FASB Addresses Sweep Issues Related to Simplifying the Balance Sheet Classification of Debt
In March 2018, the FASB staff provided external stakeholders with a preballot draft of a proposed Accounting Standards Update (ASU),1 which reflects the FASB’s tentative decisions reached to date on its project to simplify the balance sheet classification of debt as current or noncurrent.
At its August 22, 2018, meeting, the FASB addressed certain sweep issues raised by stakeholders during the external review process related to (1) unused long-term financing arrangements, (2) grace periods, and (3) effective date.
Unused Long-Term Financing Arrangements
The Board reversed its decision that if a long-term financing arrangement is in place as of the balance sheet date (e.g., an unused line of credit with the same or a different lender), the amount of current maturities for any other debt arrangements would be (1) reduced by the unused amount of the long-term financing arrangement up to the amount of the current maturities and (2) classified as a noncurrent liability.
Accordingly, an entity would disregard any unused long-term financing arrangement in place at the balance sheet date in determining the classification of debt. In addition, the Board directed the FASB staff to conduct additional outreach to stakeholders regarding scenarios in which a debtor has issued a redeemable instrument that is subject to a remarketing agreement and is also secured by a long-term letter of credit.
The Board discussed the application of the debt classification principle to scenarios in which a creditor provides a grace period to a borrower during which the borrower may cure a debt covenant violation that otherwise would make the debt become due. For example, a borrower may violate a provision of a long-term debt arrangement at the balance sheet date, and the debt arrangement may include a 90-day grace period for the borrower to cure the violation (i.e., the covenant would not be deemed to be formally violated until the 90-day grace period lapses and the borrower has not cured the violation).
The Board agreed that if the grace period results in the debt not being due at the balance sheet date, the borrower should classify the debt as a noncurrent liability. That is, a covenant violation resulting in the debt being due would not be deemed to have occurred until the 90-day grace period lapses and the borrower has not cured the violation.
In addition, the Board decided to require an entity to disclose information when a borrower violates a provision of a long-term debt agreement and the creditor provides a specified grace period. That disclosure would be required when “(1) the violation has not been cured before the financial statements are issued (or are available to be issued) and (2) the violation would make the long-term obligation become [due].”
The Board decided to delay the initially agreed-upon effective date by one year for both public business entities and all other entities as follows:
- For public business entities, for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years; and
- For all other entities, for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
The Board directed the FASB staff to draft an ASU for vote by written ballot.
For additional information about the August 22, 2018, meeting, see the meeting handout or the summary of tentative Board decisions.
FASB Proposed Accounting Standards Update, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current Versus Noncurrent).