What You Need to Know:
Debt Classification

As part of the FASB’s simplification initiative, the Board has been listening to stakeholders’ views on the need to simplify guidance on determining whether debt should be classified as current or noncurrent.

As a result, the FASB has decided to take a look at FASB Accounting Standards Codification® Topic 470, Debt. The existing guidance for debt classification does not include an overarching principle for classifying debt on the balance sheet. Instead, GAAP includes a set of rules that apply to narrow fact patterns.
Stakeholders have told the Board that current guidance is overly complex because it is granular and rules-based.

For example, existing guidance includes specific rules for:
  • Waivers of covenant violations
  • Refinances of debt after year-end
  • Callable debt
  • Debt due on demand
  • Subjective acceleration clauses, and
  • Revolving credit arrangements with lock boxes.
  • The FASB is proposing to replace the existing, pattern-specific debt classification guidance with an overarching, cohesive debt classification principle.
The FASB is drafting a proposed Accounting Standards Update that would replace the existing, pattern-specific debt classification guidance with an overarching, cohesive debt classification principle. The principle would be applied based on the facts and circumstances that exist at the balance sheet date. It would include an exception related to waivers of debt covenant violations obtained after the balance sheet date but before the financial statements are issued.

The new principles-based guidance would require noncurrent classification of debt if one of the following criteria is met:
  1. The debt must be settled 12 months or more (or operating cycle, if longer) after the balance sheet date.
  2. The organization has a contractual right to defer settlement of the debt for at least 12 months (or operating cycle, if longer) after the balance sheet date.
     

The proposal could shift classification of certain debt arrangements between current and noncurrent because the old rules will be superseded by the new principles. It is important for any organization that enters into debt arrangements to be familiar with the guidance.

The FASB plans to issue an exposure draft with a 60-day comment period in the coming months. All stakeholders are encouraged to review and provide feedback on the proposal.

The effective date will be determined after the Board considers stakeholder feedback on the amendments in this proposed Update.

The FASB expects the proposal would reduce cost and complexity when determining whether debt should be classified as current or noncurrent in the balance sheet while providing more useful information to financial statement users.