Simpler, Cheaper Way to Classify Debt to Be Proposed

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By Denise Lugo

Oct. 19 — New rules are to be proposed to provide a less costly, simpler way for companies to determine whether to classify debt as “current” or “noncurrent” in a classified balance sheet, the Financial Accounting Standards Board said.

Companies have said the current approach for classifying debt is costly and complex. Classifying whether a company’s debt is due in the near term, “current,” or long term, “noncurrent,” is significant. The number—sometimes billions in dollars—enables banks and other lenders or analysts to evaluate a company's financially health, and its ability to meet its obligations.

Useful Information

In addition to cost savings, the potential changes would improve, or maintain usefulness, of the information reported to financial statement users, according to board discussions.

The proposal, unanimously approved by FASB Oct. 19 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.

An exception would be included for waivers of debt covenant violations received after the reporting date but before the issuance date of the company’s financial statement, the board said. Violating a covenant—meaning terms of a loan—means the lender can demand repayment in full or impose other penalties unless the company is given a waiver.

Issuing by Early Jan

The proposal will include other matters including how prominent information about waivers of debt covenant violations should be in the financial statement. FASB by 5-2 majority said debt that is classified as noncurrent as a result of a waiver should be presented as a separate line item.

The public comment proposal is to be issued by the end of December of early January, and companies would likely have until May 5 to weigh in, board discussions indicated.

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

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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