On September 12, 2019, the Financial Accounting Standards Board issued a revised proposed accounting standards update for the Classification of Debt (Topic 470). Comments from the public on the revised exposure draft are due no later than October 28, 2019, with FASB re-deliberation to follow. Although the revised exposure draft has not significantly changed from the original release on January 10, 2017, the FASB no longer provides an estimate as to when the final standard will be approved or effective.
Below is a brief overview of our original article from March 11, 2019, which identifies how the new rules could have a significant impact on a contractor’s balance sheet and state capacity ratings.
- Under the proposed new rules, debt would be classified (current versus noncurrent liability) based on its status as of year-end, without regard to extensions or refinancing after year-end.
- Loan covenant violations will not require current liability classification if waivers are obtained subsequent to year-end. However, debt for which covenant waivers are obtained will be required to be reported separately in the company’s balance sheet.
- Implications of the proposed rules:
- Working capital may be adversely affected, which is a key factor in credit decisions made by banks and bonding companies. Also, reduced working capital could result in reduction of your capacity rating for state prequalification purposes.
Although the new rules will not be effective for December 31, 2019 year-ends, we recommend that you plan proactive steps to make certain the maturity dates of your long-term debt obligations are extended at least one full year beyond your year-end in 2020. In some states, to maximize your capacity ratings, maturity dates should be extended at least two full years beyond your year-end.
If you would like to discuss specific considerations for your company, how to strengthen your company’s balance sheet and improve your company’s working capital and/or your state capacity rating, please contact us.