FASB Previews New Rules on Debt Classification, Inventory Disclosures

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The Financial Accounting Standards Board (FASB) issued two proposed Accounting Standards Updates (ASUs) on Jan. 10 – one regarding simplification of debt classification in a classified balance sheet, and the other on changes to inventory disclosure requirements.

Here are key takeaways from both.

Balance Sheet Classification of Debt
Stakeholders have told the FASB that guidance on determining whether debt should be classified as current or noncurrent in a classified balance sheet is too confusing. Topic 470, Debt, currently includes guidance on various transactions that are narrowly focused and fact-specific.

The proposal would replace that guidance with “an overarching, cohesive principle,” the proposed ASU states.

The FASB is proposing that a borrower would continue to classify the debt as noncurrent when a violation of a debt covenant has been waived, if a borrower receives a waiver before the financial statements are issued (or are available to be issued), and the waiver meets certain conditions.

The proposed amendments could shift classification of certain debt arrangements between noncurrent and current liabilities as compared with current guidance in the following ways:

  • 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.

The FASB expects the proposal to reduce costs and complexity for financial statement preparers and auditors in calculating if debt should be considered current or noncurrent in the balance sheet, and also provide more consistent and transparent information to financial statement users.

Comments on the proposed ASU are due by May 5. The exposure draft includes instructions on how to submit comments to the FASB.

Inventory Disclosures
The proposal is part of the FASB’s Disclosure Framework project, which is aimed at improving the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of a reporting organization’s financial statements.

The proposed amendments would:

1. Modify disclosure requirements for inventory.
2. Would require the following disclosures for all entities:

  • Inventory disaggregated by component, such as raw materials, work in process, finished goods, and supplies.
  • Inventory disaggregated by measurement basis.
  • Changes to the inventory balance that aren’t specifically related to the purchase, manufacture, or sale of inventory in the ordinary course of business.
  • A qualitative description of the types of costs capitalized into inventory.
  • The effect of last-in, first-out (LIFO) liquidations on income.
  • The replacement cost of LIFO inventory.

3. Would require entities that report inventory using the retail inventory method to provide qualitative and quantitative information about the critical assumptions used in the calculation of inventory under the retail inventory method.
4. Would require entities that must disclose segment information in Topic 280, Segment Reporting, to disclose in both annual and interim periods inventory by reportable segment and by component for each reportable segment to the extent that information is regularly provided to the chief operating decision-maker.

The proposal does not include disclosures of the cost of goods sold. The FASB wants feedback on the proposal as it relates to private companies and nonprofit organizations.

Comments on this proposed ASU are due to the FASB by March 13.

Terry Sheridan
Columnist
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