FASB addresses debt classification, inventory disclosures

In separate proposals issued Tuesday, FASB addressed balance sheet classification of debt and the disclosure requirements for inventory under the board’s Disclosure Framework.

The proposed Accounting Standards Update on debt classification is designed to simplify guidance used to determine whether debt should be classified as current or noncurrent in a classified balance sheet.

If approved, the proposed guidance would replace existing, fact-specific rules with an overarching, cohesive principle for debt classification that would focus on a borrower’s contractual rights and obligations that exist as of the reporting date.

Under the proposal, a borrower would continue to classify the debt as noncurrent when a violation of the 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.

A shift in the classification of certain debt arrangements between noncurrent liabilities and current liabilities could occur under the proposal 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.

FASB is seeking comments on the debt classification proposal by May 5. Comments can be made at FASB’s website.

Inventory disclosures

All reporting organizations would be subject to increased disclosure requirements under the proposed inventory disclosure framework. These disclosures would include:

• 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.

Under the proposal, organizations that use the retail method to measure inventory would make qualitative and quantitative disclosures of the critical assumptions used to measure inventory. Organizations that use the last-in, first-out (LIFO) method to measure inventory would disclose the excess of replacement cost or current cost over the LIFO inventory amount and the effect on net income of any LIFO liquidations.

Organizations subject to the reporting requirements in FASB Accounting Standards Codification Topic 280, Segment Reporting, would be subject to interim and annual requirements 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.

The proposal is part of FASB’s broader Disclosure Framework project, which is designed to improve the effectiveness of disclosures in the notes to financial statements by clearly communicating the information that is most important to financial statement users. FASB is evaluating possible improvements to disclosures of inventory, fair value, and income taxes, and an employer’s disclosure of defined benefit plans.

Comments on the inventory disclosure proposal will be accepted through March 13 at the board’s website.

—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.