| FAS Statement No. 6 |
Issued: May, 1975
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| FAS Interpretation No. 8 |
Issued: January, 1976
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| Para. No. | ||
| 2 | Short
term obligations are those scheduled to mature within one year
after the date of an enterprise's balance or within an enterprise's normal
operating cycle if longer than one year.
Long-term obligations are scheduled to mature beyond one year (or the operating cycle, if applicable) from the date of an enterprise's balance sheet. Refinancing a short term obligation on a long term basis means either replacing it with a long term obligation or with equity securities or replacing it with short term obligations for an uninterrupted period extending beyond one year from the date of an enterprise's balance sheet. |
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| 3 | Paragraph 8 of chapter
3A of ARB No. 43 states that the current liability classification is not
intended to include a contractual obligation falling due at an early date
which is expected to be refunded.
Assessing whether a short term obligation is expected to be refunded: Historically, two approaches. a. Enterprise intent and its prior ability to refinance. b. Future ability to refinance as demonstrated by the existence of an agreement for long-term financing has been considered necessary. |
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| 4 | ASR No. 148 requires that commercial paper and other short-term debt be classified as a current liability unless (a) the borrower has a noncancelable binding agreement from a creditor to refinance the paper or other short-term debt; (b) the refinancing would extend the maturity date beyond one year; (c) the borrower's intention is to exercise this right. | |
| 8 | Short-term obligations arising from transactions in the normal course of business that are due in customary trade terms shall be classified as current liabilities. | |
| 9 | A short-term obligation other than one classified as a current liability shall be excluded from current liabilities only if the conditions in paragraphs 10 and 11 are met. | |
| 10 | Intent to refinance-- the enterprise intends to refinance the obligation on a long-term basis. | |
| 11 | Ability
to consummate the refinancing-- demonstrated in either of the
following ways:
a. Post balance sheet date issuance of a long-term obligation or equity securities. b. Financing agreement. Before the balance sheet is issued, the enterprise has entered into a financing agreement that clearly permits the enterprise to refinance the short-term obligation on a long-term basis on terms that are readily determinable and all of the following conditions are met: i. the agreement does not expire within one year (or normal operating cycle) from the date of the enterprise's balance sheet and the agreement is not cancelable by the lender or prospective lender or investor except for violation of a provision with which compliance is objectively determinable or measurable. ii. no violation exists at the balance sheet date and no available evidence indicates that a violation has occurred thereafter but prior to the issuance of the balance sheet, or if one exists at the balance sheet date or has occurred thereafter, a waiver has been obtained. iii. the lender or prospective lender or investor is expected to be financially capable of honoring the agreement. |
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| 12 | If the ability to
refinance is demonstrated by post balance sheet date issuance of a long-term
obligation or equity securities, the amount of the short-term obligation
excluded from current liabilities shall not exceed the proceeds of the
new long-term debt or the equity securities issued.
If the ability is demonstrated by the existence of a financing agreement, the amount excluded shall be reduced to the amount available for refinancing under the agreement when the amount available is less than the amount of the short-term obligation. |
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| 14 | Replacement of a
short-term obligation with another short-term obligation after the date
of the balance sheet but before the balance sheet is issued is not, by
itself, sufficient to demonstrate an ability to refinance the short term
obligation on a long term basis.
If for example, the replacement is made under the terms of a revolving credit agreement that provides for renewal or extension of the short-term obligation for an uninterrupted period extending beyond one year from the date of the balance sheet, revolving credit agreement must meet the conditions in paragraph 11(b) to justify exclusion of the short-term obligation from current liabilities. |
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| 15 | Disclosures
Total current liabilities shall be presented in classified balance sheets. If a short-term obligation is excluded from current liabilities, the notes to the financial statements shall include a general description of the financing agreement and the terms of any new obligation incurred or expected to be incurred or equity securities issued or expected to be issued as a result of a refinancing. |
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Interpretation No. 8, "Classification of a Short Term Obligation Repaid Prior to Being Replaced by a Long-term Security |
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| A short-term obligation repaid after the balance sheet date and subsequent issuance of a long-term obligation or equity security whose proceeds are used to replace current assets before the balance sheet is issued shall not be excluded from current liabilities at the balance sheet date. Based on the concept that a short-term obligation will not require the use of current assets during the ensuing fiscal year if it is to be excluded from current liabilities. Repayment of a short-term obligation before funds are obtained through a long-term refinancing requires the use of current assets | ||