FASB Leveraging IFRS Language to Develop Principle for Classification of Long Term Debt(1)

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By Denise Lugo

Jan. 28 — The Financial Accounting Standards Board said it will propose a principle that leverages language under international financial reporting standards for determining the classification of a loan, or other debt, as current or long term on balance sheets.

The board said it will leverage language under IFRS that requires a loan or other debt to be classified as long term when one or both of the following criteria are met:

• The loan or debt is due to be settled more than 12 months (or beyond the operating cycle) after the reporting period;

• The borrower has the right to defer settlement of the loan or debt for at least 12 months (or beyond its operating cycle) after the reporting period.

In applying right to defer settlement, borrowers would be required to use the legal interpretation to consider their rights in the contract and make their classification determination based on those rights, FASB said. Borrowers won't, however, have to consider whether they expect the lenders to exercise the rights.

FASB also agreed that the assessment of balance sheet classification of debt should be made as of the balance sheet date.

Moreover, the board said it would amend Accounting Standards Topic, ASC 470, Debt, to apply to all debt scenarios and to ensure that the scope of arrangements covered by the classification principle is clear.

Context

The project is part of the board's simplification initiative, which aimed at reducing cost and complexity while improving the usefulness of information to financial statement users.

The discussions are focused on simplifying the classification of debt within a balance sheet by developing a single principle in place of rules-based guidance. Existing guidance is complex and requires preparers, auditors, and users to consider narrow, fact-specific rules, FASB said.

Those rules often result in inconsistent debt classification for economically similar arrangements.

At its Aug. 13 meeting last year, the board expressed a preference for pursuing a principle “that would classify debt on the basis of contract terms and reporting entity's covenant compliance in lieu of an approach based on management judgment or intentions”.

FASB Jan. 28 said it will continue discussions at a future meeting to determine disclosure and transition requirements.

To contact the reporter on this story: Denise Lugo in Norwalk, Conn., at dlugo@bna.com

To contact the editor on this story: Ali Sartipzadeh in Washington at asartipzadeh@bna.com

For a copy of the board's handout go to: http://www.fasb.org.