The Accounting Policy & Practice Report ® provides financial accounting policy makers, advisors, and practitioners with the latest news, expert insights, and guidance on emerging, evolving,...
By Denise Lugo
Potential accounting rule changes to debt classification could result in more debt being determined as current, possibly boosting costs and creating operational issues for the construction industry, according to private company discussions.
FASB earlier this year proposed simpler, less costly rules for determining whether to classify debt as short or long term on the balance sheet. Implementing the proposal without consideration of the construction industry could bring influence operations and prove costly to contractors, according to July 11 discussions of FASB and the Private Company Council, one of its advisory bodies.
“I had clients whose working capital might drop 50 percent if this went through and that would kick them out of that state entirely in some instances,” FASB member Harold Monk said.
Operationally and from a cost standpoint, it would impact the construction industry because of nuances in that sector, according to the discussions. Contractors on a regular basis renegotiate debt after the balance sheet date but before the financial statement issuance date, in order to increase their legal bid limits.
There are regulations, and in some instances state laws, that place limits on contractor’s bidding process. These limits are based on working capital on a company’s financial statements, the discussions indicated.
Other problems could follow. “We’d have a training issue because those regulators that have to overcome this would have to be trained and then they would have to change their systems,” said Monk, “and in some instances it may require rewriting regulation and in some smaller number of instances it might require statutory change, which takes years.”
The revisions could also greatly reduce the size of jobs that contractors can bid on. Other impacts include an increase in professional fees—incurred for reviewed financial statements after the refinancing has occurred so that the debt could be more appropriately classified as current.
The debt companies carry can total billions of dollars and can weigh on profits. Debt classification therefore enables banks and other lenders to understand whether a company has the ability to meet its current and future obligations.
If finalized, the proposal would replace existing rules-based guidance with an overriding classification principle. The principle would be based on legal terms of the debt agreement and the company’s contractual rights as of the balance sheet date. The proposed debt classification principle might result in more debt being classified as current, which has consequences for existing contracts and debt ratios.
FASB received 29 comment letters in response to the proposal. Most public company respondents were in favor of the changes, board discussions indicated.
PCC members expressed concerns about aspects of the rules, but ultimately a majority agreed that FASB should finalize the guidance for both public and private companies with some minor revisions. “It is a simplification and I welcome the changes—there shouldn’t be any difference in terms of public versus private and in terms of debt because that’s a use of capital,” Yan Zhang, partner at EisnerAmper LLP, said.
“If we’re going to do down a path of creating some sort of difference between public and private in how to account for debt classification or refinance, it would cause a lot of confusion in practice when people look at financial statements,” she said.
To contact the reporter on this story: Denise Lugo in New York at firstname.lastname@example.org
To contact the editor responsible for this story: S. Ali Sartipzadeh at email@example.com
Copyright © 2017 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)