Borrowings under a contractually short-term revolver may be renewed or extended through a long-term financing agreement. Sometimes these borrowings specify objective criteria, such as the attainment of specified operating results, levels of financial position, or other measures (e.g., inventory levels) that the reporting entity must maintain or achieve in the future to continue borrowing. This is commonly referred to as a borrowing base.
In such cases, consistent with the guidance in ASC 470-10-45-19
, the reporting entity should classify the outstanding short-term borrowings as noncurrent if it is reasonable to expect that the specified criteria will be met, such that long-term borrowings (or successive short-term borrowings for an uninterrupted period) will be available to refinance the short-term debt on a long-term basis. The reporting entity must also demonstrate the intent and ability to refinance, as discussed in FSP 12.3.4
. Achieving noncurrent classification in this scenario requires a high degree of assurance.
Borrowings under contractually long-term revolving debt agreements may also reference a borrowing base. We believe there are two methods for determining how the borrowing base impacts the classification of debt as current or noncurrent.
- Treat the borrowing base as a debt covenant and assess it with all other debt covenants under the model discussed in FSP 12.3.3.
- Classify the outstanding borrowings as noncurrent only if it is reasonable to expect that the specified criteria will be met over the 12 months following the balance sheet date. This method is based on the ASC Master Glossary definition of a current liability.
Selection of an approach represents an accounting policy decision that should be applied consistently.
Example FSP 12-6 demonstrates the classification of a revolving credit facility that is subject to a working capital requirement.
EXAMPLE FSP 12-6
Classification of a revolver subject to a working capital requirement
FSP Corp has $10 million outstanding on its short-term revolving credit facility at December 31, 20X1. As long as FSP Corp complies with the provisions of the credit facility, which has a specified borrowing base, the amounts borrowed are permitted to be continuously renewed at its option for successive 120-day periods through December 31, 20X4. The revolver's borrowing base is calculated using a multiple of working capital. The borrowing base is calculated quarterly. Any outstanding amount that exceeds the calculated borrowing base is not permitted to be renewed, but rather is due and payable at the end of its 120-day term.
FSP Corp's outstanding borrowings did not exceed the borrowing base calculated on December 31, 20X1. It expects that the lowest borrowing base amount for the upcoming 12 months following the balance sheet date will be $6 million.
There are no events of default or covenants breached as of December 31, 20X1 and all other terms within the agreement are usual and customary.
How should FSP Corp classify the outstanding short-term borrowings in the December 31, 20X1 financial statements? What if the borrowings under the revolver were contractually long-term?
Since FSP Corp's outstanding borrowings did not exceed the borrowing base at December 31, 20X1 and it expects that the lowest borrowing base will be $6 million through January 1, 20X3, $6 million should be classified as noncurrent, assuming all of the other requirements for refinancing short-term debt on a long-term basis are met. As management expects the borrowing base to be as low as $6 million in the coming year, the excess of borrowings of $4 million ($10 million outstanding less the $6 million recorded as noncurrent) should be classified as current.
In contrast, if the borrowings under the credit facility were contractually long-term, we believe FSP Corp could apply either of the two models for determining the current and noncurrent amounts. Under the first method, all of the debt would be noncurrent because FSP Corp is not in violation of the "covenant" (i.e., it has a sufficient borrowing base at the balance sheet date). Under the second method, $6 million of the debt would be classified as noncurrent and $4 million would be classified as current based on FSP Corp's estimate of the borrowing base for the following year.