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FASB Attempt at Debt Classification Simplification Concerns Private Firms

By Denise Lugo Tentative decisions made by the Financial Accounting Standards Board that could result in a proposal to classify debt as current or noncurrent has raised concerns among private companies about the proposal's potential impacts, said Michael Cheng, FASB Supervising Project Manager, during a board webcast.Cheng June 23 reiterated concerns made by the Private Company Council in May about FASB's tentative decisions related to breaches of debt covenants where there is a subsequent waiver before the issuance of financial statements.During deliberations, FASB said it would propose that as of the balance sheet date, an entity has the right to defer settlement for a period of 12 months or more.If the entity has an ability to defer settlement as of the balance sheet date, then it is considered to be noncurrent debt, the board said. If the entity contractually doesn't have that ability, then it would be current debt.Proposal Not Useful Theoretically, the proposal makes sense, said Cheng. But the PCC's position “is that if we know with hindsight that there is going to be no use of networking capital, wouldn't it be more decision-useful to just say that ‘it's noncurrent debt because it's not current and we know it's not going to be current,' ” he said.Private companies are also concerned about the board's views related to material adverse clauses that are material adverse change clauses, as well as subjective acceleration clauses, and how they would play in the world of classifying debt, said Cheng.Next Steps FASB hasn't yet issued a proposal and still is redeliberating the topic under its simplification initiative to address the myriad of complex rules for classifying debt.The PCC at its May meeting recommended further outreach by FASB to private companies to learn more about potential effects.Discussions are expected to continue on the topic in July.To contact the reporter on this story: Denise Lugo in Norwalk, Conn.,at contact the editor responsible for this story: Steven Marcy at article first appeared in the Accounting Policy & Practice Report, the highly-respected news component of Bloomberg BNA’s Financial Accounting Resource Center. For more information about this comprehensive research service, visit or call 800.372.1033.

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