Common U.S. GAAP Issues Facing Accountants, 2nd Edition

Chapter 9Accounting for Debt

Learning objectives

• Identify debt classifications.
• Identify the guidance described in FASB Accounting Standards Codification^® (ASC) 470, Debt.

Overview

This chapter provides a broad overview of guidance described in FASB ASC 470. Debt arises in a variety of ways; this chapter focuses on typical common debt obligations from the perspective of the borrower and primarily discusses requirements in the “Overall” subtopic of FASB ASC 470. Specific features of debt are addressed in the following FASB ASC 470 subtopics, which we will discuss briefly.

• Debt with conversion and other options
• Participating mortgage loans
• Product financing arrangements
• Modifications and extinguishments
• Troubled debt restructuring by debtors

Scope

FASB ASC 470 is applicable to all entities. The separate classification of current assets and current liabilities applies only when an entity is preparing a classified balance sheet for financial accounting and reporting purposes.

Debt classification

There are times when identifying a debt obligation is not very clear. Although classification depends on the facts and circumstances of a transaction, FASB ASC 470 provides a list of various factors that independently create a rebuttable presumption that classification of proceeds as debt is appropriate. These factors include the following:

• The transaction does not purport to be a sale. (That is, the form of the transaction is debt.)
• The entity has significant continuing involvement ...