GAAP and IFRS

PCC Worried About Debt Classification Change

Private companies say a new, principles-oriented approach for classifying debt as either "current' or 'noncurrent' may have unintended consequences.
Matthew HellerFebruary 18, 2015

Private Company Council members are concerned that FASB’s effort to simply the balance sheet classification of debt may have unintended consequences.

The FASB last month tentatively decided to propose a new, principles-oriented approach for classifying debt as either “current’ or ‘noncurrent’ in an entity’s balance sheet. Existing requirements have been criticized for their cost and complexity.

[contextly_sidebar id=”JvVJFx2PixYiwqtYHZgPXb5J7tH4PjBV”]At a meeting last week, Accounting Today reports, several PCC members said the proposal was conceptually sound but expressed concern there could be unintended consequences as a result of more debt being classified as current.

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Secondary users — such as suppliers, customers, and even Dun & Bradstreet — might quickly conclude that a private company has liquidity issues, the PCC members said, noting that such users focus on the face of financial statements and rarely read the footnotes to better understand a company’s financial situation.

The PCC is a sister organization of FASB and represents privately-held companies.

Currently, any debt coming due within the next 12 months is typically categorized as “current” and any debt due beyond that period is “noncurrent.”

Under FASB’s proposal, debt would be classified as noncurrent when the “liability is due to be contractually settled more than 12 months (or operating cycle, if longer)” after the reporting date and/or “the entity has a right to defer settlement of the liability for at least 12 months (or operating cycle, if longer)” after the reporting date.

Accounting Today said the PCC is also concerned about the proposal’s impact on existing debt covenants, such as current ratio thresholds. Auditors feel compelled to perform extended going concern procedures whenever a debt covenant is violated, even if it is innocuous or quickly resolved, PCC members pointed out.