United States

Current/Noncurrent Classification of Debt (IAS 1 vs. ASC 470)

Feb 28, 2017
From the IFRS Institute

IFRS Perspectives: Update on IFRS issues in the US

Generally, more debt is classified as current under IFRS than US GAAP, but there are developments that will lessen the divergence. Understanding the differences is key to stating your financial position.

The current/noncurrent classification of debt is important to investors because it changes a company’s working capital and liquidity portrayal.

Debt arrangements often contain creditor protective clauses, including quantitative debt covenant clauses, material adverse change clauses, subjective acceleration clauses, or change in control clauses. The treatment of these features in classifying debt can result in significant differences regarding the current/noncurrent classification of debt under IFRS vs. US GAAP on the statement of financial position.

IFRS focuses on the conditions – e.g. contract breaches and waivers – existing at the reporting date, while US GAAP considers post-balance sheet events. US GAAP also requires, in certain situations, a likelihood assessment as of the reporting date as to whether the creditor will be able to accelerate repayment of the debt. IFRS does not consider likelihood or probability assessments.

IFRS focuses on existing conditions at the reporting date

Under IFRS, a financial liability that is due within 12 months from the reporting date, or is payable on demand, is classified as current. This applies to a loan with terms that enable the lender to call the loan at any time, even if such a loan may not be due to be settled within 12 months of the reporting date.

A loan with breached conditions at the reporting date is also classified as current. Unlike US GAAP, this is true even if the lender has agreed, after the reporting date but before the financial statements are authorized for issue, not to demand repayment as a result of the breach.

Under US GAAP, a liability is not classified as current if, after the reporting date but before the financial statements are issued or available for issuance, the debt is refinanced or the lender has waived its right to demand repayment for more than 12 months from the reporting date.

IFRS has no specific guidance on subjective acceleration clauses

When assessing the appropriate classification of debt for an IFRS reporting entity, compliance with loan covenants should be assessed as of the reporting date. Covenant tests using information after the reporting date should be disregarded even when the likelihood of a breach at such future date is probable; however relevant disclosures might be appropriate. 

US GAAP provides specific guidance on current/noncurrent classification when an otherwise long-term debt agreement includes a subjective acceleration clause. Classification of debt is based on the likelihood (remote, reasonably possible or probable) that the creditor will accelerate repayment of the liability, which may result debt classified as current under US GAAP that would be classified as noncurrent under IFRS.

Future developments

Both the IASB and the FASB have proposed amendments to their respective guidance on the balance sheet classification of debt. The IASB proposals are only intended to clarify the existing requirements. However, the FASB proposes to simplify its guidance, which would bring US GAAP closer to IFRS on the matter of subjective acceleration clauses and debt that is refinanced in the post-balance sheet period.

The key difference would be on covenant breach waivers obtained after the reporting date, but before the financial statements are issued: US GAAP would continue to classify the debt as noncurrent whereas under IFRS such arrangements are classified as current.

For more information and questions related to IFRS please contact one of our Accounting Advisory Services professionals.

East region

Erik Lange
Partner, Accounting Advisory Services
: +1 212-872-6654
E: elange@kpmg.com

Ingo Zielhoff
Managing Director, Accounting Advisory Services
: +1 212-872-4423
E: ingozielhoff@kpmg.com

Reza Van Roosmalen
Managing Director, Accounting Advisory Services
: +1 212-954-6996
E: rezavanroosmalen@kpmg.com

West region

Jason Anglin
Principal, Accounting Advisory Services
: +1 415-963-7606
E: janglin@kpmg.com

Southeast Region

Jack Ingram
Partner, Accounting Advisory Services
: +1 404-221-2398
E: jtingram@kpmg.com

Midwest region

Marybeth Shamrock
Partner, Accounting Advisory Services
: +1 216-875-8158
E: mshamrock@kpmg.com

South region

Michael Nesta
Partner, Accounting Advisory Services
: +1 214-840-2730
E: mnesta@kpmg.com

The descriptive and summary statements in this newsletter are not intended to be a substitute for the potential requirements of the proposed standard or any other potential or applicable requirements of the accounting literature or SEC regulations. Companies applying U.S. GAAP or filing with the SEC should apply the texts of the relevant laws, regulations, and accounting requirements, consider their particular circumstances, and consult their accounting and legal advisors.