Question

Use a FASB codification to support your answer please

Describe how a company would classify debt that includes covenants. What conditions must exist in order to depart from the normal rule?

Answer 1

FASB has been listening to stakeholders’ need to simplify guidance on determining whether debt should be classified as current or noncurrent. FASB has decided to take a look at FASB Accounting Standards Codification® Topic 470, Debt.A loan might require periodic compliance with lender covenants. Violation of covenant may give a lender the right to demand immediate repayment of the loan. We should classify a debt obligation as non-current, unless there has been a violation of covenant that gives the lender the right to call the debt and it is probable that the entity won't be able to comply with the covenant within the next twelve months. If both of these criteria are satisfied , then classify the debt as a current liability. We shouldn't classify a debt as a current liability if the lender has waived the right to demand repayment for more than 1 year, the entity has cured the violation of covenant , or it is probable that the entity will cure the violation within the specified grace period.

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