Simplifying the Balance Sheet Classification of Debt

Objective:


The objective of this project was to provide guidance that would reduce the cost and complexity of determining the current versus noncurrent balance sheet classification of debt.
 

Background:


The project on simplifying the balance sheet classification of debt was added to the technical agenda in August 2014 as part of the Board’s Simplification Initiative. The objective of that initiative was to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity could have been reduced while maintaining or improving the usefulness of the information required to be reported by an entity.
 
Stakeholders told the Board that the guidance on determining whether debt should be classified as a current liability or a noncurrent liability in a classified balance sheet is overly complex. To reduce complexity, the current narrow-scope guidance would have been replaced with principles-based guidance.
 
On January 10, 2017, the FASB issued the proposed Accounting Standards Update, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent). In the 2017 proposed Update, the Board proposed replacing the existing narrow-scope, fact-specific guidance in Topic 470 with an overarching, cohesive principle for debt classification. The due date for comment letters was May 5, 2017.
 
During redeliberations on the 2017 proposed Update, the Board added proposed requirements to preclude the consideration of unused long-term financing arrangements and to allow the consideration of grace periods. No other significant changes to the 2017 proposed Update were made. There also were clarifications and revisions made to several aspects of the 2017 proposed Update, including scope, debt settled in equity, debt-covenant waiver conditions, and disclosures.
 
On September 12, 2019, the FASB issued a revised proposed Accounting Standards Update, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent). The purpose of re-exposure was to raise awareness of the revisions with all entities, including private company and not-for-profit organization stakeholders, and to identify unintended consequences of the proposed guidance. The due date for comment letters was October 28, 2019.
 

Final Project Update:


In April 2021, the Board discussed comments received on and redeliberated the proposed amendments in its January 2017 proposed Accounting Standards Update and its September 2019 revised proposed Accounting Standards Update, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent).

Some Board members preferred to move forward with finalizing the project, noting that the proposed classification principle was operable and would have provided decision-useful information to financial statement users. However, the majority of the Board members noted that the proposed amendments would not achieve the objective of the project and would replace the current cost and complexity with new cost and complexity. Therefore, the Board removed the project from its technical agenda.