FASB Issues Proposed Changes on Balance Sheet Debt Classification and Disclosure Requirements for Inventory
FASB has issued proposed Accounting Standards Updates (ASUs) on:
- Classification of debt in a classified balance sheet (current versus noncurrent)
- Changes to the disclosure requirements for inventory under the Disclosure Framework.
Balance Sheet Classification of Debt
The proposed ASU is intended to improve financial reporting by simplifying guidance used to determine whether debt should be classified as current or noncurrent in a classified balance sheet. It would replace the existing, fact-specific guidance with an overarching, cohesive principle for debt classification that focuses on a borrower’s contractual rights and obligations that exist as of the reporting date.
Under the proposed ASU, a borrower would continue to classify its 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 result in a shift in the classification of certain debt arrangements between noncurrent liabilities and current liabilities as compared with current balance sheets 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.
Stakeholders are encouraged to review and provide comment on the FASB’s proposal to simplify and improve the guidance on determining whether debt should be classified as a current or noncurrent liability in a classified balance sheet by May 5, 2017.
Disclosure Framework: Inventory
The proposed ASU is part of FASB’s broader Disclosure Framework project to improve 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 ASU would increase inventory disclosure requirements for all reporting organizations, including:
- Changes in inventory that are not related to the ordinary course of manufacturing, purchasing, or selling inventory
- Inventory disaggregated by major components
- Inventory disaggregated by measurement basis
- Qualitative description of costs capitalized.
For companies and other organizations applying the retail inventory method of measuring inventory, the proposed ASU includes qualitative and quantitative disclosure of the critical assumptions used to measure that inventory. For companies and organizations applying the last-in, first-out (LIFO) method of measuring inventory, the proposed ASU includes disclosure of the excess of replacement cost or current cost over the LIFO inventory amount and the effect on net income of any LIFO liquidations.
Additionally, for organizations subject to the reporting requirements in Topic 280, Segment Reporting, there is an interim and annual requirement to disclose inventory in total and by major component for each reportable segment if that information is regularly reviewed by the chief operating decision maker.
Inventory is one of four areas where the Board is evaluating improvements to existing disclosure requirements. Other areas the Board is addressing include an employer’s disclosure of defined benefit plans, fair value, and income taxes.
Disclosure Framework Roundtable Scheduled March 17, 2017
To solicit additional feedback on the Board’s decision process under the Disclosure Framework, the Board plans to hold a public roundtable meeting March 17, 2017. Comment letter respondents to the Exposure Draft of Chapter 8 or any of the four Topical reviews are eligible to participate in the roundtable meeting. Those who have not yet submitted a comment letter and are interested in participating are asked to submit written comments on the proposed inventory disclosures by February 27, 2017. All other stakeholders are encouraged to review and comment on the proposed inventory disclosures by March 13, 2017.
The Board will determine effective dates for final ASUs after redeliberating comments received during the comment periods and from the public roundtable meetings.