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Attention, all aficionados of corporate debt! The Financial Accounting Standards Board has floated a proposal to simplify how debt is classified on the balance sheet, which could ultimately change the amounts companies report as current or non-current.

The proposal, published earlier this week, would replace the fact-specific test that FASB offers now with simpler, principles-based guidance. That should ease the task of deciding where to report debt, either as current or non-current. The proposal would amend Accounting Standard 470, Debt.

The goal with the amendments is to focus debt classification on what the borrower’s rights and obligations are, as of the date a financial statement is filed. So for example, if a violation of a debt covenant has been waived, the borrowing company could continue to list that debt as non-current if the waiver is issued before the financial statements are filed.

The proposals are out for public comment until May, and then FASB will review the feedback and deliberate more; even if everyone loves the idea, no change will go into effect any time soon. The debt proposals are part of FASB’s long-term effort to simplify the rules around financial disclosure.

Assuming the rules do get adopted, they could lead companies to shift around some debt between current and non-current lines. FASB gave two examples:

  • Short-term debt that is refinanced on a long-term basis after the balance sheet date would no longer be classified as a noncurrent liability.
  • Companies with debt that contains subjective acceleration clauses would no longer be required to assess the likelihood of acceleration of the due date when determining whether the debt is a noncurrent or current liability.

None of this will affect Calcbench subscribers directly; we will always be able to capture current and non-current debt levels as companies report them. But financial analysts could see those debt levels shift around in the future, and this is why. We just wanted to pass along the news as a public service to anyone who might want to review the proposals and comment on them.

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