October 25, 2018 — FASB Decides to Perform Additional Research on Issues Related to Simplifying the Balance Sheet Classification of Debt

At its August 22, 2018, meeting, the FASB 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. The reversal applied to all entities.

In response to this decision, constituents provided feedback that this reversal could have a significant impact on the health care industry. This issue was discussed in further detail at the FASB’s October 24, 2018, board meeting. Many companies in the health care industry have entered into long-term debt arrangements and liquidity arrangements (e.g., a line of credit) contemporaneously and in contemplation of each other. In such arrangements, the proceeds from the line of credit may only be used for repayment of the debt issued in a long-term debt arrangement. This linkage is contractually specified. Some Board members questioned whether it would be appropriate for entities with such arrangements to disregard the liquidity arrangement that contractually specifies that the proceeds may only be used to repay such long-term debt in the determination of the appropriate balance sheet classification for such debt. While the same types of arrangements may occur in other industries, they are most prevalent in the health care industry.

Several Board members indicated that it would be particularly important that the FASB's proposed Accounting Standards Update1 on this topic specify the scenarios in which a contractually linked liquidity arrangement could be considered when determining the balance sheet classification of long-term debt. Such factors include, but are not limited to, (1) the maturity of the long-term debt compared to the expiration of the liquidity arrangement and (2) the method of evaluating the financial viability of the financial institution issuing the liquidity arrangement.

The Board directed the FASB staff to perform additional research on issues related to simplifying the balance sheet classification of debt.

For more information about the October 24, 2018, meeting, see the meeting handout or the summary of tentative Board decisions.