Chapter 13 — Balance Sheet Classification | DART – Deloitte Accounting Research Tool

Chapter 13 — Balance Sheet Classification

13.1 Background

Many entities prepare a classified balance sheet in which assets and liabilities are grouped on the basis of whether they are current or noncurrent. ASC 470-10 contains guidance related to such classification, whereas ASC 210-10 contains more broadly applicable requirements related to an entity’s classification of assets and liabilities as either current or noncurrent.

13.2 Scope

13.2.1 Entities

ASC 210-10

05-4 . . . 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.

15-3 The guidance in this Subtopic that relates to separate classification of current assets and current liabilities (that is, a classified balance sheet) applies only when an entity is preparing a classified balance sheet for financial accounting and reporting purposes.

The guidance in ASC 470-10 on the balance sheet classification of debt applies to debtors that present a classified balance sheet, which (as indicated in ASC 210-10-05-4) includes most debtors. Further, Regulation S-X, Rule 5-02 (reproduced in ASC 210-10-S99-1), requires SEC registrants within the scope of that rule (i.e., commercial and industrial companies) to present a classified balance sheet when filing financial statements with the SEC. However, that requirement does not apply to registered investment companies, employee stock purchase, savings and similar plans, insurance companies, bank holding companies and banks, brokers and dealers, and real estate entities.

13.2.2 Instruments

ASC 210-10 contains broadly applicable guidance on the classification of assets and liabilities as current or noncurrent. Further, ASC 470-10 requires entities to classify the following types of obligations as current or noncurrent on a classified balance sheet:

Debt repayable on demand (see Section 13.4).
Long-term debt that includes covenants that, if violated, make the debt repayable (see Section 13.5).
Long-term obligations that contain a subjective acceleration clause (SAC) (see Section 13.6).
Short-term obligations expected to be refinanced on a long-term basis (see Section 13.7)
Revolving-credit arrangements, including those with lockbox arrangements (see Section 13.8).
Increasing-rate debt (see Section 13.9).

For discussion of the application of the classification guidance to convertible debt, see Section 13.10.

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
Long-term debt that does not contain a SAC and for which no covenant violation has occurred (see Section 13.3.4.3) Long-term debt that contains a SAC and is unlikely to be triggered (see Section 13.6) Long-term debt that became payable on demand or within one year (or the operating cycle, if longer) after the balance sheet date because of a covenant violation if the creditor granted a waiver of the covenant violation that meets certain criteria (see Sections 13.5.3.2 and 13.5.3.3) Long-term debt that will become payable on demand or within one year (or the operating cycle, if longer) because of a covenant violation if the debt contains a grace period and it is probable that the violation will be cured within that period (see Section 13.5.3.4) Short-term debt that is expected to be refinanced on a long-term basis if certain qualifying criteria are met (see Section 13.7) Long-term revolving debt with a springing lockbox arrangement and no SAC (see Section 13.8.3.2) Long-term revolving debt with a springing lockbox arrangement and a SAC that is not likely to be triggered (see Section 13.8.3.2)	Debt that is 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 scheduled to mature within one year (or the operating cycle, if longer) after the balance sheet date (see Section 13.3.3.4) Debt that is due on demand or that will become payable on demand within one year (or the operating cycle, if longer) after the balance sheet date (see Section 13.4) Long-term debt that has become payable on demand or within one year (or the operating cycle, if longer) after the balance sheet date because of a covenant violation (if no exception applies; see Section 13.5.1) Long-term debt that will become payable on demand or within one year (or the operating cycle, if longer) because of a covenant violation if the debt contains a grace period and it is not probable that the violation will be cured within that period (see Section 13.5.3.4) Long-term debt that contains a SAC that is likely to be triggered (see Section 13.6) Revolving debt with a traditional lockbox arrangement and a SAC (see Section 13.8.3.1) Revolving debt with a springing lockbox arrangement and a SAC that is likely to be triggered (see Section 13.8.3.2)

Noncurrent

Current1

Long-term debt that does not contain a SAC and for which no covenant violation has occurred (see Section 13.3.4.3)
Long-term debt that contains a SAC and is unlikely to be triggered (see Section 13.6)
Long-term debt that became payable on demand or within one year (or the operating cycle, if longer) after the balance sheet date because of a covenant violation if the creditor granted a waiver of the covenant violation that meets certain criteria (see Sections 13.5.3.2 and 13.5.3.3)
Long-term debt that will become payable on demand or within one year (or the operating cycle, if longer) because of a covenant violation if the debt contains a grace period and it is probable that the violation will be cured within that period (see Section 13.5.3.4)
Short-term debt that is expected to be refinanced on a long-term basis if certain qualifying criteria are met (see Section 13.7)
Long-term revolving debt with a springing lockbox arrangement and no SAC (see Section 13.8.3.2)
Long-term revolving debt with a springing lockbox arrangement and a SAC that is not likely to be triggered (see Section 13.8.3.2)

Debt that is 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 scheduled to mature within one year (or the operating cycle, if longer) after the balance sheet date (see Section 13.3.3.4)
Debt that is due on demand or that will become payable on demand within one year (or the operating cycle, if longer) after the balance sheet date (see Section 13.4)
Long-term debt that has become payable on demand or within one year (or the operating cycle, if longer) after the balance sheet date because of a covenant violation (if no exception applies; see Section 13.5.1)
Long-term debt that will become payable on demand or within one year (or the operating cycle, if longer) because of a covenant violation if the debt contains a grace period and it is not probable that the violation will be cured within that period (see Section 13.5.3.4)
Long-term debt that contains a SAC that is likely to be triggered (see Section 13.6)
Revolving debt with a traditional lockbox arrangement and a SAC (see Section 13.8.3.1)
Revolving debt with a springing lockbox arrangement and a SAC that is likely to be triggered (see Section 13.8.3.2)

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.

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.

13.5 Credit-Related Covenant Violations That Cause Debt to Become Repayable

13.5.1 General

ASC 470-10

45-11 Current liabilities shall include long-term obligations that are or will be callable by the creditor either because the debtor’s violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable. . . .

If an entity violates an objectively determinable covenant on a long-term debt arrangement, the contractual terms might accelerate the debt’s due date or give the creditor the right to accelerate the debt’s due date. Long-term debt that has become payable on demand or within one year (or the operating cycle, if longer) after the balance sheet date because of a covenant violation that has occurred as of the balance sheet date or, in the case of credit-related covenants, after the balance sheet date but before the financial statements are issued (or available to be issued) (see Section 13.5.2.2) generally must be classified as current. This is the case even if the creditor has not demanded repayment and there is no indication that it will do so. However, a credit-related covenant violation in a long-term obligation does not trigger current classification if one of the following exceptions in ASC 470-10 applies:

Covenant waiver — The debtor obtains a covenant waiver that meets the requirements in ASC 470-10-45-1 and ASC 470-10-45-11(a) before the financial statements are issued or are available to be issued (see Sections 13.5.3.2 and 13.5.3.3).
Grace period — The debt contains a grace period and it is probable that the violation will be cured within such period (see ASC 470-10-45-11(b) and Section 13.5.3.4).
Refinancing arrangement — The debtor has the intent and ability to refinance the obligation on a long-term basis (see Section 13.7).

To apply the exceptions in ASC 470-10-45-11 that address covenant waivers and grace periods, an entity must ensure that the violated provision is related to credit (see Section 13.3.4.5). The exception for refinancing arrangements applies irrespective of whether the event is associated with credit. For a discussion of the analysis of covenant violations that are not credit-related, see Section 13.4.3.

13.5.2 Scope

13.5.2.1 Background

This section discusses credit-related covenant violations that occur after the balance sheet date but before the financial statements are issued or available to be issued (see the next section), debt modifications that are made to avoid a covenant violation (see Section 13.5.2.3), and credit-related covenant violations that are cured before the financial statements are issued or available to be issued (see Section 13.5.2.4).

13.5.2.2 Covenant Violation After the Balance Sheet Date

The classification implications of credit-related debt covenant violations that occur after the balance sheet date but before the financial statements are issued or available to be issued are generally consistent with the requirements triggered by a violation as of the balance sheet date (see Section 13.5.1). A debt covenant violation that occurs after the balance sheet date but before the financial statements are issued or available to be issued would generally be an example of other “facts and circumstances,” as discussed in ASC 470-10-45-1 (see Section 13.5.3.3), under which current classification of the debt would be required unless one of the exceptions described in Section 13.5.3 applies. We have confirmed this position through informal discussions with the SEC staff.

Such scenarios primarily involve credit-related debt covenants, including those associated with quantitative financial metrics or ratios and those regarding going-concern matters. In some circumstances, the violation may be unrelated to credit or may be the result of a discrete event after year-end (e.g., a debt covenant that is triggered upon a sale of specified assets that occurred after year-end). We encourage entities to consult their advisers in these situations to determine the appropriate classification guidelines to apply.

Sometimes, a debtor might expect that it will violate a credit-related debt covenant only after the financial statements have been issued or are available to be issued. Unless the debtor is virtually certain that it will violate the covenant after such time, it should not classify the debt as a current liability on the basis of such anticipated covenant violation.

Example 13-3

Debt That Becomes Due on Demand as a Result of a Going-Concern Audit Opinion

Company ABC has a long-term loan that requires it to (1) comply with quantitative ratios, including liquidity ratios (e.g., current ratio, quick ratio) and financial leverage ratios (e.g., debt ratio, debt-to-equity ratio), and (2) obtain an audit opinion on its annual financial statements that is not subject to any qualifications or exceptions with respect to the scope of the audit or that contains a going-concern emphasis. If ABC does not comply with each of these covenant requirements, the lender has the ability to require repayment of the debt immediately. As of December 31, 20X1, ABC is in compliance with all of the quantitative ratios; however, the audit opinion issued for December 31, 20X1, will contain a going-concern emphasis. Company ABC does not obtain a waiver from the lender.

Because of the going-concern emphasis in the audit opinion, ABC should classify the loan as a current obligation in its December 31, 20X1, balance sheet. Although the audit opinion is issued after the balance sheet date, under ASC 470-10-45-1, such a known violation as of the date financial statements are issued or available to be issued would be considered an example of other “facts and circumstances” under which current classification of the debt would be required as of December 31, 20X1.

Example 13-4

Debt That Becomes Due on Demand Because of Failure to Satisfy Quantitative Covenants

Company ABC has a long-term loan that requires it to comply with quantitative ratios, including liquidity ratios (e.g., current ratio, quick ratio) and financial leverage ratios (e.g., debt ratio, debt-to-equity ratio). If ABC does not comply with each of these covenant requirements, the lender has the ability to require repayment of the debt immediately. Assume that ABC violated one of the quantitative ratio covenants as of a measurement date after the balance sheet date but before issuance of the financial statements. Assume also that ABC has obtained a waiver related to the specific violation before issuance of the financial statements for the year ended December 31, 20X1, and that ABC believes that it is probable that it will fail to meet the same covenant requirement again as of measurement dates occurring within the 12 months after December 31, 20X1.

In this situation, the covenant violation after the balance sheet date but before financial statement issuance should be viewed in the same way as a violation as of the balance sheet date (i.e., the violation constitutes evidence of “other facts and circumstances” as discussed in ASC 470-10-45-1). Since it is probable that ABC will not be able to comply with the same covenant as of compliance dates within 12 months of the balance sheet date, the debt should be classified as current as of December 31, 20X1.

13.5.2.3 Covenant Violation Would Have Occurred in the Absence of Debt Modification

ASC 470-10-55-4(d) and ASC 470-10-55-6 (see Section 13.5.3.3) indicate that a modification of the contractual terms of a debt obligation before the balance sheet date should be analyzed as a covenant violation as of the balance sheet date if all of the following conditions are met:

The modification removes or adjusts the covenant so that the debtor will comply as of the balance sheet date.
In the absence of the modification, the debtor would have violated the covenant as of the balance sheet date.
The same or a more restrictive covenant must be met as of the compliance dates after the balance sheet date.

A debt modification that meets the above conditions is treated as a covenant waiver under ASC 470-10, even though no covenant violation exists as of the balance sheet date, because a covenant violation would have occurred notwithstanding the modification (i.e., in substance, the modification represents a waiver).

13.5.2.4 Covenant Violation Cured Before the Financial Statements Are Issued or Available to Be Issued

If a debtor cures a credit-related covenant violation before the financial statements are issued or available to be issued or before the creditor otherwise loses its right to demand repayment for more than one year (or the operating cycle, if longer) after the balance sheet date, the debt is classified as noncurrent (see ASC 470-10-45-11(a) and Section 13.5.3.2). For example, if a long-term debt obligation contains a put option that may be exercised by the creditor because of a covenant violation, but such option is only exercisable for 30 days after the balance sheet date, noncurrent classification is appropriate since the put option expired before the issuance of the financial statements.

13.5.3 Exceptions to the Current-Classification Requirements

13.5.3.1 Background

Violation of a covenant in a long-term obligation that makes the debt repayable on demand does not cause the debt to be classified as current if an exception in ASC 470-10 related to one or more of the following applies:

Covenant waivers and cures (see Section 13.5.3.2).
Grace periods (see Section 13.5.3.4).
Refinancing arrangements (see Section 13.7).

13.5.3.2 Covenant Waivers and Cures

ASC 470-10

45-11 Current liabilities shall include long-term obligations that are or will be callable by the creditor either because the debtor’s violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable. Accordingly, such callable obligations shall be classified as current liabilities unless either of the following conditions is met:

The creditor has waived or subsequently lost (for example, the debtor has cured the violation after the balance sheet date and the obligation is not callable at the time the financial statements are issued or are available to be issued [as discussed in Section 855-10-25]) the right to demand repayment for more than one year (or operating cycle, if longer) from the balance sheet date. If the obligation is callable because of violations of certain provisions of the debt agreement, the creditor needs to waive its right with regard only to those violations. . . .

Long-term obligations that become payable on demand or within one year (or the operating cycle, if longer) after the balance sheet date because of a covenant violation are classified as current liabilities unless the debtor obtains a covenant waiver that meets the requirements in ASC 470-10-45-1 and ASC 470-10-45-11(a) before the financial statements are issued or are available to be issued. Such debt would qualify as noncurrent if the creditor either waives its right to demand repayment under the specific covenant that was violated or otherwise loses its right to demand repayment (e.g., because the debtor cures the violation) for a period of more than one year after the balance sheet date. However, noncurrent classification would not be permitted if the creditor retains its right to demand repayment with respect to future covenant violations and it is probable that the debtor will violate the same or a more restrictive covenant as of measurement dates that are within 12 months of the balance sheet date (see Section 13.5.3.3). To apply the exception in ASC 470-10-45-11(a) for covenant waivers, an entity must ensure that the violated provision is related to credit (see Section 13.3.4.5). For a discussion of the analysis of covenant violations that are not credit-related, see Section 13.4.3.

Debt cannot be classified as noncurrent unless a waiver is binding and eliminates the creditor’s right to demand repayment of the debt within one year (or the operating cycle, if longer) after the balance sheet date as a result of the covenant violation. If the creditor has a right to revoke the waiver at its sole discretion, the waiver would not meet this condition. Further, a creditor’s statement that it does not intend or expect to demand repayment in the event of a covenant violation does not represent a waiver. A debtor is not permitted to consider the likelihood that a creditor will grant a waiver in the future even if the creditor has historically issued a waiver for the same type of violation or other covenant violations.

Lenders often request something in exchange for a covenant waiver. For example, the parties might agree to an up-front fee, an increase to the interest rate, a principal modification, the addition of a cross-default provision, or additional collateral. Since such changes represent modifications to the contractual terms of the original debt instrument, the debtor should consider whether the modifications are TDRs under ASC 470-60 (see Chapter 11) and, if not, whether to account for them as an extinguishment or modification of the original debt under ASC 470-50 (see Chapter 10). Unless it performs the necessary calculations, an entity cannot assume that the payment of a fee to obtain a debt covenant waiver does not pass the 10 percent cash flow test under ASC 470-50 (see Section 10.3.3).

13.5.3.3 Recurring Covenant Tests

ASC 470-10

45-1 Some long-term loans require compliance with certain covenants that must be met on a quarterly or semiannual basis. If a covenant violation occurs that would otherwise give the lender the right to call the debt, a lender may waive its call right arising from the current violation for a period greater than one year while retaining future covenant requirements. Unless facts and circumstances indicate otherwise, the borrower shall classify the obligation as noncurrent, unless both of the following conditions exist:

A covenant violation that gives the lender the right to call the debt has occurred at the balance sheet date or would have occurred absent a loan modification.
It is probable that the borrower will not be able to cure the default (comply with the covenant) at measurement dates that are within the next 12 months.

See Example 1 (paragraph 470-10-55-2) for an illustration of this classification guidance.

The contractual terms of long-term debt obligations often contain covenants that must be met on certain dates and that render the debt repayable on demand if they are not met on those dates. If such a covenant has been violated as of the balance sheet date or before the date on which the financial statements are issued or available to be issued, the debt must be classified as current unless one of the exceptions in ASC 470-10-45-11 or ASC 470-10-45-14 applies (see Section 13.5.3.1).

ASC 470-10-45-1 addresses the application of ASC 470-10-45-11 to covenant waivers (see Section 13.5.3.2) in situations in which the creditor has waived the specific covenant that was violated as of the balance sheet date but retains its right to demand debt repayment if the debtor violates the same or a more restrictive covenant on subsequent compliance dates within one year (or the operating cycle, if longer) after the balance sheet date. This guidance applies when a debtor would have violated a covenant as of the balance sheet date in the absence of a modification to the debt terms (i.e., a debt modification before the balance sheet date is treated as a waiver of a debt covenant under this guidance; see Section 13.5.2.3).

Example 13-5

Recurring Minimum Working Capital Requirement

The terms of a debt obligation require the debtor to maintain a minimum amount of working capital in each fiscal quarter. If the working capital requirement is not met, the creditor obtains the right to immediately accelerate the due date of the debt’s outstanding amount. The debtor violates the covenant as of December 31, 20X1. Further, the creditor waives its right to accelerate the due date of the debt as a result of the debtor’s violation of the covenant as of December 31, 20X1. However, the debtor retains its right to accelerate the debt’s due date if the covenant is not met as of March 31, 20X2. In this scenario, the debtor must consider the guidance in ASC 470-10-45-1.

Generally, a long-term obligation should be classified as noncurrent if the creditor has waived the specific covenant violation unless it is probable that the debtor will be unable to cure the violation on the compliance dates within the next 12 months (or the operating cycle, if longer) after the balance sheet date. If it is reasonably possible that the debtor will meet the same and more restrictive covenants on the subsequent compliance dates within the next 12 months (or the operating cycle, if longer) after the balance sheet date, the debt should be classified as noncurrent. However, the obligation should be classified as current if it is probable that debtor will be unable to meet the covenant on any of the subsequent compliance dates within the next 12 months (or the operating cycle, if longer) after the balance sheet date. In other words, the obligation should be classified as current if there is a remote likelihood that the debtor will meet the covenant on all subsequent compliance dates within the next 12 months (or the operating cycle, if longer) after the balance sheet date.

Note that the guidance on recurring covenant tests includes a different likelihood threshold for curing the covenant violation than the guidance on grace periods. For a debtor to justify noncurrent classification under the guidance on grace periods, curing the default must be probable (see Section 13.5.3.4), whereas it must merely not be probable that the debtor will be unable to cure the default under the guidance on recurring covenant tests.

ASC 470-10

Example 1: Classification of Long-Term Debt That Includes Covenants

55-2 This Example illustrates the guidance in paragraph 470-10-45-1 for the classification of long-term debt when a debt covenant violation is waived by a lender for a period greater than a year.

55-3 A borrower has a long-term loan that requires compliance with certain covenants, such as maintenance of a minimum current ratio, minimum debt-to-equity ratio, or minimum level of shareholders’ equity. The borrower must meet the covenants on a quarterly or semiannual basis. At one of the compliance dates, the borrower violates a covenant. That violation gives the lender the right to call the debt. The lender waives that right for a period greater than one year but retains the future covenant requirements.

55-4 The issue is whether the waiver of the lender’s rights resulting from the violation of the covenant with the retention of the periodic covenant tests represents, in substance, a grace period. If viewed as a grace period, the borrower would classify the debt as current (see paragraph 470-10-45-11) unless it is probable that the borrower can cure the violation (comply with the covenant) within the grace period. Specifically, the balance sheet classification of an obligation is considered in the following situations:

The debt covenants are applicable only after the balance sheet date, and it is probable that the borrower will fail to meet the covenant requirement at the compliance date three months after the balance sheet date.
The borrower meets the current covenant requirement at the balance sheet date, and it is probable that the borrower will fail to meet the same covenant requirement at the compliance date in three months.
The borrower meets the current covenant requirement, and it is probable that the borrower will fail to meet a more restrictive covenant requirement applicable at the compliance date in three months.
The borrower has met the covenant requirement in the prior quarter but before the balance sheet date negotiates a modification of the loan agreement that eliminates the covenant requirement at the balance sheet date or modifies the requirement so that the borrower will comply. Absent the modification, the borrower would have been in violation of the covenant at the balance sheet date. The same or a more restrictive covenant must be met at the compliance date in three months, and it is probable that the borrower will fail to meet that requirement at that subsequent date.
The borrower is in violation of the current covenant requirement at the balance sheet date and, after the balance sheet date but before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), obtains a waiver. The same or a more restrictive covenant must be met at the compliance date in three months, and it is probable that the borrower will fail to meet that requirement at that subsequent date.

55-5 In the situations described in (a) through (c) of the preceding paragraph, the debt would be classified as noncurrent, in which case the borrower would be required to disclose the adverse consequences of its probable failure to satisfy future covenants.

55-6 In the situations described in paragraph 470-10-55-4(d) through (e), the debt would be classified as current. However, if the debt is expected to be refinanced on a long-term basis and the borrower meets the provisions of paragraphs 470-10-45-13 through 45-20, the debt would be classified as noncurrent.

13.5.3.4 Grace Periods

ASC 470-10

45-11 Current liabilities shall include long-term obligations that are or will be callable by the creditor either because the debtor’s violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable. Accordingly, such callable obligations shall be classified as current liabilities unless either of the following conditions is met: . . .

b. For long-term obligations containing a grace period within which the debtor may cure the violation, it is probable that the violation will be cured within that period, thus preventing the obligation from becoming callable.

Generally, long-term debt that has become payable on demand or within one year (or the operating cycle, if longer) after the balance sheet date because of a covenant violation is classified as current (see Section 13.5.1). However, if the debt agreement contains a grace period during which the debtor may cure the violation, the debtor classifies the debt as noncurrent if it is probable that the violation will be cured within the established grace period. To apply the exception in ASC 470-10-45-11(b) for grace periods, an entity must ensure that the violated provision is related to credit (see Section 13.3.4.5). For a discussion of the analysis of covenant violations that are not credit-related, see Section 13.4.3.

In determining whether it is probable that the violation will be cured within the contractual grace period, a debtor must use judgment and consider all relevant facts and circumstances. In the absence of persuasive evidence that it is probable that the debtor will be able to cure the violation before the end of the grace period, the obligation should be classified as current unless the debtor has obtained a covenant waiver that meets the requirements in ASC 470-10-45-11(a) (see Section 13.5.3.2) or the debtor has the intent and ability to refinance the obligation on a long-term basis (see Section 13.7). If a more than remote likelihood exists that the debtor will be unable to remedy the violation, the debt should be classified as current even if the debtor expects that the creditor will not demand repayment.

ASC 470-10-50-2 requires a debtor to disclose the circumstances in which it is in violation of a debt covenant but classifies the related debt as noncurrent because it is probable that the violation will be cured within a specified grace period (see Section 13.5.4).

13.5.3.5 Comparison of Guidance on Covenant Waivers and Grace Periods

When a lender issues a covenant waiver, the related debt is classified as noncurrent unless it is probable that the debtor will violate the same or a more restrictive covenant again as of a measurement date that is within 12 months of the balance sheet date (see Section 13.5.3.3). By contrast, when a loan agreement contains a grace period, the related debt is classified as current unless it is probable that the debtor will cure the violation within the specified grace period, thus preventing the obligation from becoming repayable on demand (see Section 13.5.3.4). The decision tree below summarizes the guidance on classification of debt upon the violation of a covenant as of the balance sheet date.

Example 13-6

Failure to Satisfy Debt Covenant — No Grace Period Provided in Debt Agreement

Company A has a long-term loan that requires it to comply with certain covenants, including quarterly minimum quantitative ratios (e.g., a debt-to-equity ratio) and issuance of annual audited financial statements with an audit opinion that is not subject to any qualifications or exceptions with respect to the scope of the audit or any going-concern emphasis. Company A failed to meet the minimum quantitative ratio as of December 31, 20X1. Thus, the lender has the right to demand repayment of the debt immediately. The loan agreement does not specify a grace period for curing covenant violations.

Company A must classify the debt as current as of December 31, 20X1. When a loan agreement does not contain a grace period, long-term debt should be classified as current when a debtor is in violation of a loan covenant as of the balance sheet date since the obligation is repayable on demand by the lender.

Example 13-7

Failure to Satisfy Debt Covenant — Grace Period Provided in Debt Agreement

Assume the same facts as in the example above, except that the loan agreement contains a grace period during which the debtor can cure the violation. Company A would need to assess the probability of curing the covenant violation. Unless A determines that it is probable that the covenant violation will be cured within the specified grace period, current classification of the loan would be required.

Example 13-8

Failure to Satisfy Debt Covenant — Waiver Obtained by Debtor

Assume the same facts as in Example 13-6 except that the lender has waived its right to demand repayment of the loan related to the specific covenant violation for a period of more than 12 months after the balance sheet date. Company A would classify the debt as a current liability only if it is probable that it will violate the same or a more restrictive covenant again as of measurement dates that are within 12 months of the balance sheet date (see Section 13.5.3.3).

13.5.4 Disclosure

ASC 470-10

50-2 If an obligation under paragraph 470-10-45-11(b) is classified as a long-term liability (or, in the case of an unclassified balance sheet, is included as a long-term liability in the disclosure of debt maturities), the circumstances shall be disclosed.

SEC Regulation S-X, Rule 4-08

§210.4-08 General Notes to Financial Statements [Reproduced in ASC 235-10-S99-1]

If applicable to the person for which the financial statements are filed, the following shall be set forth on the face of the appropriate statement or in appropriately captioned notes. The information [required by paragraph (c)] shall be provided as of the most recent audited balance sheet being filed . . . . When specific statements are presented separately, the pertinent notes shall accompany such statements unless cross-referencing is appropriate. . . .

(c) Defaults. The facts and amounts concerning any default in principal, interest, sinking fund, or redemption provisions with respect to any issue of securities or credit agreements, or any breach of covenant of a related indenture or agreement, which default or breach existed at the date of the most recent balance sheet being filed and which has not been subsequently cured, shall be stated in the notes to the financial statements. If a default or breach exists but acceleration of the obligation has been waived for a stated period of time beyond the date of the most recent balance sheet being filed, state the amount of the obligation and the period of the waiver. . . .

Nonauthoritative AICPA Guidance

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

.17 Disclosure of Covenant Violation and Subsequent Bank Waiver

Inquiry — At the balance-sheet date, an entity was in violation of certain provisions of the loan covenant associated with its long-term debt. Under the terms of the loan agreement, the obligation is now callable by the creditor. Subsequent to the balance-sheet date, the bank waived its right to demand repayment for more than one year from the balance-sheet date. Therefore, the loan remained classified as long-term, per Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 470-10-45-12. Does the covenant violation and subsequent bank waiver need to be disclosed in the financial statements?

Reply — The authoritative literature applicable to nonpublic entities does not address disclosure of debt covenant violations existing at the balance-sheet date that have been waived by the creditor for a stated period of time. Nevertheless, disclosure of the existing violation(s) and the waiver period should be considered for reasons of adequate disclosure. If the covenant violation resulted from nonpayment of principal or interest on the debt, inability to maintain required financial ratios, or other such financial covenants, that information may be vital to users of the financial statements even though the debt is not callable. If the lender has waived the right for greater than one year but retained the future covenant requirements (i.e., covenant requirements will have to be met at interim dates during the next 12 months), the accounting and disclosure provisions of FASB ASC 470, Debt, apply.

For SEC registrants, Regulations S-X, Article 4, Section 210-4-08(c), requires disclosure of the amount of the obligation and the period of waiver whenever a creditor has waived its right to call the debt for a stated period of time.

ASC 470-10-50-2 requires a debtor to disclose the circumstances in which it is in violation of a debt covenant but classifies the related debt as noncurrent because it is probable that the violation will be cured with a specified grace period that extends beyond the date on which the financial statements are to be issued (see Section 13.5.3.4). For example, it might be appropriate to disclose a description of the nature of the violation, the actions taken by the debtor to cure the violation, and a statement that it is probable that the violation will be cured before the end of the grace period. In addition, debtors that do not present a classified balance sheet and describe the obligation as a long-term liability must disclose this description in their discussion of debt maturities.

Further, SEC Regulation S-X, Rule 4-08, requires SEC registrants to disclose information about (1) the facts and amounts associated with any defaults or other covenant violations that existed as of the balance sheet date and that have not been subsequently cured and (2) the amount and the period of the waiver if a waiver of a default or covenant violation was given for a period beyond the balance sheet date. As discussed in AICPA Technical Q&As Section 3200.17, disclosure of covenant waivers and the waiver period “may be vital” also for users of financial statements of nonpublic entities.

13.6 SACs in Long-Term Obligations

ASC 470-10

45-2 In some situations, the circumstances (for example, recurring losses or liquidity problems) would indicate that long-term debt subject to a subjective acceleration clause should be classified as a current liability. Other situations would indicate only disclosure of the existence of such clauses. Neither reclassification nor disclosure would be required if the likelihood of the acceleration of the due date were remote, such as if the lender historically has not accelerated due dates of loans containing similar clauses and the financial condition of the borrower is strong and its prospects are bright.

50-3 As indicated in paragraph 470-10-45-2, in some situations long-term debt subject to a subjective acceleration clause shall be reclassified. That paragraph explains that other situations would indicate only disclosure of the existence of such clauses. That paragraph states further that neither reclassification nor disclosure is required if the likelihood of the acceleration of the due date is remote, such as when the lender historically has not accelerated due dates of loans containing similar clauses and the financial condition of the borrower is strong and its prospects are bright.

If a long-term debt obligation contains a SAC, the debtor should assess the likelihood that the creditor will accelerate the debt’s due date. If exercise of the SAC is probable, the long-term obligation must be classified as a current liability and the SAC disclosed. If the debtor has experienced recurring losses or liquidity problems, the obligation should be classified as current unless the exception for refinancing arrangements applies (see Section 13.7). If the likelihood that the creditor will accelerate the debt’s due date is reasonably possible, the existence of the SAC should be disclosed. If the likelihood that the debt’s due date will be accelerated is remote, neither disclosure nor reclassification is required. If a creditor has accelerated the debt’s due date under a SAC, the debt is considered due on demand (see Section 13.4) and is classified as current unless the exception for refinancing arrangement is met.

ASC 470-10 contains guidance on the impact of SACs on the classification of revolving-debt arrangements that require a lockbox arrangement (see Section 13.8).

13.7 Refinancing Arrangements

13.7.1 Background

Under ASC 470-10-45-14, short-term obligations are classified as noncurrent if the debtor has the intent and ability to refinance the obligation on a long-term basis. To demonstrate that it has such an intent and ability, a debtor must (1) refinance the obligation on a long-term basis (see Section 13.7.3) after the balance sheet date, but before the financial statements are issued or available to be issued, or (2) have a financing agreement that clearly permits it to refinance the obligation on a long-term basis (see Section 13.7.4) before the financial statements are issued or available to be issued.

13.7.2 Scope

13.7.2.1 Background

ASC 470-10-45-14 applies to certain short-term obligations (see Section 13.3.4.2) of a debtor that has the intent and ability to refinance on a long-term basis (see the next section). It does not apply to certain short-term obligations incurred as part of an entity’s operating cycle (see Section 13.7.2.3). Further, the post-balance-sheet-date refinancing or financing agreement must be in place before the financial statements are issued or available to be issued (see Section 13.3.4.9).

13.7.2.2 Refinancing a Short-Term Obligation on a Long-Term Basis

ASC 470-10

45-12A Some short-term obligations are expected to be refinanced on a long-term basis and, therefore, are not expected to require the use of working capital during the ensuing fiscal year. Examples include commercial paper, construction loans, and the currently maturing portion of long-term debt.

45-12B Refinancing a short-term obligation on a long-term basis means either replacing it with a long-term obligation or with equity securities or renewing, extending, or replacing it with short-term obligations for an uninterrupted period extending beyond one year (or the operating cycle, if applicable) from the date of an entity’s balance sheet.

45-13 . . . A short-term obligation shall be excluded from current liabilities only if the conditions in the following paragraph are met. Funds obtained on a long-term basis before the balance sheet date would be excluded from current assets if the obligation to be liquidated is excluded from current liabilities.

45-14 A short-term obligation shall be excluded from current liabilities if the entity intends to refinance the obligation on a long-term basis (see paragraph 470-10-45-12B) and the intent to refinance the short-term obligation on a long-term basis is supported by an ability to consummate the refinancing demonstrated in either of the following ways:

Post-balance-sheet-date issuance of a long-term obligation or equity securities. . . .
Financing agreement. . . .

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. Similarly, if the replacement is a rollover of commercial paper accompanied by a standby credit agreement, the standby agreement must meet the conditions in that paragraph to justify excluding the short-term obligation from current liabilities.

As discussed in Section 13.7.1, ASC 470-10-45-14 applies when a debtor has the intent and ability to refinance a short-term obligation on a long-term basis. ASC 470-10-45-12B clarifies that refinancing a short-term obligation on a long-term basis includes:

Issuing a long-term obligation that replaces the short-term obligation.
Issuing equity securities that replace the short-term obligation.
Renewing or extending a short-term obligation for a period of more than one year (or the operating cycle, if longer) after the balance sheet date. (Note that provisions that permit the successive renewal or extension of short-term obligations generally should be evaluated under the guidance on financing agreements [see Section 13.7.4] and not under the requirements for post-balance-sheet-date issuance of long-term obligations or equity securities [see Section 13.7.3] since they do not represent long-term obligations.)

A debtor does not have the intent and ability to refinance a short-term obligation on a long-term basis if:

It issues another short-term obligation that matures within one year (or the operating cycle, if longer) after the balance sheet date.
It extends or renews a short-term obligation for a period of less than one year (or the operating cycle, if longer) after the balance sheet date.
The short-term financing agreement expires within one year (or the operating cycle, if longer) after the balance sheet date.

13.7.2.3 Short-Term Obligations Related to the Operating Cycle

ASC 470-10

45-13 Short-term obligations arising from transactions in the normal course of business that are due in customary terms shall be classified as current liabilities. . . .

ASC 470-10-45-14 does not apply to short-term obligations that are classified as current liabilities under ASC 210-10-45-8 and the first sentence of ASC 470-10-45-13 (see Section 13.3.3.4). That is, “[s]hort-term obligations arising from transactions in the normal course of business that are due in customary terms,” such as payables for goods and services and accruals for wages, salaries, commissions, rentals, and royalties, cannot be classified as noncurrent on the basis of the guidance on refinancing arrangements. However, as noted in paragraph 20 of the Basis for Conclusions of FASB Statement 6, the guidance does apply to short-term obligations “arising from the acquisition or construction of noncurrent assets” or “not directly related to the operating cycle,” such as a “note given to a supplier to replace an account payable that originally arose in the normal course of business and had been due in customary terms.”

13.7.3 Post-Balance-Sheet-Date Issuance of Long-Term Debt or Equity

13.7.3.1 General

ASC 470-10

45-14 A short-term obligation shall be excluded from current liabilities if the entity intends to refinance the obligation on a long-term basis (see paragraph 470-10-45-12B) and the intent to refinance the short-term obligation on a long-term basis is supported by an ability to consummate the refinancing demonstrated in either of the following ways:

Post-balance-sheet-date issuance of a long-term obligation or equity securities. After the date of an entity’s balance sheet but before that balance sheet is issued or is available to be issued (as discussed in Section 855-10-25), a long-term obligation or equity securities have been issued for the purpose of refinancing the short-term obligation on a long-term basis. If equity securities have been issued, the short-term obligation, although excluded from current liabilities, shall not be included in owners’ equity. . . .

45-16 If an entity’s ability to consummate an intended refinancing of a short-term obligation on a long-term basis is demonstrated by post-balance-sheet-date issuance of a long-term obligation or equity securities (see paragraph 470-10-45-14(a)), the amount of the short-term obligation to be excluded from current liabilities shall not exceed the proceeds of the new long-term obligation or the equity securities issued.

One way a debtor can demonstrate its intent and ability to refinance a short-term obligation on a long-term basis is to repay the short-term obligation by using the proceeds from the issuance of a long-term obligation or equity securities. Such refinancing must occur before the financial statements are issued or available to be issued (see Section 13.3.4.9). The amount of the short-term obligation that is classified as noncurrent cannot exceed the amount of the proceeds received from issuing the new long-term obligation or equity securities and that are used to repay the short-term obligation.

The issuance of a new debt instrument or equity security that contains a put option or other provision that permits the holder to demand repayment within one year (or the operating cycle, if longer) after the balance sheet date does not demonstrate the debtor’s ability to refinance on a long-term basis (see Section 13.4.2). A debtor that has violated a credit-related covenant in the new debt obligation before the financial statements are issued or available to be issued should consider the guidance on covenant violations (see Section 13.5). If a new long-term debt obligation contains a SAC, the debtor should assess the likelihood that the holder will accelerate the debt’s due date under that clause since it can affect whether noncurrent classification is appropriate (see Section 13.6).

ASC 470-10-55-15 through 55-24 contain an example of a post-balance-sheet-date refinancing that would be evaluated under ASC 470-10-45-14(a) (see Section 13.7.6.3).

13.7.3.2 Repayment of Short-Term Obligation Before Long-Term Refinancing

ASC 470-10

45-15 Repayment of a short-term obligation before funds are obtained through a long-term refinancing requires the use of current assets. Therefore, if a short-term obligation is repaid after the balance sheet date and subsequently a long-term obligation or equity securities are issued whose proceeds are used to replenish current assets before the balance sheet is issued or is available to be issued (as discussed in Section 855-10-25), the short-term obligation shall not be excluded from current liabilities at the balance sheet date. See Example 5 (paragraph 470-10-55-33) for an illustration of this guidance.

If a debtor repays a short-term obligation after the balance sheet date by using current assets (e.g., excess cash), that obligation must be classified as current as of the balance sheet date even if the debtor subsequently issues a new long-term obligation or equity securities before the financial statements are issued or available to be issued. This is because the repayment of the short-term obligation required the use of current assets. ASC 470-10-55-33 through 55-36 contain an example of a short-term obligation that is repaid after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued (see Section 13.7.6.3).

13.7.4 Financing Agreement

13.7.4.1 Background

A debtor can demonstrate that it is able to refinance a short-term obligation on a long-term basis by having a financing agreement (e.g., a term loan commitment, a line of credit, a revolving-debt arrangement, an equity facility, or a forward sale of debt or equity securities) that permits such refinancing and meets certain criteria (see the next section). Further, the guidance on financing agreements applies to scenarios in which the debtor renews or extends the short-term obligation (see ASC 470-10-45-12B).

ASC 470-10 limits the amount of the short-term obligation that can be classified as noncurrent (see Section 13.7.4.3). Generally, a debtor is not precluded from using a stand-by financing agreement, although its terms cannot be unreasonable (see Section 13.7.4.4). However, a best-efforts agreement cannot be used to demonstrate an ability to refinance a short-term obligation on a long-term basis (see Section 13.7.4.5). In certain circumstances, a subsidiary might be able to use a parent’s financing agreement to demonstrate such ability (see Section 13.7.4.6).

13.7.4.2 Financing Agreement Criteria

ASC 470-10

45-14 A short-term obligation shall be excluded from current liabilities if the entity intends to refinance the obligation on a long-term basis (see paragraph 470-10-45-12B) and the intent to refinance the short-term obligation on a long-term basis is supported by an ability to consummate the refinancing demonstrated in either of the following ways: . . .

b. Financing agreement. Before the balance sheet is issued or is available to be issued (as discussed in Section 855-10-25), the entity has entered into a financing agreement that clearly permits the entity to refinance the short-term obligation on a long-term basis on terms that are readily determinable, and all of the following conditions are met:

1. The agreement does not expire within one year (or operating cycle) from the date of the entity’s balance sheet and during that period the agreement is not cancelable by the lender or the prospective lender or investor (and obligations incurred under the agreement are not callable during that period) except for violation of a provision with which compliance is objectively determinable or measurable. For purposes of this Subtopic, violation of a provision means failure to meet a condition set forth in the agreement or breach or violation of a provision such as a restrictive covenant, representation, or warranty, whether or not a grace period is allowed or the lender is required to give notice. Financing agreements cancelable for violation of a provision that can be evaluated differently by the parties to the agreement (such as a material adverse change or failure to maintain satisfactory operations) do not comply with this condition.

2. No violation of any provision in the financing agreement exists at the balance sheet date and no available information indicates that a violation has occurred thereafter but before the balance sheet is issued or is available to be issued (as discussed in Section 855-10-25), or, if one exists at the balance sheet date or has occurred thereafter, a waiver has been obtained.

3. The lender or the prospective lender or investor with which the entity has entered into the financing agreement is expected to be financially capable of honoring the agreement.

55-1 Under paragraph 470-10-45-2, the lender has already loaned money on a long-term basis. To continue long-term classification requires a judgment about the likelihood of acceleration of the due date. Paragraphs 470-10-45-13 through 45-20 cover circumstances in which the obligation is by its terms short-term. For such an obligation to be excluded from current liabilities, the lender must advance new funds or refinance the short-term obligation on a long-term basis based on conditions existing on the date of the new loan or refinancing. Therefore, to classify an obligation as long-term, paragraphs 470-10-45-13 through 45-20 require a higher standard for a financing agreement that permits an entity to refinance a short-term obligation on a long-term basis than paragraph 470-10-50-2 requires for an existing long-term loan for which early repayment might be requested.

For debt to be classified as noncurrent on the basis of a financing agreement, all of the following conditions must be met:

The financing agreement must clearly permit the debtor to refinance the short-term obligation on a long-term basis on terms that are readily determinable.

The terms of the financing commitment must be unambiguous about whether the debtor is able to refinance the short-term obligation on a long-term basis. For example, the agreement might state that “[b]orrowings are available at [the debtor’s] request for such purposes as it deems appropriate and will mature three years from the date of borrowing” (see ASC 470-10-55-16(a) and ASC 470-10-55-17 in Section 13.7.6.4). Further, the debtor cannot be subject to any legal or contractual restrictions that prevent it from accessing funds that otherwise would be available under the financing agreement (e.g., transfer restrictions) (see Section 13.7.4.3). If the amount available under the financing agreement fluctuates, only the minimum amount that is expected to be available can be used to support a conclusion that noncurrent classification is appropriate for a short-term obligation. If the amount available under the financing agreement fluctuates and no reasonable estimate of the minimum amount that is expected to be available can be made, the financing agreement does not allow the debtor to refinance a short-term obligation on a long-term basis (see Section 13.7.4.3).

In addition, the agreement must bind the potential creditor or investor to extend credit on a long-term basis or purchase the debtor’s equity securities. If the potential creditor or investor has a right to cancel the agreement in its sole discretion without any penalty or damages, the agreement would not meet this condition. For example, a letter of intent or memorandum of understanding would generally not be sufficient to meet this condition even if the potential investor or creditor is expected to honor its stated intent. Further, ASC 470-10-55-8 implies that the existence of a best-efforts remarketing agreement is not sufficient to demonstrate an intent and ability to refinance a short-term obligation on a long-term basis under ASC 470-10-45-14(b) (see Section 13.7.4.5). However, there is no requirement that the financing agreement be contractually linked to the short-term obligation.

The fact that a debtor is considering other more advantageous sources of financing does not necessarily preclude it from asserting an intent to use a financing agreement to refinance a short-term obligation on a long-term basis under ASC 470-10-45-14(b) (see Section 13.7.4.4). However, the debtor must intend to use the financing agreement if no other source of financing becomes available (see ASC 470-10-45-20).
The financing agreement must be in place as of the date the financial statements are issued or available to be issued.

There is no requirement that the debtor enter into the financing agreement as of the balance sheet date. ASC 470-10-45-14(b) requires the financing agreement to have been executed by the time the financial statements are issued or available to be issued.
The financing agreement cannot expire within one year (or the debtor’s operating cycle, if longer) after the balance sheet date except for the violation of an objective covenant.

ASC 470-10-45-14(b)(1) requires the potential creditor’s or investor’s commitment under the financing agreement to be for at least one year (or the operating cycle, if longer) after the balance sheet date. During that period, the potential creditor or investor cannot have a right to cancel the agreement unless the debtor violates a provision (e.g., a restrictive covenant, representation, or warranty) with which compliance is objectively determinable or measurable (see item 5 below and Section 13.3.4.6).
The obligations or equity securities that would be issued under the financing agreement cannot be repayable on demand or within one year (or the operating cycle, if longer) after the balance sheet date.

ASC 470-10-45-14(b)(1) indicates that any obligation incurred or equity securities issued under the financing agreement cannot be repayable on demand or within one year (or the debtor’s operating cycle, if longer) after the balance sheet date. Obligations that are repayable on demand or within one year (or the debtor’s operating cycle, if longer) after the balance sheet date are considered short-term obligations (see Section 13.4). Similarly, the renewal or extension of a short-term obligation for a period of more than one year would not meet this condition if the obligation contains a put option or other provision that permits the holder to demand repayment within one year after the balance sheet date.
The financing agreement and any obligations that would be issued under the financing agreement cannot contain a SAC.

ASC 470-10-45-14(b)(1) indicates that the financing agreement cannot contain a SAC (see Section 13.3.4.6). For example, a liquidity facility with a material adverse change clause that permits the potential creditor or investor to terminate the facility would not qualify under this condition.

Note that a long-term financing arrangement might not meet the conditions in ASC 470-10-45-14(b) for classification of a short-term obligation as noncurrent even if the debt that would be issued under the financing agreement would qualify as noncurrent once issued (see ASC 470-10-55-1). Long-term obligations with SACs often qualify as noncurrent under ASC 470-10-45-2 (see Section 13.6). However, a financing agreement can only be used as the basis for excluding a short-term obligation from current liabilities if the financing cannot be canceled by the lender on the basis of a SAC. The FASB believes that the circumstances addressed in the guidance on refinancing agreements in ASC 470-10-45-13 through 45-20 are different from those addressed in the guidance on SACs in long-term obligations in ASC 470-10-45-2. That is, the guidance on SACs in long-term obligations requires an entity to use judgment in determining the likelihood of acceleration of the due date of the long-term obligation, whereas the guidance on refinancing arrangements in ASC 470-10-45-14 requires the creditor to advance new funds or refinance the short-term obligation on a long-term basis.
If the debtor has violated a provision in the financing agreement, it has obtained a waiver.

Under ASC 470-10-45-14(b)(2), the debtor must not be in violation of any provision in the financing agreement on the balance sheet date or when the financial statements are issued or available to be issued or, if a violation has occurred, the other party must have granted a waiver. Waivers should be evaluated under the guidance in ASC 470-10 on waivers (see Sections 13.5.3.2 and 13.5.3.3).
The potential creditor or investor must be expected to be financially capable of honoring the agreement.

Under ASC 470-10-45-14(b)(3), the potential creditor or investor must be “expected to be financially capable of honoring the [financing] agreement.” If substantial doubt exists about the potential creditor’s or investor’s capacity to honor its commitment, this condition is not met.
The terms of the financing agreement cannot be unreasonable to the debtor.

If the terms of a financing agreement are unreasonable to the debtor (e.g., with respect to interest rates or collateral requirements), the debtor would not be able to assert an intent to refinance the short-term obligation on a long-term basis under that agreement. Although a debtor is permitted to seek alternative sources of financing (see Section 13.7.4.4), it must intend to use the existing financing agreement if another source of financing does not become available.

13.7.4.3 Limit on the Amount That Can Be Classified as Noncurrent

ASC 470-10

45-17 If ability to refinance is demonstrated by the existence of a financing agreement (see paragraph 470-10-45-14(b)), the amount of the short-term obligation to be excluded from current liabilities shall be reduced to the amount available for refinancing under the agreement if the amount available is less than the amount of the short-term obligation.

45-18 The amount to be excluded shall be reduced further if information (such as restrictions in other agreements or restrictions as to transferability of funds) indicates that funds obtainable under the agreement will not be available to liquidate the short-term obligation.

45-19 Further, if amounts that could be obtained under the financing agreement fluctuate (for example, in relation to the entity’s needs, in proportion to the value of collateral, or in accordance with other terms of the agreement), the amount to be excluded from current liabilities shall be limited to a reasonable estimate of the minimum amount expected to be available at any date from the scheduled maturity of the short-term obligation to the end of the fiscal year (or operating cycle). If no reasonable estimate can be made, the entire outstanding short-term obligation shall be included in current liabilities.

The amount of a short-term obligation that can be classified as noncurrent cannot exceed the amount that the debtor is able to access under the financing agreement and should take into account any limitations on the debtor’s ability to access the amount committed under the financing agreement. For example, the debtor may be subject to legal or contractual restrictions that prevent it from using some or all of the amount committed under the financing agreement to repay its short-term obligation. ASC 470-10-55-20 and 55-21 (see Section 13.7.6.4) include an example of a scenario in which the transfer of funds between a parent and subsidiary is legally restricted so that the parent is unable to access funds that are available under the subsidiary’s financing agreement.

If the amount obtainable under a financing agreement fluctuates (e.g., on the basis of collateral value of the debtor’s trade receivables), the debtor should make a reasonable estimate of the minimum amount expected to be available on any date during the period from the scheduled maturity of the short-term obligation to the end of the fiscal year (or the entity’s operating cycle, if longer). If a reasonable estimate cannot be made, the financing agreement cannot be used to support a decision to exclude the short-term obligation from current liabilities. ASC 470-10-55-27 through 55-29 (see Section 13.7.6.4) contain an example of a financing agreement that meets the conditions in ASC 470-10-45-14(b) and limits the amount that the debtor can borrow under the agreement to the amount of its inventory.

13.7.4.4 Standby Financing Agreement

ASC 470-10

45-20 The entity may intend to seek an alternative source of financing rather than to exercise its rights under the existing agreement when the short-term obligation becomes due. The entity must intend to exercise its rights under the existing agreement, however, if that other source does not become available. The intent to exercise may not be present if the terms of the agreement contain conditions or permit the prospective lender or investor to establish conditions, such as interest rates or collateral requirements, that are unreasonable to the entity.

A financing agreement can qualify under ASC 470-10-45-14(b) even if a debtor is seeking an alternative source of financing (e.g., one that is more advantageous). Although a debtor is required to demonstrate an intent to refinance the short-term obligation on a long-term basis, such an intent can be present even if the financing agreement serves as a fallback or standby source of financing. It is sufficient that the debtor intends to use the financing agreement to refinance the short-term obligation on a long-term basis if it does not find another source of financing. However, the debtor should evaluate whether the terms of the financing agreement are reasonable. If the terms are unreasonable to the debtor (e.g., the interest rate is in excess of what the debtor is ready and willing to pay), it would be unable to assert an intent to use that financing agreement if another source of financing is not available.

Example 13-9

Lack of Intent to Refinance Short-Term Obligation on a Long-Term Basis

A debtor is evaluating whether it can classify a short-term obligation as a noncurrent liability under ASC 470-10-45-14(b). It has a long-term line of credit that clearly permits it to refinance the short-term obligation on a long-term basis at 15 percent per annum. Because that interest rate is significantly in excess of the interest rate the debtor expects it would have to pay if it were to enter into a similar line of credit arrangement that reflects current market interest rates, it is exploring whether to renegotiate the line of credit. However, if it is unable to obtain a reduction in the interest rate on the line of credit, the debtor expects to pay off the short-term obligation by using excess cash. In this scenario, the debtor would not be able to assert an intent to refinance the short-term obligation on a long-term basis under the line of credit because it expects to use current assets rather than the existing financing agreement to repay the short-term obligation if it is unable to renegotiate the financing agreement’s terms.

13.7.4.5 Best-Efforts Remarketing Agreements

ASC 470-10

Example 2: Classification by the Issuer of Redeemable Instruments That Are Subject to Remarketing Agreements

55-7 This Example illustrates the guidance for the appropriate classification by the issuer of debt if all of the following conditions exist:

The debt has a long-term maturity (for example, 30 to 40 years).
The debt holder may redeem or put the bond on short notice (7 to 30 days).
The issuer has a remarketing agreement that states that the agent will make its best effort to remarket the bond when redeemed.
The debt is secured by a short-term letter of credit that provides protection to the debt holder in the event that the redeemed debt cannot be remarketed. (Amounts drawn against the letter of credit are payable back to the issuer of the letter of credit by the issuer of the redeemable debt instrument on the same day that the drawdown occurs.)

55-8 Debt agreements that allow a debt holder to redeem (or put) a debt instrument on demand (or within one year) should be classified as short-term liabilities despite the existence of a best-efforts remarketing agreement. That is, unless the issuer of the redeemable debt instrument has the ability and intent to refinance the debt on a long-term basis as provided for in paragraph 470-10-45-14, the debt should be classified as a current liability.

55-9 In this Example, the obligation would be classified by the issuer as noncurrent only if the letter-of-credit arrangement meets the requirements of paragraph 470-10-45-14(b).

ASC 470-10-55-7 through 55-9 include guidance on the classification of a puttable debt obligation (such as a variable rate demand obligation) that is subject to a best-efforts remarketing agreement and short-term letter of credit. ASC 470-10-55-8 indicates that since a best-efforts remarketing agreement is not binding, its existence is not sufficient evidence of a debtor’s intent and ability to refinance a short-term obligation on a long-term basis under ASC 470-10-45-14(b) (see Section 13.7.4.2).

13.7.4.6 Subsidiary’s Ability to Rely on Parent’s Financing Agreement

Rather than have multiple subsidiaries enter into individual long-term financing agreements, a parent may enter into a single external arrangement that allows it to provide intercompany financing to its subsidiaries for all their short-term obligations to be refinanced on a long-term basis. Although there may be no formal written agreement between the parent and its individual subsidiaries that describes the terms of such a financing arrangement, the parent’s intent and ability to provide long-term financing to the subsidiary (through either an intercompany loan or an infusion of capital) would enable the subsidiary to refinance its short-term obligations on a long-term basis. The parent may provide such financing to the subsidiary by either (1) using its own working capital or (2) drawing down on the external financing agreement.

To exclude short-term obligations from current liabilities in its stand-alone financial statements, a subsidiary may use an intercompany financing arrangement with its parent to demonstrate its ability to refinance a short-term obligation on a long-term basis if the criteria in ASC 470-15-45-14 are met (see Section 13.7.4.2). For the subsidiary to meet the criteria in ASC 470-15-45-14, there must be evidence that its parent has committed a portion of its liquidity resources to servicing the subsidiary’s short-term obligation on a long-term basis. That evidence should be documented in a written intercompany financing agreement or in a confirmation of the details of the arrangement with the parent. In either case, the evidence should explicitly cover the criteria in ASC 470-10-45-14:

The parent must be committed to providing financing to the subsidiary on terms that would allow the subsidiary to refinance the short-term obligation on a long-term basis.
The parent must be committed to not canceling the agreement within one year (or the operating cycle) after the subsidiary’s balance sheet date for any reason that is not objectively determinable. To the extent that objectively determinable events may give rise to cancellation of the agreement, such events should be detailed in the confirmation obtained from the parent.
The parent must be financially capable of honoring the intercompany financing agreement after taking into account all of its other obligations, including the obligation to provide financing to other subsidiaries under similar agreements.

Although the parent is not required to have an external financing agreement that meets the conditions in ASC 470-10-45-14 to demonstrate its financial capabilities, in some circumstances establishing the parent’s ability to refinance may be difficult in the absence of such agreement. In the consolidated financial statements, a subsidiary’s obligations represent obligations of the consolidated entity; therefore, the absence of an external financing agreement (or post-balance-sheet issuance of a long-term obligation or equity securities) that meets the conditions in ASC 470-10-45-14 would preclude a noncurrent classification of the subsidiary’s short-term obligations on the parent’s consolidated balance sheet.

13.7.5 Disclosure

ASC 470-10

Short-Term Obligations Expected to Be Refinanced

50-4 If a short-term obligation is excluded from current liabilities pursuant to the provisions of this Subtopic, the notes to financial statements shall include a general description of the financing agreement and the terms of any new obligation incurred or expected to be incurred or equity securities issued or expected to be issued as a result of a refinancing.

When a debtor classifies a short-term obligation as a noncurrent liability under ASC 470-10-45-14, it must include a general description of the post-balance-sheet-date refinancing (see Section 13.7.3) or the financing agreement (see Section 13.7.4), as applicable.

13.7.6 Examples

13.7.6.1 Background

ASC 470-10

Example 4: Current Maturity of Long-Term Debt and Notes Payable to Be Refinanced

55-13 The following Cases illustrate various scenarios for refinancing the current portion of long-term debt and notes payable as discussed in paragraphs 470-10-45-13 through 45-20:

Entity refinances on long-term basis the current maturity of long-term debt and notes payable (Case A).
Laws prohibit the transfer of funds (Case B).
Entity issues debentures to liquidate the debt (Case C).
Entity negotiates a revolving credit agreement (Case D).
Entity negotiates a revolving credit agreement with borrowing limits (Case E).
Entity refinances commercial paper (Case F).
Case illustrates balance sheet presentation (Case G).

ASC 470-10-55 includes multiple cases illustrating whether short-term obligations should be classified as current or noncurrent under ASC 470-10-45-14 in various refinancing scenarios. The assumptions in most of the cases are similar (see the next section). The cases address the application of the guidance to:

Two post-balance-sheet-date refinancing scenarios (Case C of Example 4, and Example 5); see Section 13.7.6.3.
Various financing agreements (Cases A, B, D, and E of Example 4); see Section 13.7.6.4.
A financing agreement related to a long-term construction project (Case F of Example 4); see Section 13.7.6.5. (SAB Topic 6.H.2 also addresses this scenario.)

In addition, Case G in Example 4 illustrates balance sheet presentation; see Section 13.7.6.6.

13.7.6.2 Shared Assumptions

ASC 470-10

Example 4: Current Maturity of Long-Term Debt and Notes Payable to Be Refinanced

55-14 The Cases in this Example do not comprehend all possible circumstances and do not include all the disclosures that would typically be made regarding long-term debt or current liabilities.

55-15 Cases A through G share all of the following assumptions:

Entity A’s fiscal year-end is December 31, 19X5.
The date of issuance of the December 31, 19X5, financial statements is March 31, 19X6; the Entity’s practice is to issue a classified balance sheet.
At December 31, 19X5, short-term obligations include $5,000,000 representing the portion of 6 percent long-term debt maturing in February 19X6 and $3,000,000 of 9 percent notes payable issued in November 19X5 and maturing in July 19X6.
The Entity intends to refinance on a long-term basis both the current maturity of long-term debt and the 9 percent notes payable.
Accounts other than the long-term debt maturing in February 19X6 and the notes payable maturing in July 19X6 are as follows.
Unless otherwise indicated, the Cases also assume that the lender or prospective lender is expected to be capable of honoring the agreement, that there is no evidence of a violation of any provision, and that the terms of borrowings available under the agreement are readily determinable.

ASC 470-10-55-14 and 55-15 contain assumptions that apply to Cases A through G in Example 4 in ASC 470-10-55-16 through 55-32 (see the next section and Section 13.7.6.4).

13.7.6.3 Post-Balance-Sheet-Date Refinancing

ASC 470-10

Example 4: Current Maturity of Long-Term Debt and Notes Payable to Be Refinanced

Case C: Entity Issues Debentures to Liquidate the Debt

55-21 In this Case, the Entity issues $8,000,000 of 10-year debentures to the public in January 19X6. The Entity intends to use the proceeds to liquidate the $5,000,000 debt maturing February 19X6 and the $3,000,000 of 9 percent notes payable maturing July 19X6. In addition, assume the debt maturing February 19X6 is paid before the issuance of the balance sheet, and the remaining proceeds from the sale of debentures are invested in a U.S. Treasury note maturing the same day as the 9 percent notes payable.

55-22 Because the Entity refinanced the long-term debt maturing in February 19X6 in a manner that meets the conditions set forth in paragraph 470-10-45-14, that obligation would be excluded from current liabilities. In addition, the 9 percent notes payable maturing in July 19X6 would also be excluded because the Entity has obtained funds expressly intended to be used to liquidate those notes and not intended to be used in current operations. In balance sheets after the date of sale of the debentures and before the maturity date of the notes payable, the Entity would exclude the notes payable from current liabilities if the U.S. Treasury note is excluded from current assets (see paragraph 210-10-45-4).

55-23 If the debentures had been sold before January 1, 19X6, the $8,000,000 of obligations to be paid would be excluded from current liabilities in the balance sheet at that date if the $8,000,000 in funds were excluded from current assets.

55-24 If, instead of issuing the 10-year debentures, the Entity had issued $8,000,000 of equity securities and all other facts in this Case remained unchanged, both the 6 percent debt due February 19X6 and the 9 percent notes payable due July 19X6 would be classified as liabilities other than current liabilities, such as Indebtedness Due in 19X6 Refinanced in January 19X6.

Example 5: Classification of a Short-Term Obligation Repaid Before Being Replaced by a Long-Term Security

55-33 This Example illustrates the guidance in paragraph 470-10-45-15.

55-34 This Example has the following assumptions:

An Entity has issued $3,000,000 of short-term commercial paper during the year to finance construction of a plant.
At June 30, 1976, the Entity’s fiscal year end, the Entity intends to refinance the commercial paper by issuing long-term debt. However, because the Entity temporarily has excess cash, in July 1976 it liquidates $1,000,000 of the commercial paper as the paper matures.
In August 1976, the Entity completes a $6,000,000 long-term debt offering.
Later during the month of August, it issues its June 30, 1976, financial statements.
The proceeds of the long-term debt offering are to be used to do all of the following:
1. Replenish $1,000,000 in working capital
2. Pay $2,000,000 of commercial paper as it matures in September 1976
3. Pay $3,000,000 of construction costs expected to be incurred later that year to complete the plant.

55-35 The $1,000,000 of commercial paper liquidated in July would be classified as a current liability in the Entity’s balance sheet at June 30, 1976. The $2,000,000 of commercial paper liquidated in September 1976 but refinanced by the long-term debt offering in August 1976 would be excluded from current liabilities in balance sheets at the end of June 1976, July 1976, and August 1976. It should be noted that the existence of a financing agreement at the date the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) rather than a completed financing at that date would not change these classifications.

55-36 At the end of August 1976, $2,000,000 of cash would be excluded from current assets or, if included in current assets, a like amount of debt would be classified as a current liability.

Case C in Example 4 in ASC 470-10-55-21 through 55-24 illustrates the application of the guidance on post-balance-sheet-date refinancings in ASC 470-10-25-14(a) (see Section 13.7.3.1). Example 5 in ASC 470-10-55-33 through 55-36 illustrates the application of that guidance in a scenario in which the short-term obligation is repaid before the post-balance-sheet-date refinancing (see Section 13.7.3.2). The assumptions in ASC 470-10-55-14 and 55-15 apply to Case C (see Section 13.7.6.2).

13.7.6.4 Financing Agreements

ASC 470-10

Example 4: Current Maturity of Long-Term Debt and Notes Payable to Be Refinanced

Case A: Entity Refinances on Long-Term Basis the Current Maturity of Long-Term Debt and Notes Payable

55-16 The Entity negotiates a financing agreement with a commercial bank in December 19X5 for a maximum borrowing of $8,000,000 at any time through 19X7 with the following terms:

Borrowings are available at Entity A’s request for such purposes as it deems appropriate and will mature three years from the date of borrowing.
Amounts borrowed will bear interest at the bank’s prime rate.
An annual commitment fee of 1/2 of 1 percent is payable on the difference between the amount borrowed and $8,000,000.
The agreement is cancelable by the lender only if any of the following occur:
1. The Entity’s working capital, excluding borrowings under the agreement, falls below $10,000,000.
2. The Entity becomes obligated under lease agreements to pay an annual rental in excess of $1,000,000.
3. Treasury stock is acquired without the prior approval of the prospective lender.
4. The Entity guarantees indebtedness of unaffiliated persons in excess of $500,000.

55-17 The Entity’s intention to refinance meets the condition specified by paragraph 470-10-45-14. Compliance with the provisions listed in (d) of the preceding paragraph is objectively determinable or measurable; therefore, the condition specified by paragraph 470-10-45-14(b)(1) is met. The proceeds of borrowings under the agreement are clearly available for the liquidation of the 9 percent notes payable and the long-term debt maturing in February 19X6. Both obligations, therefore, would be classified as other than current liabilities.

55-18 Following are the liability section of Entity A’s balance sheet at December 31, 19X5, and the related note disclosures required by this Subtopic, based on the information in paragraphs 470-10-55-15 through 55-16. Because the balance sheet is issued subsequent to the February 19X6 maturity of the long-term debt, the note describes the refinancing of that obligation.

Note A

The Entity has entered into a financing agreement with a commercial bank that permits the Entity to borrow at any time through 19X7 up to $8,000,000 at the bank’s prime rate of interest. The Entity must pay an annual commitment fee of 1/2 of 1 percent of the unused portion of the commitment. Borrowings under the financing agreement mature three years after the date of the loan. Among other things, the agreement prohibits the acquisition of treasury stock without prior approval by the bank, requires maintenance of working capital of $10,000,000 exclusive of borrowings under the agreement, and limits the annual rental under lease agreements to $1,000,000. In February 19X6, the Entity borrowed $5,000,000 at 8 percent and liquidated the 6 percent long-term debt, and it intends to borrow additional funds available under the agreement to refinance the 9 percent notes payable maturing in July 19X6.

Case B: Laws Prohibit the Transfer of Funds

55-19 A foreign subsidiary of the Entity negotiates a financing agreement with its local bank in December 19X5. Funds are available to the subsidiary for its unrestricted use, including loans to affiliated entities; other terms are identical to those cited in Case A. Local laws prohibit the transfer of funds outside the country.

55-20 The requirement of paragraph 470-10-45-14(b)(1) is met because compliance with the provisions of the agreement is objectively determinable or measurable. Because of the laws prohibiting the transfer of funds, however, the proceeds from borrowings under the agreement are not available for liquidation of the debt maturing in February and July 19X6. Accordingly, both the 6 percent debt maturing in February 19X6 and the 9 percent notes payable maturing in July 19X6 would be classified as current liabilities.

Case D: Revolving Credit Agreement

55-25 In December 19X5 the Entity negotiates a revolving credit agreement providing for unrestricted borrowings up to $10,000,000. Borrowings will bear interest at 1 percent over the prevailing prime rate of the bank with which the agreement is arranged but in any event not less than 8 percent, will have stated maturities of 90 days, and will be continuously renewable for 90-day periods at the Entity’s option for 3 years provided there is compliance with the terms of the agreement. Provisions of the agreement are similar to those cited in paragraph 470-10-55-16(d). Further, the Entity intends to renew obligations incurred under the agreement for a period extending beyond one year from the balance sheet date. There are no outstanding borrowings under the agreement at December 31, 19X5.

55-26 In this instance, the long-term debt maturing in February 19X6 and the 9 percent notes payable maturing in July 19X6 would be excluded from current liabilities because the Entity consummated a financing agreement meeting the conditions set forth in paragraph 470-10-45-14(b) before the issuance of the balance sheet.

Case E: Revolving Credit Agreement With Borrowing Limits

55-27 Assume that the agreement cited in Case D included an additional provision limiting the amount to be borrowed by the Entity to the amount of its inventory, which is pledged as collateral and is expected to range between a high of $8,000,000 during the second quarter of 19X6 and a low of $4,000,000 during the fourth quarter of 19X6.

55-28 The terms of the agreement comply with the conditions required by this Subtopic; however, because the minimum amount expected to be available from February to December 19X6 is $4,000,000, only that amount of short-term obligations can be excluded from current liabilities (see paragraphs 470-10-45-16 through 45-19). Whether the obligation to be excluded is a portion of the currently maturing long-term debt or some portions of both it and the 9 percent notes payable depends on the intended timing of the borrowing.

55-29 If the Entity intended to refinance only the 9 percent notes payable due July 19X6 and the amount of its inventory is expected to reach a low of approximately $2,000,000 during the second quarter of 19X6 but be at least $3,000,000 in July 19X6 and thereafter during 19X6, the $3,000,000 9 percent notes payable would be excluded from current liabilities at December 31, 19X5 (see paragraphs 470-10-45-16 through 45-19).

Cases A, B, D, and E in Example 4 in ASC 470-10-55-16 through 55-20 and ASC 470-10-55-25 through 55-29 illustrate the application of the guidance on financing agreements in ASC 470-10-25-14(b) (see Section 13.7.4). The assumptions in ASC 470-10-55-14 and 55-15 (see Section 13.7.6.2) apply to these cases. Further, Cases B and E illustrate the application of the guidance on the limits on the amount that can be classified as noncurrent when the amount available under the financing agreement is subject to transfer restrictions or fluctuates (see Section 13.7.4.3).

13.7.6.5 Financing Agreements Related to Long-Term Construction Projects

ASC 470-10

Example 4: Current Maturity of Long-Term Debt and Notes Payable to Be Refinanced

Case F: Commercial Paper Refinancing

55-30 In lieu of the facts given in paragraph 470-10-55-15(c) through (d), assume that during 19X5 the Entity entered into a contract to have a warehouse built. The warehouse is expected to be financed by issuance of the Entity’s commercial paper. In addition, the Entity negotiated a standby agreement with a commercial bank that provides for maximum borrowings equal to the expected cost of the warehouse, which will be pledged as collateral. The agreement also requires that the proceeds from the sale of commercial paper be used to pay construction costs. Borrowings may be made under the agreement only if the Entity is unable to issue new commercial paper. The proceeds of borrowings must be used to retire outstanding commercial paper and to liquidate additional liabilities incurred in the construction of the warehouse. At December 31, 19X5, the Entity has $7,000,000 of commercial paper outstanding and $1,000,000 of unpaid construction costs resulting from a progress billing through December 31.

55-31 Because the commercial paper will be refinanced on a long-term basis, either by uninterrupted renewal or, failing that, by a borrowing under the agreement, the commercial paper would be excluded from current liabilities. The $1,000,000 liability for the unpaid progress billing results from the construction of a noncurrent asset and will be refinanced on the same basis as the commercial paper and, therefore, it would also be excluded from current liabilities (see paragraph 470-10-45-13).

SEC Staff Accounting Bulletins

SAB Topic 6.H.2, Classification of Short-Term Obligations — Debt Related to Long-Term Projects

[Reproduced in ASC 470-10-S99-3]

Facts: Companies engaging in significant long-term construction programs frequently arrange for revolving cover loans which extend until the completion of long-term construction projects. Such revolving cover loans are typically arranged with substantial financial institutions and typically have the following characteristics:

A firm long-term mortgage commitment is obtained for each project.
Interest rates and terms are in line with the company’s normal borrowing arrangements.
Amounts are equal to the expected full mortgage amount of all projects.
The company may draw down funds at its option up to the maximum amount of the agreement.
The company uses short-term interim construction financing (commercial paper, bank loans, etc.) against the revolving cover loan. Such indebtedness is rolled over or drawn down on the revolving cover loan at the company’s option. The company typically has regular bank lines of credit, but these generally are not legally enforceable.

Question: Under FASB ASC Subtopic 470-10, Debt — Overall, will the classification of loans such as described above as long-term be acceptable?

Interpretive Response: Where such conditions exist providing for a firm commitment throughout the construction program as well as a firm commitment for permanent mortgage financing, and where there are no contingencies other than the completion of construction, the guideline criteria are met and the borrowing under such a program should be classified as long-term with appropriate disclosure.

Case F in Example 4 in ASC 470-10-55-30 and 55-31 and SAB Topic 6.H.2 illustrate the application of the guidance on financing agreements in ASC 470-10-25-14(b) (see Section 13.7.4) to scenarios that involve short-term interim financing to fund long-term construction projects. The assumptions in ASC 470-10-55-14 and 55-15 (see Section 13.7.6.2) apply to Case F except as specified in ASC 470-10-55-30.

This guidance illustrates that a short-term interim financing (e.g., commercial paper, bank loans) can be classified as noncurrent if a financing agreement (e.g., a firm, revolving long-term mortgage commitment for the construction project) meets the conditions in ASC 470-10-45-14(b). The fact that the financing agreement is contingent on the completion of construction is not relevant.

13.7.6.6 Balance Sheet Presentation

ASC 470-10

Example 4: Current Maturity of Long-Term Debt and Notes Payable to Be Refinanced

Case G: Balance Sheet Presentation

55-32 The following are two methods of presenting liabilities in Entity A’s balance sheet at December 31, 19X5, assuming the Entity intends to refinance the 6 percent debt maturing in February 19X6 and the 9 percent notes payable maturing in July 19X6 but has not met the conditions required by this Subtopic to exclude those obligations from current liabilities.

Alternative 1

Alternative 2

Case G in Example 4 in ASC 470-10-55-32 illustrates the appropriate balance sheet presentation based on the assumptions in ASC 470-10-55-14 and 55-15 (see Section 13.7.6.2).

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:

2

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).

3

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.

13.9 Increasing-Rate Debt

ASC 470-10

45-7 Classification of increasing-rate debt as current or noncurrent would reflect the borrower’s anticipated source of repayment that is, current assets or a new short-term debt borrowing versus a long-term refinancing agreement that meets the requirements of this Subtopic and need not be consistent with the time frame used to determine periodic interest cost.

The manner in which increasing-rate extendable debt is classified as current or noncurrent is not necessarily consistent with how periodic interest cost is determined under ASC 470-10-35-1 and 35-2 (see Section 6.2.4.5). Rather, increasing-rate extendable debt should be classified as current or noncurrent on the basis of the same general guidance in ASC 470-10 that applies to all other debt instruments. The debtor may therefore need to consider whether a refinancing arrangement meets the requirements in ASC 470-10-45-14 (see Section 13.7).

13.10 Convertible Debt

ASC 470-20

45-1B The guidance on convertible debt instruments in this Subtopic does not affect an issuer’s determination of whether the instruments should be classified as a current liability or a long-term liability. For purposes of applying other applicable U.S. generally accepted accounting principles (GAAP) to make that determination, all terms of the convertible debt instrument shall be considered.

Nonauthoritative AICPA Guidance

Technical Q&As Section 1100, “Statement of Financial Position”

.14 Classification of Convertible Debt

Inquiry — A company has debt that is convertible into common stock of the company at the option of the company. The debt by its terms is considered long-term debt in the classified balance sheet. The company intends to call the debt and issue the common stock within one year of the balance sheet date. Should this debt be classified as a current liability?

Reply — No. The expected call of the debt securities will not consume current assets or increase current liabilities, and accordingly should continue to be classified as a long-term obligation.

The general principle underlying the classification of debt in a debtor’s principal balance sheet should be based on facts existing at the date of the balance sheet rather than on expectations. According to FASB Accounting Standards Codification (ASC) glossary, the term 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.” . . .

The classification of convertible debt as current or noncurrent depends on the terms of the debt. Current liabilities generally include convertible debt obligations for which payment of cash or other current assets or the creation of current liabilities could be required within one year (or the operating cycle, if longer) after the balance sheet date. Unless debt has met the requirements related to short-term obligations expected to be refinanced on a long-term basis (see Section 13.7), current classification is necessary for:

Convertible debt that is scheduled to mature within one year (or the operating cycle, if longer) after the balance sheet date (see Section 13.3).
Any portion of long-term convertible debt that is scheduled to mature within one year (or the operating cycle, if longer) after the balance sheet date (e.g., the current portion of an amortizing long-term debt obligation for which the principal amount is paid down over the obligation’s life; see Section 13.3).
Convertible debt that is repayable on demand or puttable by the holder within one year (or the operating cycle, if longer) after the balance sheet date (see Section 13.4), including convertible debt that is contingently puttable if the contingency has been met.
Long-term convertible debt that became repayable on demand or within one year (or the operating cycle, if longer) after the balance sheet date because of a covenant violation that occurred as of the balance sheet date or before the financial statements were issued or available to be issued (see Section 13.5). Note that the issuer should consider whether either of the exceptions for covenant waivers and grace periods is applicable (see Section 13.5.3).
The cash-settled portion of debt that is convertible at any time or within one year (or the operating cycle, if longer) after the balance sheet date if the issuer is or could be required to settle all or part of the conversion value in cash upon conversion (e.g., Instrument A and Instrument C; see Section 2.3.2.2). Such debt is treated as debt that is repayable on demand (see Section 13.4) even if the conversion option is out-of-the-money.

Generally, the holder’s conversion option does not affect the classification of convertible debt as current or noncurrent if it must be settled by the delivery of the issuer’s equity shares (see Section 13.3.3.4).

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.

13.12 Presentation

13.12.1 Balance Sheet Presentation

ASC 210-10

45-5 A total of current liabilities shall be presented in classified balance sheets.

In a classified balance sheet, current liabilities are presented separately from noncurrent liabilities, with a summation of each total. SEC Regulation S-X, Rule 5-02 (reproduced in ASC 210-10-S99-1), requires SEC registrants within the scope of that rule (i.e., commercial and industrial companies) to present long-term debt separately from current liabilities when filing financial statements with the SEC. Case G in Example 4 in ASC 470-10-55-32 illustrates the appropriate balance sheet presentation based on the assumptions in ASC 470-10-55-14 and 55-15 (see Section 13.7.6.6).

13.12.2 Subsidiary’s and Parent’s Fiscal Years Differ

ASC 470-10 — SEC Materials — SEC Staff Guidance

Comments Made by SEC Observer at Emerging Issues Task Force (EITF) Meetings

SEC Observer Comment: Classification of Subsidiary’s Loan Payable in Consolidated Balance Sheet When Subsidiary’s and Parent’s Fiscal Years Differ

S99-4 The following is the text of SEC Observer Comment: Classification of Subsidiary’s Loan Payable in Consolidated Balance Sheet When Subsidiary’s and Parent’s Fiscal Years Differ.

Issues periodically occur related to classification of a subsidiary’s loan payable in a consolidated balance sheet when the subsidiary’s and parent’s fiscal years differ. For example, assume that a consolidated balance sheet prepared as of February 29, 1988, comprised of the parent company’s balance sheet as of that date and the subsidiary’s balance sheet as of December 31, 1987. The subsidiary’s balance sheet included a material loan payable to a bank due January 31, 1989. The SEC staff would expect the debt in this case to be classified as current because to do otherwise would result in a material misclassification.

A subsidiary’s fiscal year may end before that of its parent. As a result, a subsidiary may have debt that becomes due more than one year (or the operating cycle, if longer) after the subsidiary’s balance sheet date but less than one year (or the operating cycle, if longer) after the parent’s balance sheet date. ASC 470-10-S99-4 includes the SEC staff’s views about the classification in this situation. If a debt obligation matures less than one year (or the operating cycle, if longer) after the parent’s balance sheet date, the debt should be classified as a current liability in the parent’s consolidated balance sheet.

13.12.3 Comparative Financial Statements

Nonauthoritative AICPA Guidance

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

.13 Uncertainty Arising From Violation of Debt Agreement

Inquiry — At the end of 20X1, a company was in violation of its long-term debt covenant and was unable to obtain a waiver from the bank. It therefore reclassified its debt to current and appropriate footnote disclosures were made. During 20X2, the violation was cured. What is the proper classification of the debt in the company’s 20X2 comparative financial statements?

Reply — . . . Since the violation was cured in 20X2, the debt should be classified as long-term in the 20X2 financial statements. The debt should not be reclassified to long term in the 20X1 financial statements because it was a current liability based on the facts existing at the 20X1 balance sheet date. . . .

AICPA Technical Q&As Section 3200.13 clarifies that when an entity presents comparative financial statements, it should not retrospectively reclassify debt as noncurrent if the debt was appropriately classified as current when those financial statements were first issued. The specific situation addressed in Technical Q&As Section 3200.13 is one in which the debtor (1) violated a covenant, which caused the debt to become repayable as of the 20X1 balance sheet date (see Section 13.5), and (2) did not obtain a waiver from the creditor before the 20X1 financial statements were issued (see Section 13.5.3). Accordingly, the debt was classified as current in the 20X1 financial statements. The debtor cured the violation in 20X2 so that the debt qualified for noncurrent classification in the 20X2 financial statements. Nevertheless, the debtor could not reclassify the debt as noncurrent in its 20X2 comparative financial statements for 20X1.