13.4 Debt With Early Settlement Feature
13.4.1 Background
This section discusses the classification of debt with early settlement features
(such as put and call options), including debt with provisions that (1) permit
the creditor to demand early repayment (see the next section), (2) contingently
accelerate the maturity date or contingently permit the debtor to demand early
repayment (see Section
13.4.3), or (3) permit the debtor to prepay the amount
outstanding (see Section
13.4.4). For a discussion of credit-related early settlement
features with contingencies, see Section 13.5.
13.4.2 Provisions That Permit the Creditor to Demand Early Repayment
ASC 470-10
45-9 Loan agreements may
specify the debtor’s repayment terms but also enable the
creditor, at his discretion, to demand payment at any
time. Those loan arrangements may have wording such as
either of the following:
-
“The term note shall mature in monthly installments as set forth therein or on demand, whichever is earlier.”
-
“Principal and interest shall be due on demand, or if no demand is made, in quarterly installments beginning on. . . .”
45-10 The current liability
classification shall include obligations that, by their
terms, are due on demand or will be due on demand within
one year (or operating cycle, if longer) from the
balance sheet date, even though liquidation may not be
expected within that period. The demand provision is not
a subjective acceleration clause as discussed in
paragraph 470-10-45-2.
Except for certain obligations that are expected to be
refinanced on a long-term basis (see Section 13.7), debt that is due on demand
or that will become payable on demand within one year after the balance sheet
date (or the operating cycle, if longer) should be classified as current even if
it is not expected to be repaid within that period. For example, an obligation
that is scheduled to mature more than one year after the balance sheet date may
contain an embedded put option that permits the investor to put the debt to the
issuer at any time or on one or more dates within the next 12 months in exchange
for the repayment of the principal and interest amounts owed. Such debt would be
classified as current under ASC 470-10-45-10 unless it meets the conditions for
debt that is expected to be refinanced on a long-term basis (see Section 13.7). An entity
should generally treat debt that is repayable upon the occurrence or
nonoccurrence of an event that is within the creditor’s control as debt that is
due on demand.
13.4.3 Provisions That Require or Permit the Creditor to Demand Early Payment Upon a Non-Credit-Related Contingent Event
Some debt obligations become immediately due and payable, or
payable within one year (or the operating cycle, if longer) after the balance
sheet date, upon the occurrence or nonoccurrence of a specified event that is
beyond the control of the creditor. For example, debt may contain a put option
or redemption feature that is activated upon the occurrence or nonoccurrence of
a specified event (e.g., a fundamental change, a change of control, a ratings
downgrade, delisting, or the loss of a business license or permit) or on the
basis of quantitative criteria (e.g., related to the debtor’s stock price,
debt-to-equity ratio, working capital, or other financial ratios).
If the contingency that causes the debt to become repayable is met as of the
balance sheet date and is not credit-related, such debt obligations are analyzed
as debt that is due on demand or within one year (or the operating cycle, if
longer) after the balance sheet date (see the previous section). If, as a result
of a discrete event that occurred after the balance sheet date, the contingency
is not credit-related and is not met as of the balance sheet date but is met
before the financial statements are issued (or available to be issued), it is
acceptable to treat the debt as a long-term obligation. For example, noncurrent
classification would be appropriate if the triggering event was within the
debtor’s control (e.g., the entity’s decision to sell certain assets after the
balance sheet date). In that scenario, the debtor should disclose an
acceleration of the debt’s due date as a nonrecognized subsequent event under
ASC 855-10.
If the contingency is credit-related, the debtor should apply
the guidance in ASC 470-10-45-11 on covenant violations that cause the debt to
become repayable (see Section
13.5) regardless of whether the covenant violation occurred (1)
as of the balance sheet date or (2) after the balance sheet date but before the
financial statements were issued (or available to be issued).
13.4.4 Provisions That Permit the Debtor to Pay Early
Some debt obligations contain call or prepayment options that permit the debtor
to prepay the obligation before its maturity date (e.g., at any time, on
specified dates, or upon the occurrence or nonoccurrence of a specified event).
Generally, such options do not affect the classification of debt as current or
noncurrent before it is exercised since the debtor has discretion over whether
to exercise the options and could not be contractually forced to repay the debt
early because of them. However, if the debtor irrevocably exercises a call or
prepayment option before or as of the balance sheet date, the related debt
should be classified as current if the debt’s repayment will occur within one
year (or the operating cycle, if longer) after the balance sheet date. If the
debtor exercises a call or prepayment option after the balance sheet date, it
should disclose that fact as a nonrecognized subsequent event.