As a part of the FASB’s Simplification Initiative, the FASB has released a revised proposed ASU that seeks to simplify the classification of debt between current and non-current debt by making this determination more principles based. The FASB had previously issued a proposed ASU on this topic in January 2017 and received comment letters that sparked additional research by the FASB that led to some changes in the proposed ASU. The FASB added the proposed requirement in this revision to preclude the consideration of unused long-term financing arrangements and to allow the consideration of grace periods.

Although not required for all entities, most entities present a classified balance sheet that presents current and non-current assets and liabilities separately. This presentation allows a reader to better understand how much of the assets of the entity are readily available to meet the needs of the organization in the next year. The proposed amendment would add a principle to follow when classifying current and noncurrent debt. In accordance with this principle, an entity would classify a debt instrument as noncurrent if either of the following criteria is met as of the balance sheet date:

• The liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date.

• The entity has a contractual right to defer settlement of the liability for a period of greater than one year (or operating cycle, if longer) after the balance sheet date.

Waivers received for debt covenant failures that would normally allow for acceleration of debt would still allow an entity to recognize the debt as noncurrent, if the waiver was received before the financial statements were available to be issued. If a grace period exists that allows a borrower to cure the violation without a waiver, then the new principle must be applied as opposed to a probability assessment regarding the likelihood the violation would be cured. Under the new principle, the ability to classify short-term debt that is refinanced on a long-term basis after the balance sheet date as a noncurrent liability would no longer be available. Instead, this debt would be presented as a current liability as the facts and circumstances that existed at the balance sheet date were that the debt was a current liability on that date. Disclosure of the refinancing would be allowable within the footnotes to the financial statements. Additionally any short-term debt with associated long-term financing arrangements would be classified according to this principle and an entity would be precluded from considering the other long-term financing arrangements.

This standard would be effective in the first set of financial statements following the effective date of the amendment. This date will be determined by the FASB after stakeholder feedback is considered. An entity would apply this proposed standard on a prospective basis and early adoption would be permitted.

Comments are due on this Exposure Draft to the FASB by October 28, 2019. The full text of the Exposure Draft is available here.

^{Readers should not act upon information presented without individual professional consultation.}