Question

The FASB attempted to improve guidance used to determine how debt is shown on a classified balance sheet in January 2017. Recently in October and November 2019, some revisions to this guidance were discussed.

Go on-line and research this proposal and suggested revisions, and describe your thoughts.

• Be detailed in your analysis
• Relate your discussion to the current chapter (for example, why does classifying debt as current or long-term matter?)

Answer 1

Financial Accounting Standards Board

The Financial Accounting Standards Board (FASB) established in 1973 , in Norwalk, Connecticut (U.S) is a independent private sector organization (the word “independent “ over here means that it does not act as per any ones’ personal intent or for promotion of personal interest). The FASB is established to frame financial accounting and reporting standards (standards are charter which guide as how the items which is going to be a part of financial statement should be dealt)such standards are framed again in light of the Generally Accepted Accounting Principles) for private and public companies and the non-profit organization .

It is to be noted that FASB objective is to frame such standards as described above, but not the implementation. However any form of organization which does not imply with the accounting and reporting standards of FASB does not full fill the basic criteria of audit which in turn will allow the auditors to issue a unfavorable audit report. Therefore standards drafted by FASB help organization to provide their financial information to their users in a detailed manner and present a true and fair picture about their activities , which could allow the users to take a rational decision on investment and lending in organization.

Recently in October 2019 the FASB has issue an update in the accounting standard for “debts” as per which a proper determination can be made as whether a debt should be classified as current or non-current liability item which preparing the balance sheet. Accordingly, “The debt classification principle implies that debt that is not contractually due to be settled within 12 months of the last balance sheet date generally would be classified as noncurrent even if the debtor expects to settle the debt within that period.” Hence if a lender of any amount of loan/debt has entered in a contract with the debtor that the loan amount will be repaid back within 12 months of the balance sheet date then such a debt has to be classified as current item in the upcoming balance sheet . Again if no such contract was made or a contract was made to repay the debt within some stipulated time period but the due date is falling after twelve months after the balance sheet date then it has to classified as non-current debt.

What prompted the FASB to issue an update in classification to current and non-current liability for debt ?

It was the stakeholders request to the board in order to reduce complexity in accounting standards for determining whether debt should be classified as current or noncurrent in a classified balance sheet.

Whom would the above stated standard apply ?

The above stated accounting standard update would apply to all the organizations or entities as per which each and every organization would need to provide a classified section for their liabilities as current and non-current liabilities, which previously was not required for such entities which were not preparing a classified balance sheet.

Advantage :-

Such a classification of current and noncurrent liabilities would help the users to get a classified and detailed information about the financial activities of organization which in turn helps them to estimate the credit worthiness and find investment opportunities in an organization behind this it would also help the auditors to conduct the audit in an efficient manner as there would be a proper standard for debt classification which in turn will save time, cost and effort.