Chapter 13 — Balance Sheet Classification

13.8 Revolving Debt

13.8.1 Background

ASC Master Glossary

Line-of-Credit Arrangement

A line-of-credit or revolving-debt arrangement is an agreement that provides the borrower with the option to make multiple borrowings up to a specified maximum amount, to repay portions of previous borrowings, and to then reborrow under the same contract. Line-of-credit and revolving-debt arrangements may include both amounts drawn by the debtor (a debt instrument) and a commitment by the creditor to make additional amounts available to the debtor under predefined terms (a loan commitment).

A revolving-debt arrangement is an agreement under which borrowed amounts that are repaid can be reborrowed. That is, the potential debtor can make multiple borrowings up to a specified maximum amount, repay borrowed amounts, and reborrow. Some, but not all, revolving-debt arrangements contain a lockbox feature with which remittances made by the debtor’s customers are used to repay the debtor’s outstanding debt obligation (see Sections 13.3.4.7 and 13.3.4.8). The next section discusses the classification of a revolving-debt arrangement without a lockbox feature, and Section 13.8.3 addresses revolving-debt arrangements with a lockbox feature.

13.8.2 Revolving Debt Without Lockbox Feature

ASC 470-10

45-4 Borrowings outstanding under certain revolving credit agreements are considered long-term debt because the borrowings are due at the end of a specified period (for example, 3 years) rather than when short-term notes roll over (for example, every 90 days). Borrowings may be collateralized, but the only note is the overall note signed at the agreement’s inception. . . .

Nonauthoritative AICPA Guidance

Technical Q&As Section 3200, “Long-Term Debt”

.12 Balance Sheet Classification of Revolving Line of Credit

Inquiry — A company has a revolving line of credit with a bank. The company is only required to make monthly interest payments. No principal payments are required. In the event the credit line is terminated, the principal is due 12 months after the date of termination.

Should the principal amount be classified as current or long-term in a classified balance sheet?

Reply — Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 210-10-45-9 states that liabilities whose regular and 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. If the line of credit has not been terminated at the balance sheet date, the principal amount should be classified as long-term, unless the company intends to repay the outstanding debt within 12 months.

[Revised, June 2009, to reflect conforming changes necessary due to the issuance of FASB ASC.]

Borrowings under a revolving-debt agreement without a lockbox feature are classified as current or noncurrent in the same manner as nonrevolving-debt obligations. Generally, such borrowings are classified as current liabilities if (1) they are scheduled to mature within one year (or the operating cycle, if longer), (2) the creditor could demand earlier repayment (see Sections 13.4 and 13.5), or (3) it is probable that a SAC will be exercised (see Section 13.6). However, a revolving-debt agreement would qualify as a noncurrent liability if the debtor can demonstrate its intent and ability to refinance the obligation on a long-term basis (see Section 13.7) or, in the case of a long-term revolving-debt agreement for which a covenant violation has occurred, either of the exceptions for covenant waivers and grace periods applies (see Section 13.5.3). ASC 470-10-55-25 and 55-26 illustrate a scenario in which a long-term revolving-credit agreement is used to demonstrate an intent and ability to refinance a short-term obligation on a long-term basis (see Section 13.7.6.4).

13.8.3 Revolving Debt With Lockbox Feature

Some debt agreements require the debtor to establish a lockbox with the creditor. ASC 470-10-45-5 and 45-6 draw a distinction between traditional and springing lockbox features.

13.8.3.1 Traditional Lockbox Arrangements

As discussed in Section 13.8.3.3, a revolving-debt obligation that contains a traditional lockbox arrangement is considered a short-term obligation. Therefore, it can be classified as a noncurrent liability only if the debtor has the intent and ability to refinance the obligation on a long-term basis. This depends on the circumstances, including whether the debt agreement has a SAC and whether repayments made through the lockbox arrangement can be considered refinanced on a long-term basis in accordance with ASC 470-10-45-13 through 45-21 (see Section 13.7.4).

13.8.3.2 Springing Lockbox Arrangements

Because customer remittances paid to a lockbox in a revolving-credit arrangement that incorporates a springing lockbox feature (see Section 13.3.4.8) are not used to pay down the debtor’s obligation unless the springing lockbox is triggered, a revolving-credit arrangement that is not repayable within one year (or the operating cycle, if longer) generally is considered a long-term obligation under ASC 470-10 even if it contains a springing lockbox feature (see ASC 470-10-45-6).

Springing lockbox arrangements usually include a SAC (see Section 13.3.4.6) that, if exercised, allows the creditor to cause the cash in the lockbox at that moment, as well as all subsequent customer lockbox remittances, to be applied against the debtor’s outstanding debt balance. That is, once the creditor exercises the SAC, in addition to acceleration of the debt, the springing lockbox arrangement will function like a traditional lockbox agreement (see Section 13.3.4.7). Therefore, the debtor must consider the guidance on SACs in long-term obligations (see Section 13.6).

Borrowings under revolving-debt arrangements with a springing lockbox feature are classified as noncurrent liabilities if they are scheduled to mature one year (or the operating cycle, if applicable) after the balance sheet date unless (1) the creditor could demand earlier repayment (see Sections 13.4 and 13.5) or (2) it is probable that a SAC will be exercised (see Section 13.6). If a covenant violation has occurred that makes the debt repayable within one year (or the operating cycle, if longer) after the balance sheet date, the debtor should also consider whether the debt can be classified as noncurrent under the guidance on waiver exceptions and grace periods (see Section 13.5.3).

Borrowings under revolving-debt arrangements with a springing lockbox feature are classified as current liabilities if (1) they are scheduled to mature within one year (or the operating cycle, if longer), (2) the creditor could demand earlier repayment (see Sections 13.4 and 13.5), or (3) it is probable that a SAC will be exercised (see Section 13.6). However, such borrowings qualify as noncurrent liabilities if the debtor can demonstrate its intent and ability to refinance the obligation on a long-term basis (see Section 13.7) or, in the case of a covenant violation, either of the exceptions for covenant waivers and grace periods applies (see Section 13.5.3).

13.8.3.3 Revolving Debt With Lockbox Feature and SAC

ASC 470-10

45-3 This guidance does not apply to lock-box arrangements that are maintained at the discretion of the borrower.

45-4 . . . Some agreements require that the borrower maintain a lock-box arrangement. If borrowings outstanding under the agreement are considered long-term obligations, the effect of a subjective acceleration clause on balance sheet classification is determined based on the criteria in paragraph 470-10-45-2. If borrowings outstanding are considered short-term obligations, and the borrower intends to refinance the obligation on a long-term basis, paragraph 470-10-45-13 applies and the debt shall be classified as a current liability because of the existence of the subjective acceleration clause.

45-5 Borrowings outstanding under a revolving credit agreement that includes both a subjective acceleration clause and a requirement to maintain a lock-box arrangement shall be considered short-term obligations. Accordingly, because of the subjective acceleration clause, the debt shall be classified as a current liability unless the conditions in paragraph 470-10-45-14 are met based on an agreement, other than the revolving credit agreement, to refinance the obligation after the balance sheet date on a long-term basis.

45-6 Borrowings outstanding under a revolving credit agreement that includes both a subjective acceleration clause and a requirement to maintain a springing lock-box arrangement shall be considered long-term obligations since the remittances do not automatically reduce the debt outstanding without another event occurring. The effect of the agreement’s subjective acceleration clause shall be determined based on the provisions of paragraph 470-10-45-2.

45-21 Replacement of a short-term obligation with another short-term obligation after the date of the balance sheet but before the balance sheet is issued or is available to be issued (as discussed in Section 855-10-25) is not, by itself, sufficient to demonstrate an entity’s ability to refinance the short-term obligation on a long-term basis. If, for example, the replacement is made under the terms of a revolving credit agreement that provides for renewal or extension of the short-term obligation for an uninterrupted period extending beyond one year (or operating cycle) from the date of the balance sheet, the revolving credit agreement must meet the conditions in paragraph 470-10-45-14(b) to justify excluding the short-term obligation from current liabilities. . . .

A revolving-credit arrangement with a traditional lockbox feature (see Section 13.3.4.7) is considered a short-term obligation. Under ASC 470-10-45-14, short-term obligations are classified as noncurrent liabilities if the borrower has the intent and ability to refinance such obligations on a long-term basis (see Section 13.7). However, the existence of a SAC within a revolving-debt arrangement disqualifies the entity from using the revolving-debt arrangement as the means to refinance the obligation on a long-term basis even if the revolving-debt arrangement does not expire within one year (or the operating cycle, if longer) after the balance sheet date. Accordingly, a revolving-credit agreement that incorporates both a traditional lockbox feature and a SAC must be classified as a current liability unless the conditions in ASC 470-10-45-14 are met on the basis of an agreement other than the revolving-debt arrangement (see Section 13.7). (As discussed in Section 13.7.4, a long-term revolving-debt agreement with a traditional lockbox feature that does not have a SAC may meet the conditions in ASC 470-10-45-14(b).)

If a long-term revolving-debt arrangement incorporates a springing lockbox feature (see Section 13.3.4.8) and a SAC (see Section 13.3.4.6), the classification of the related borrowings depends on the likelihood that the SAC will be exercised. If exercise of the SAC is probable, the revolving-debt arrangement must be classified as a current liability unless the conditions in ASC 470-10-45-14 are met on the basis of an agreement other than the revolving-debt arrangement (see Section 13.7). The impact of lockbox features and SACs on the classification of a revolving-credit agreement is summarized in the following decision tree:

Remittances from the borrower’s customers are forwarded to the debtor’s general bank account and not used to reduce the outstanding debt unless or until the lender exercises the SAC (ASC 470-10-45-6).

Classify the borrowing as a current liability unless the ability to refinance the liability for a long-term period comes from an agreement other than the revolving-credit agreement.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.