repayment of
the debt, and the demand feature therefore expired
unexercised. In addition, as of February 1, 20X5,
ABC’s financial statements as of and for the year
ended December 31, 20X4, were not yet issued (or
available to be issued, as discussed in ASC
855-10).
Company ABC has determined that the purpose of the
change-in-control feature was to protect the lender
from potential adverse credit-related events that
could result from a change of control. Therefore,
ABC concludes that ASC 470-10-45-11 applies to the
change-in-control provision.
As long as ABC is able to objectively and
unconditionally determine that the lender’s ability
to demand repayment of the debt has lapsed as of or
before the date the 20X4 financial statements are
issued (or available to be issued), ABC would
classify the debt as noncurrent on its balance
sheet.
Example 13-2
Debt Repayable on Lender’s Demand
On December 15, 20X2, Company SCP issued a 10-year
debt instrument that allows the lender to demand
repayment of the debt three years after the original
issuance date. However, the lender’s ability to
demand repayment of the debt expires 60 days from
the third anniversary of the debt instrument’s
issuance date.
On December 15, 20X5 (the third anniversary of the
debt’s issuance date), and as of SCP’s December 31,
20X5, balance sheet date, the debt instrument was
payable on demand. On February 14, 20X6, the
lender’s right to demand repayment of the debt
expired unexercised. In addition, as of February 14,
20X6, the financial statements of SCP as of and for
the year ended December 31, 20X5, were not yet
issued (or available to be issued, as discussed in
ASC 855-10).
Company SCP has determined that the purpose for
including the feature in the debt instrument is
unrelated to potential adverse credit-related
events, and it therefore concludes that applying ASC
470-10-45-11 to the feature is not appropriate.
Accordingly, because SCP’s debt is repayable on
demand as of the balance sheet date, it would be
classified as a current liability under ASC
470-10-45-10 even though the lender ultimately did
not exercise its right (see Section 13.4).
The guidance in ASC 470-10-45-11 related to objectively determinable covenant
violations differs from that for SACs. Whereas the likelihood that the
creditor will demand repayment is a factor in the evaluation of whether a
SAC that has not been invoked triggers current classification of a long-term
obligation, such likelihood usually does not affect the analysis of an
objectively determinable covenant that has not been violated (see
Section 13.5.2.2).
Nevertheless, the likelihood of a repayment demand is a factor in an entity’s
evaluation of whether it can apply one of the exceptions to current
classification for an objectively determinable covenant that has been
violated. That is, before it can apply the covenant waiver exception, a
debtor must assess whether it will comply with the covenant as of
measurement dates that are within the next 12 months (see Section
13.5.3.3). Likewise, before it can apply the grace period
exception, a debtor must assess whether it is probable that it will cure the
violation within the grace period (see Section
13.5.3.4).
13.3.4.6 Subjective Acceleration Clauses
ASC Master Glossary
Subjective Acceleration Clause
A subjective acceleration clause is a provision in a
debt agreement that states that the creditor may
accelerate the scheduled maturities of the
obligation under conditions that are not objectively
determinable (for example, if the debtor fails to
maintain satisfactory operations or if a material
adverse change occurs).
The contractual terms of debt obligations often include some debt covenants
that are objectively determinable (e.g., nonpayment of a debt obligation)
and others that require a subjective evaluation (e.g., failure to maintain
satisfactory operations or a material adverse change). A SAC is a
contractual term in a debt agreement that permits the creditor to accelerate
the repayment of the debt under conditions that are not objectively
determinable. A subjective cancellation clause (which is also considered a
SAC and referred to as such herein) is a contractual term in a financing
agreement that permits the potential creditor or investor to terminate the
financing agreement on terms that are not objectively determinable.
A subjective condition is one that may be evaluated differently by the
parties to the agreement. Examples of subjective conditions include the following:
-
At all times, the debtor’s financial condition and results of operations must be satisfactory to the creditor.
-
There will be an event of default if there is a material impairment of the collateral on a debt obligation (and “material” is not objectively defined).
-
The creditor must have reasonably determined that any event that materially adversely affects a debt instrument’s collectibility has not occurred (i.e., a material adverse change clause).
-
A deterioration has taken place in the quality of the servicing of receivables used as collateral on a debt instrument that the creditor, in its sole discretion, determines to be material.
An objectively determinable condition is one that would not
be evaluated differently by the parties to the agreement. Examples include
but are not limited to specified financial ratios, a change-of-control
provision based on a specified percentage change in capital ownership of the
debtor, and the occurrence of particular events (bankruptcy, restatements,
going-concern audit opinions, etc.). If a debt contract defines an adverse
change in an objectively determinable manner (e.g., a maximum decrease in
reported earnings), it would be considered an objectively determinable
condition.
Some debt and financing agreements (e.g., revolving-debt agreements) contain
a material adverse change clause that applies only upon the initial
execution of the agreement. For example, a creditor might require a debtor
to represent that no material adverse change has occurred in the period
between the most recent financial statements and the initial execution of
the agreement as a precondition for entering into the agreement. However,
the agreement might not give the creditor a right to demand repayment or
cancel the agreement if the debtor experiences a material adverse change
after the agreement’s initial execution. In this case, the agreement does
not contain a subjective acceleration or cancellation provision since it
does not permit the creditor to demand repayment or cancel the agreement
unless it can demonstrate that the debtor’s initial representation was
false. Conversely, an agreement is considered to contain a subjective
acceleration or cancellation clause if the creditor is able to demand
repayment or reject a funding request if it determines that a material
adverse change has occurred after the initial execution of the agreement.
For example, a financing agreement would be considered to contain a
subjective cancellation provision if it requires the debtor to represent
that no material adverse change has occurred each time it borrows under the
agreement.
An acceleration or cancellation clause in a debt or financing agreement may
include both objectively determinable and subjective conditions that must be
met before the creditor is permitted to demand repayment or cancel the
agreement. For example, a financing agreement might require the debtor to
represent that it has not, without the creditor’s prior written consent,
amended, restated, or otherwise modified any contracts that serve as
collateral under the agreement in a manner that would reasonably be expected
to have a material adverse effect. Such a clause should be evaluated as an
objectively determinable condition under ASC 470-10 since the creditor
cannot demand repayment or cancel the agreement unless the objectively
determinable condition is met (i.e., the debtor has amended, restated, or
otherwise modified such contracts without the creditor’s prior written
consent).
13.3.4.7 “Traditional” Lockbox Arrangement
ASC Master Glossary
Lock-Box Arrangement
An arrangement with a lender whereby the borrower’s
customers are required to remit payments directly to
the lender and amounts received are applied to
reduce the debt outstanding. A lock-box arrangement
refers to any situation in which the borrower does
not have the ability to avoid using working capital
to repay the amounts outstanding. That is, the
contractual provisions of a loan arrangement require
that, in the ordinary course of business and without
another event occurring, the cash receipts of a
debtor are used to repay the existing
obligation.
ASC 470-10
45-5A The term lock-box
arrangement as used in this guidance refers to
any situation in which the borrower does not have
the ability to avoid using working capital to repay
the amounts outstanding. That is, if the contractual
provisions of a loan arrangement require that, in
the ordinary course of business and without another
event occurring, the cash receipts of a debtor be
used to repay the existing obligation, the credit
agreement shall be considered a short-term
obligation.
The terms of some debt obligations contain a “lockbox” arrangement under
which the debtor’s customers submit payments for goods or services directly
to a special collection account maintained by the creditor. In a
“traditional” lockbox arrangement, payments to the lockbox are automatically
applied to reduce the outstanding debt. Therefore, a debt arrangement that
incorporates a traditional lockbox arrangement is considered a short-term
obligation under ASC 470-10 even if the final maturity of the debt is not
within one year (or the operating cycle, if longer) after the balance sheet
date (see Section 13.8.3.1). In a revolving-debt
arrangement, the contractual terms usually permit the debtor to request
additional borrowings so that the outstanding balance due under the
arrangement remains unchanged (i.e., the debtor draws an amount equal to the
daily cash receipts). To determine the appropriate classification of such
debt, the debtor must evaluate the right to request additional borrowings
under the guidance on refinancing arrangements (see Sections
13.7.4 and 13.8.3.3).
Connecting the Dots
A contractual provision might meet the definition of a lockbox
arrangement even if the terms of the debt do not explicitly refer to
it as a lockbox. For example, a contract might refer to a lockbox as
a blocked collection account or a deposit account control
agreement.
13.3.4.8 Springing Lockbox Arrangement
ASC Master Glossary
Springing Lock-Box Arrangement
Some borrowings outstanding under a revolving credit
agreement include both a subjective acceleration
clause and a requirement to maintain a springing
lock-box arrangement, whereby remittances from the
borrower’s customers are forwarded to the debtor’s
general bank account and do not reduce the debt
outstanding until and unless the lender exercises
the subjective acceleration clause.
In a springing lockbox arrangement, the debtor has full access to amounts
collected from its customers. The creditor is not entitled to the payments,
although such amounts may be subject to a security interest in the
creditor’s favor. If a triggering event occurs (e.g., the debtor does not
pay its debts on time or the creditor exercises a SAC), the arrangement
becomes a traditional lockbox under which the payments received from
customers are automatically applied to reduce the debtor’s outstanding debt.
A springing lockbox arrangement does not prevent a debt instrument from
being treated as a long-term obligation (see Section
13.8.3.2).
13.3.4.9 Financial Statements Are Issued (or Available to Be Issued)
ASC Master Glossary
Financial Statements Are Available to Be
Issued
Financial statements are considered available to be
issued when they are complete in a form and format
that complies with GAAP and all approvals necessary
for issuance have been obtained, for example, from
management, the board of directors, and/or
significant shareholders. The process involved in
creating and distributing the financial statements
will vary depending on an entity’s management and
corporate governance structure as well as statutory
and regulatory requirements.
Financial Statements Are Issued
Financial statements are considered issued when they
are widely distributed to shareholders and other
financial statement users for general use and
reliance in a form and format that complies with
GAAP. (U.S. Securities and Exchange Commission [SEC]
registrants also are required to consider the
guidance in paragraph 855-10-S99-2.)
ASC 855-10 — SEC Materials — SEC
Staff Guidance
Announcements
Made by SEC Staff at Emerging Issues Task Force
(EITF) Meetings
SEC Staff Announcement: Issuance of
Financial Statements
S99-2 The following is the
text of SEC Staff Announcement: Issuance of
Financial Statements.
In considering
when financial statements have been issued, the SEC
staff observed that Rules 10b-5 and 12b-20 under the
Securities Exchange Act of 1934 and General
Instruction C(3) to Form 10-K specify that financial
statements must not be misleading as of the date
they are filed with the Commission. For example,
assume that a registrant widely distributes its
financial statements but, before filing them with
the Commission, the registrant or its auditor
becomes aware of an event or transaction that
existed at the date of the financial statements that
causes those financial statements to be materially
misleading. If a registrant does not amend those
financial statements so that they are free of
material misstatement or omissions when they are
filed with the Commission, the registrant will be
knowingly filing a false and misleading document. In
addition, registrants are reminded of their
responsibility to, at a minimum, disclose subsequent
events,FN1 while independent auditors
are reminded of their responsibility to assess
subsequent eventsFN2 and evaluate the
impact of the events or transactions on their audit
report.FN3
A registrant
and its independent auditor have responsibilities
with regard to post-balance-sheet-date subsequent
events, as well as the application of authoritative
literature applicable to such events. See Topic 855
and AU 560, Subsequent Events, paragraph 3.
Generally, the
staff believes that financial statements are
“issued” as of the date they are distributed for
general use and reliance in a form and format that
complies with generally accepted accounting
principles (GAAP) and, in the case of annual
financial statements, that contain an audit report
that indicates that the auditors have complied with
generally accepted auditing standards (GAAS) in
completing their audit. Issuance of financial
statements then would generally be the earlier of
when the annual or quarterly financial statements
are widely distributed to all shareholders and other
financial statement usersFN4 or filed
with the Commission. Furthermore, the issuance of an
earnings release does not constitute issuance of
financial statements because the earnings release
would not be in a form and format that complies with
GAAP and GAAS.
_____________________
FN1 See AU Section 560,
Subsequent Events, paragraphs 5 and 8 and Section
855-10-50.
FN2 See AU 560 and AU
Section 561, Subsequent Discovery of Facts Existing
at Date of the Auditor’s Report.
FN3 See AU Section 530,
Dating of the Independent Auditor’s Report, and AU
560, paragraph 9.
FN4 Posting financial
statements to a registrant’s web site would be
considered wide distribution to all shareholders and
other financial statement users if the registrant
uses its web site to disclose information to the
public in a manner consistent with the requirements
of Regulation FD. See the Commission’s interpretive
guidance in Exchange Act Release No. 58288 (Aug. 7,
2008).
Some of the guidance in ASC 470-10 refers to the date on which the financial
statements are “issued” or “available to be issued” (e.g., the guidance on
refinancing arrangements in ASC 470-10-45-14 discussed in Section 13.7), as those terms are defined in
ASC 855-10. Financial statements are considered available to be issued when
they have been completed in a form and format that complies with GAAP and
all necessary approvals for issuance have been obtained. Generally,
financial statements are considered issued when they are widely distributed
for general use in a form and format that complies with GAAP. For an SEC
registrant, financial statements are generally considered issued on the
earlier of the date on which they are (1) widely distributed to all
shareholders and other financial statement users or (2) filed with the
SEC.
Footnotes
1
Unless an item must be classified as noncurrent
because the refinancing exception discussed in
Section 13.7
applies.