ASC 470-10
Overall
470 Debt
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ASC 470-10 is the Overall subtopic of the Debt topic and governs a borrower's balance sheet classification (current vs. noncurrent) of specific obligations: short-term obligations expected to be refinanced, due-on-demand loans, callable debt and covenant violations, revolving credit agreements with lock-box arrangements and subjective acceleration clauses, increasing-rate debt, sales of future revenue, and indexed debt. Core rules: callable and demand obligations are current unless a waiver/cure exception applies (470-10-45-10 through 45-11), and a short-term obligation may be excluded from current liabilities only if the entity intends to refinance long term and demonstrates ability via post-balance-sheet issuance of long-term debt/equity or a qualifying financing agreement (470-10-45-14). It also sets debt-versus-deferred-income classification for proceeds from sales of future revenue and disclosure requirements for maturities, unused lines of credit, and refinancings.
Key points (7)
- Obligations due on demand, or that will become due on demand within one year (or operating cycle, if longer) of the balance sheet date, are current liabilities even if liquidation is not expected; a demand provision is not a subjective acceleration clause (470-10-45-10).
- Long-term obligations that are or will be callable because of a covenant violation at the balance sheet date are current liabilities unless the creditor has waived or lost the right to demand repayment for more than one year, or it is probable the violation will be cured within a stated grace period (470-10-45-11).
- Where a lender waives its call right for more than one year while retaining future covenant tests, the debt is noncurrent unless both a violation existed (or would have absent modification) at the balance sheet date and it is probable the borrower cannot cure at measurement dates within the next 12 months (470-10-45-1; Example 1 at 470-10-55-2).
- A short-term obligation is excluded from current liabilities only if the entity intends to refinance on a long-term basis and that intent is supported by post-balance-sheet-date issuance of long-term debt or equity securities, or by a financing agreement meeting the noncancelable/objectively determinable-covenant, no-violation, and financially capable lender conditions (470-10-45-14); the excluded amount is capped by proceeds or amounts available (470-10-45-16 through 45-19).
- Repaying a short-term obligation with current assets after the balance sheet date and later replenishing working capital with long-term financing does not permit exclusion from current liabilities (470-10-45-15; Example 5 at 470-10-55-33).
- Revolver borrowings subject to both a subjective acceleration clause and a lock-box arrangement are short-term obligations classified as current unless the 470-10-45-14 refinancing conditions are met under a separate agreement (470-10-45-5); a springing lock-box arrangement leaves the borrowings long term, with the subjective acceleration clause evaluated under 470-10-45-2.
- For sales of future revenue, factors such as the transaction not purporting to be a sale, significant continuing involvement, cancelability, a capped investor return, or investor recourse create a rebuttable presumption of debt classification (470-10-25-2); debt is amortized under the interest method and deferred income under the units-of-revenue method (470-10-35-3).
For students. Balance sheet classification of debt is a recurring exam and practice issue: the classic trap is assuming that a post-year-end covenant waiver or a rollover of short-term borrowings automatically supports noncurrent classification — the waiver must extend more than one year (or a grace-period cure must be probable), and refinancing ability must be demonstrated by an actual long-term issuance or a qualifying, noncancelable financing agreement before the statements are issued.
current versus noncurrent classificationshort-term obligations expected to be refinancedsubjective acceleration clauselock-box arrangementdebt covenant violation and waivercallable debtsales of future revenueincreasing-rate debt
Machine-generated study aid for ASC 470-10. Check the source paragraphs below.
470-10-00Status
Source downloaded: .Record version 7e08ea693d20. Effective date must be checked in the source.
470-10-00-1
The following table identifies the changes made to this Subtopic.
470-10-05Overview and Background
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470-10-05-1
The Codification contains several Topics that address certain aspects of the accounting for debt. The Topics include:
- aLiabilities
- bDebt
- cDistinguishing Liabilities from Equity.
470-10-05-2
The Debt Topic provides accounting and reporting guidance for borrowers. This Topic includes the following Subtopics:
- aOverall
- bDebt with Conversion and Other Options
- cParticipating Mortgage Loans
- dProduct Financing Arrangements
- eModifications and Extinguishments
- fTroubled Debt Restructurings by Debtors.
470-10-05-3
The Liabilities Topic provides accounting and reporting guidance related to liabilities typically considered short-term in nature, and certain guidance that may apply broadly to any liability, including those addressed in this Topic.
470-10-05-4
The Distinguishing Liabilities from Equity Topic provides accounting and reporting guidance for determining whether a transaction represents a liability or equity.
470-10-05-5
The Overall Subtopic addresses classification determination for specific obligations, such as the following:
- aShort-term obligations expected to be refinanced on a long-term basis
- bDue-on-demand loan arrangements
- cCallable debt
- dSales of future revenue
- eIncreasing rate debt
- fDebt that includes covenants
- gRevolving credit agreements subject to lock-box arrangements and subjective acceleration clauses
- hIndexed debt.
470-10-15Scope and Scope Exceptions
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Entities
470-10-15-1
The guidance in this Subtopic applies to all entities.
Transition date:(P) June 30, 2027; (N) June 30, 2027Transition guidance:
105-10-65-7 The guidance in this Subtopic applies to all entities, excluding paragraph 470-10-50-7, which applies to public business entities only. Transactions
470-10-15-2
The guidance in this Subtopic that relates to separate classification of current assets and current liabilities (that is, a classified balance sheet) applies only when an entity is preparing a classified balance sheet for financial accounting and reporting purposes.
470-10-25Recognition
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Sales of Future Revenues or Various Other Measures of Income
470-10-25-1
An entity receives cash from an investor and agrees to pay to the investor for a defined period a specified percentage or amount of the revenue or of a measure of income (for example, gross margin, operating income, or pretax income) of a particular product line, business segment, trademark, patent, or contractual right. It is assumed that immediate income recognition is not appropriate due to the facts and circumstances. The payment to the investor and the future revenue or income on which the payment is based may be denominated in a foreign currency.
470-10-25-2
While the classification of the proceeds from the investor as debt or deferred income depends on the specific facts and circumstances of the transaction, the presence of any one of the following factors independently creates a rebuttable presumption that classification of the proceeds as debt is appropriate:
- aThe transaction does not purport to be a sale (that is, the form of the transaction is debt).
- bThe entity has significant continuing involvement in the generation of the cash flows due the investor (for example, active involvement in the generation of the operating revenues of a product line, subsidiary, or business segment).
- cThe transaction is cancelable by either the entity or the investor through payment of a lump sum or other transfer of assets by the entity.
- dThe investor's rate of return is implicitly or explicitly limited by the terms of the transaction.
- eVariations in the entity's revenue or income underlying the transaction have only a trifling impact on the investor's rate of return.
- fThe investor has any recourse to the entity relating to the payments due the investor.
Indexed Debt
470-10-25-3
Debt instruments may be issued with both guaranteed and contingent payments. The contingent payments may be linked to the price of a specific commodity (for example, oil) or a specific index (for example, the S&P 500). In some instances, the investor's right to receive the contingent payment (an indexing feature) is separable from the debt instrument. If the indexing feature does not warrant separate accounting under Topic 815 or the instrument does not meet the definition of a derivative under Topic 815, the entire instrument shall be accounted for in accordance with paragraphs 470-10-25-4 and 470-10-35-4.
470-10-25-4
If the investor's right to receive the contingent payment is separable, the proceeds shall be allocated between the debt instrument and the investor's stated right to receive the contingent payment. The premium or discount on the debt resulting from the allocation shall be accounted for in accordance with Subtopic 835-30.
470-10-35Subsequent Measurement
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Increasing Rate Debt
470-10-35-1
A debt instrument may have a maturity date that can be extended at the option of the borrower at each maturity date until final maturity. In such cases, the interest rate on the note increases a specified amount each time the note is renewed. For guidance on accounting for interest, see Subtopic 835-30.
470-10-35-2
The borrower's periodic interest cost shall be determined using the interest method based on the estimated outstanding term of the debt. In estimating the term of the debt, the borrower shall consider its plans, ability, and intent to service the debt. Debt issue costs shall be amortized over the same period used in the interest cost determination. The term-extending provisions of the debt instrument should be analyzed to determine whether those provisions constitute an embedded derivative that warrants separate accounting as a derivative under Subtopic 815-10.
Sale of Future Revenues or Various Other Measures of Income
470-10-35-3
Amounts recorded as debt shall be amortized under the interest method (see Subtopic 835-30) and amounts recorded as deferred income shall be amortized under the units-of-revenue method.
Indexed Debt
470-10-35-4
As the applicable index value increases such that an issuer would be required to pay an investor a contingent payment at maturity, the issuer shall recognize a liability for the amount that the contingent payment exceeds the amount, if any, originally attributed to the contingent payment feature. The liability for the contingent payment feature shall be based on the applicable index value at the balance sheet date and shall not anticipate any future changes in the index value. When no proceeds are allocated originally to the contingent payment, the additional liability resulting from the fluctuating index value shall be accounted for as an adjustment of the carrying amount of the debt obligation.
470-10-45Other Presentation Matters
Source downloaded: .Record version 8a0f9bdbdd67. Effective date must be checked in the source.
Classification of Debt That Includes Covenants
470-10-45-1
Some long-term loans require compliance with certain covenants that must be met on a quarterly or semiannual basis. If a covenant violation occurs that would otherwise give the lender the right to call the debt, a lender may waive its call right arising from the current violation for a period greater than one year while retaining future covenant requirements. Unless facts and circumstances indicate otherwise, the borrower shall classify the obligation as noncurrent, unless both of the following conditions exist:
- aA covenant violation that gives the lender the right to call the debt has occurred at the balance sheet date or would have occurred absent a loan modification.
- bIt is probable that the borrower will not be able to cure the default (comply with the covenant) at measurement dates that are within the next 12 months.
Subjective Acceleration Clauses and Debt Classification
470-10-45-2
In some situations, the circumstances (for example, recurring losses or liquidity problems) would indicate that long-term debt subject to a subjective acceleration clause should be classified as a current liability. Other situations would indicate only disclosure of the existence of such clauses. Neither reclassification nor disclosure would be required if the likelihood of the acceleration of the due date were remote, such as if the lender historically has not accelerated due dates of loans containing similar clauses and the financial condition of the borrower is strong and its prospects are bright.
Classification of Revolving Credit Agreements Subject to Lock-Box Arrangements and Subjective Acceleration Clauses
470-10-45-3
This guidance does not apply to lock-box arrangements that are maintained at the discretion of the borrower.
470-10-45-4
Borrowings outstanding under certain revolving credit agreements are considered long-term debt because the borrowings are due at the end of a specified period (for example, 3 years) rather than when short-term notes roll over (for example, every 90 days). Borrowings may be collateralized, but the only note is the overall note signed at the agreement's inception. Some agreements require that the borrower maintain a lock-box arrangement. If borrowings outstanding under the agreement are considered long-term obligations, the effect of a subjective acceleration clause on balance sheet classification is determined based on the criteria in paragraph 470-10-45-2. If borrowings outstanding are considered short-term obligations, and the borrower intends to refinance the obligation on a long-term basis, paragraph 470-10-45-13 applies and the debt shall be classified as a current liability because of the existence of the subjective acceleration clause.
470-10-45-5
Borrowings outstanding under a revolving credit agreement that includes both a subjective acceleration clause and a requirement to maintain a lock-box arrangement shall be considered short-term obligations. Accordingly, because of the subjective acceleration clause, the debt shall be classified as a current liability unless the conditions in paragraph 470-10-45-14 are met based on an agreement, other than the revolving credit agreement, to refinance the obligation after the balance sheet date on a long-term basis.
470-10-45-5A
The term lock-box arrangement as used in this guidance refers to any situation in which the borrower does not have the ability to avoid using working capital to repay the amounts outstanding. That is, if the contractual provisions of a loan arrangement require that, in the ordinary course of business and without another event occurring, the cash receipts of a debtor be used to repay the existing obligation, the credit agreement shall be considered a short-term obligation.
470-10-45-6
Borrowings outstanding under a revolving credit agreement that includes both a subjective acceleration clause and a requirement to maintain a springing lock-box arrangement shall be considered long-term obligations since the remittances do not automatically reduce the debt outstanding without another event occurring. The effect of the agreement's subjective acceleration clause shall be determined based on the provisions of paragraph 470-10-45-2.
Classification of Increasing-Rate Debt
470-10-45-7
Classification of increasing-rate debt as current or noncurrent would reflect the borrower's anticipated source of repayment that is, current assets or a new short-term debt borrowing versus a long-term refinancing agreement that meets the requirements of this Subtopic and need not be consistent with the time frame used to determine periodic interest cost.
470-10-45-8
If the debt is paid at par before its estimated maturity, any excess interest accrued shall be an adjustment of interest expense.
Due on Demand Loan Arrangements
470-10-45-9
Loan agreements may specify the debtor's repayment terms but also enable the creditor, at his discretion, to demand payment at any time. Those loan arrangements may have wording such as either of the following:
- a"The term note shall mature in monthly installments as set forth therein or on demand, whichever is earlier."
- b"Principal and interest shall be due on demand, or if no demand is made, in quarterly installments beginning on...."
470-10-45-10
The current liability classification shall include obligations that, by their terms, are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date, even though liquidation may not be expected within that period. The demand provision is not a subjective acceleration clause as discussed in paragraph 470-10-45-2.
Callable Debt
470-10-45-11
Current liabilities shall include long-term obligations that are or will be callable by the creditor either because the debtor's violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable. Accordingly, such callable obligations shall be classified as current liabilities unless either of the following conditions is met:
- aThe creditor has waived or subsequently lost (for example, the debtor has cured the violation after the balance sheet date and the obligation is not callable at the time the financial statements are issued or are available to be issued [as discussed in Section 855-10-25]) the right to demand repayment for more than one year (or operating cycle, if longer) from the balance sheet date. If the obligation is callable because of violations of certain provisions of the debt agreement, the creditor needs to waive its right with regard only to those violations.
- bFor long-term obligations containing a grace period within which the debtor may cure the violation, it is probable that the violation will be cured within that period, thus preventing the obligation from becoming callable.
470-10-45-12
Drawing a distinction between significant violations of critical conditions and technical violations is not practicable. A violation that a debtor considers to be technical may be considered critical by the creditor. Furthermore, a creditor may choose to use a technical violation as a means to withdraw from its lending relationship with the debtor. If the violation is considered insignificant by the creditor, then the debtor should be able to obtain a waiver as discussed in the preceding paragraph.
Short-Term Obligations Expected to Be Refinanced
470-10-45-12A
Some short-term obligations are expected to be refinanced on a long-term basis and, therefore, are not expected to require the use of working capital during the ensuing fiscal year. Examples include commercial paper, construction loans, and the currently maturing portion of long-term debt.
470-10-45-12B
Refinancing a short-term obligation on a long-term basis means either replacing it with a long-term obligation or with equity securities or renewing, extending, or replacing it with short-term obligations for an uninterrupted period extending beyond one year (or the operating cycle, if applicable) from the date of an entity's balance sheet.
470-10-45-13
Short-term obligations arising from transactions in the normal course of business that are due in customary terms shall be classified as current liabilities. A short-term obligation shall be excluded from current liabilities only if the conditions in the following paragraph are met. Funds obtained on a long-term basis before the balance sheet date would be excluded from current assets if the obligation to be liquidated is excluded from current liabilities.
Intent and Ability to Refinance on a Long-Term Basis
470-10-45-14
A short-term obligation shall be excluded from current liabilities if the entity intends to refinance the obligation on a long-term basis (see paragraph 470-10-45-12B) and the intent to refinance the short-term obligation on a long-term basis is supported by an ability to consummate the refinancing demonstrated in either of the following ways:
- aPost-balance-sheet-date issuance of a long-term obligation or equity securities. After the date of an entity's balance sheet but before that balance sheet is issued or is available to be issued (as discussed in Section 855-10-25), a long-term obligation or equity securities have been issued for the purpose of refinancing the short-term obligation on a long-term basis. If equity securities have been issued, the short-term obligation, although excluded from current liabilities, shall not be included in owners' equity.
- bFinancing agreement. Before the balance sheet is issued or is available to be issued (as discussed in Section 855-10-25), the entity has entered into a financing agreement that clearly permits the entity 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:
- 1The agreement does not expire within one year (or operating cycle) from the date of the entity's balance sheet and during that period the agreement is not cancelable by the lender or the prospective lender or investor (and obligations incurred under the agreement are not callable during that period) except for violation of a provision with which compliance is objectively determinable or measurable. For purposes of this Subtopic, violation of a provision means failure to meet a condition set forth in the agreement or breach or violation of a provision such as a restrictive covenant, representation, or warranty, whether or not a grace period is allowed or the lender is required to give notice. Financing agreements cancelable for violation of a provision that can be evaluated differently by the parties to the agreement (such as a material adverse change or failure to maintain satisfactory operations) do not comply with this condition.
- 2No violation of any provision in the financing agreement exists at the balance sheet date and no available information indicates that a violation has occurred thereafter but before the balance sheet is issued or is available to be issued (as discussed in Section 855-10-25), or, if one exists at the balance sheet date or has occurred thereafter, a waiver has been obtained.
- 3The lender or the prospective lender or investor with which the entity has entered into the financing agreement is expected to be financially capable of honoring the agreement.
- 1
470-10-45-15
Repayment of a short-term obligation before funds are obtained through a long-term refinancing requires the use of current assets. Therefore, if a short-term obligation is repaid after the balance sheet date and subsequently a long-term obligation or equity securities are issued whose proceeds are used to replenish current assets before the balance sheet is issued or is available to be issued (as discussed in Section 855-10-25), the short-term obligation shall not be excluded from current liabilities at the balance sheet date. See Example 5 (paragraph 470-10-55-33) for an illustration of this guidance.
470-10-45-16
If an entity's ability to consummate an intended refinancing of a short-term obligation on a long-term basis is demonstrated by post-balance-sheet-date issuance of a long-term obligation or equity securities (see paragraph 470-10-45-14(a)), the amount of the short-term obligation to be excluded from current liabilities shall not exceed the proceeds of the new long-term obligation or the equity securities issued.
470-10-45-17
If ability to refinance is demonstrated by the existence of a financing agreement (see paragraph 470-10-45-14(b)), the amount of the short-term obligation to be excluded from current liabilities shall be reduced to the amount available for refinancing under the agreement if the amount available is less than the amount of the short-term obligation.
470-10-45-18
The amount to be excluded shall be reduced further if information (such as restrictions in other agreements or restrictions as to transferability of funds) indicates that funds obtainable under the agreement will not be available to liquidate the short-term obligation.
470-10-45-19
Further, if amounts that could be obtained under the financing agreement fluctuate (for example, in relation to the entity's needs, in proportion to the value of collateral, or in accordance with other terms of the agreement), the amount to be excluded from current liabilities shall be limited to a reasonable estimate of the minimum amount expected to be available at any date from the scheduled maturity of the short-term obligation to the end of the fiscal year (or operating cycle). If no reasonable estimate can be made, the entire outstanding short-term obligation shall be included in current liabilities.
470-10-45-20
The entity may intend to seek an alternative source of financing rather than to exercise its rights under the existing agreement when the short-term obligation becomes due. The entity must intend to exercise its rights under the existing agreement, however, if that other source does not become available. The intent to exercise may not be present if the terms of the agreement contain conditions or permit the prospective lender or investor to establish conditions, such as interest rates or collateral requirements, that are unreasonable to the entity.
Transactions after the Balance Sheet Date
470-10-45-21
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 or is available to be issued (as discussed in Section 855-10-25) is not, by itself, sufficient to demonstrate an entity's 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 (or operating cycle) from the date of the balance sheet, the revolving credit agreement must meet the conditions in paragraph 470-10-45-14(b) to justify excluding the short-term obligation from current liabilities. Similarly, if the replacement is a rollover of commercial paper accompanied by a standby credit agreement, the standby agreement must meet the conditions in that paragraph to justify excluding the short-term obligation from current liabilities.
470-10-50Disclosure
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Disclosure of Long-Term Obligations
470-10-50-1
The combined aggregate amount of maturities and sinking fund requirements for all long-term borrowings shall be disclosed for each of the five years following the date of the latest balance sheet presented. (See paragraph 505-10-50-11 for related disclosure guidance on redeemable securities). See Example 3 (paragraph 470-10-55-10) for an illustration of this disclosure requirement.
470-10-50-2
If an obligation under paragraph 470-10-45-11(b) is classified as a long-term liability (or, in the case of an unclassified balance sheet, is included as a long-term liability in the disclosure of debt maturities), the circumstances shall be disclosed.
Subjective Acceleration Clauses
470-10-50-3
As indicated in paragraph 470-10-45-2, in some situations long-term debt subject to a subjective acceleration clause shall be reclassified. That paragraph explains that other situations would indicate only disclosure of the existence of such clauses. That paragraph states further that neither reclassification nor disclosure is required if the likelihood of the acceleration of the due date is remote, such as when the lender historically has not accelerated due dates of loans containing similar clauses and the financial condition of the borrower is strong and its prospects are bright.
Short-Term Obligations Expected to Be Refinanced
470-10-50-4
If a short-term obligation is excluded from current liabilities pursuant to the provisions of this Subtopic, the notes to 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.
Summary Disclosure of Securities Outstanding
470-10-50-5
Paragraph 505-10-50-3 requires that an entity explain, in summary form within its financial statements, the pertinent rights and privileges of various securities outstanding.
Unused Commitments and Lines of Credit
470-10-50-6
Transition date:(P) June 30, 2027; (N) June 30, 2027Transition guidance:
105-10-65-7An entity shall separately disclose the following in the notes to financial statements: - aThe amount and terms of unused commitments for long-term financing arrangements (including commitment fees and the conditions under which commitments may be withdrawn)
- bThe amount and terms of unused lines of credit for short-term financing arrangements (including commitment fees and the conditions under which lines may be withdrawn) and the amount of those lines of credit that support commercial paper borrowing arrangements or similar arrangements.
Weighted-Average Interest Rate on Short-Term Borrowings
470-10-50-7
Transition date:(P) June 30, 2027; (N) June 30, 2027Transition guidance:
105-10-65-7A public business entity shall disclose the weighted-average interest rate on short-term borrowings outstanding as of the date of each balance sheet presented. 470-10-55Implementation Guidance and Illustrations
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Implementation Guidance
470-10-55-1
Under paragraph 470-10-45-2, the lender has already loaned money on a long-term basis. To continue long-term classification requires a judgment about the likelihood of acceleration of the due date. Paragraphs cover circumstances in which the obligation is by its terms short-term. For such an obligation to be excluded from current liabilities, the lender must advance new funds or refinance the short-term obligation on a long-term basis based on conditions existing on the date of the new loan or refinancing. Therefore, to classify an obligation as long-term, paragraphs require a higher standard for a financing agreement that permits an entity to refinance a short-term obligation on a long-term basis than paragraph 470-10-50-2 requires for an existing long-term loan for which early repayment might be requested.
Illustrations
470-10-55-2
This Example illustrates the guidance in paragraph 470-10-45-1 for the classification of long-term debt when a debt covenant violation is waived by a lender for a period greater than a year.
470-10-55-3
A borrower has a long-term loan that requires compliance with certain covenants, such as maintenance of a minimum current ratio, minimum debt-to-equity ratio, or minimum level of shareholders' equity. The borrower must meet the covenants on a quarterly or semiannual basis. At one of the compliance dates, the borrower violates a covenant. That violation gives the lender the right to call the debt. The lender waives that right for a period greater than one year but retains the future covenant requirements.
470-10-55-4
The issue is whether the waiver of the lender's rights resulting from the violation of the covenant with the retention of the periodic covenant tests represents, in substance, a grace period. If viewed as a grace period, the borrower would classify the debt as current (see paragraph 470-10-45-11) unless it is probable that the borrower can cure the violation (comply with the covenant) within the grace period. Specifically, the balance sheet classification of an obligation is considered in the following situations:
- aThe debt covenants are applicable only after the balance sheet date, and it is probable that the borrower will fail to meet the covenant requirement at the compliance date three months after the balance sheet date.
- bThe borrower meets the current covenant requirement at the balance sheet date, and it is probable that the borrower will fail to meet the same covenant requirement at the compliance date in three months.
- cThe borrower meets the current covenant requirement, and it is probable that the borrower will fail to meet a more restrictive covenant requirement applicable at the compliance date in three months.
- dThe borrower has met the covenant requirement in the prior quarter but before the balance sheet date negotiates a modification of the loan agreement that eliminates the covenant requirement at the balance sheet date or modifies the requirement so that the borrower will comply. Absent the modification, the borrower would have been in violation of the covenant at the balance sheet date. The same or a more restrictive covenant must be met at the compliance date in three months, and it is probable that the borrower will fail to meet that requirement at that subsequent date.
- eThe borrower is in violation of the current covenant requirement at the balance sheet date and, after the balance sheet date but before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), obtains a waiver. The same or a more restrictive covenant must be met at the compliance date in three months, and it is probable that the borrower will fail to meet that requirement at that subsequent date.
470-10-55-5
In the situations described in (a) through (c) of the preceding paragraph, the debt would be classified as noncurrent, in which case the borrower would be required to disclose the adverse consequences of its probable failure to satisfy future covenants.
470-10-55-6
In the situations described in paragraph 470-10-55-4(d) through (e), the debt would be classified as current. However, if the debt is expected to be refinanced on a long-term basis and the borrower meets the provisions of paragraphs , the debt would be classified as noncurrent.
470-10-55-7
This Example illustrates the guidance for the appropriate classification by the issuer of debt if all of the following conditions exist:
- aThe debt has a long-term maturity (for example, 30 to 40 years).
- bThe debt holder may redeem or put the bond on short notice (7 to 30 days).
- cThe issuer has a remarketing agreement that states that the agent will make its best effort to remarket the bond when redeemed.
- dThe debt is secured by a short-term letter of credit that provides protection to the debt holder in the event that the redeemed debt cannot be remarketed. (Amounts drawn against the letter of credit are payable back to the issuer of the letter of credit by the issuer of the redeemable debt instrument on the same day that the drawdown occurs.)
470-10-55-8
Debt agreements that allow a debt holder to redeem (or put) a debt instrument on demand (or within one year) should be classified as short-term liabilities despite the existence of a best-efforts remarketing agreement. That is, unless the issuer of the redeemable debt instrument has the ability and intent to refinance the debt on a long-term basis as provided for in paragraph 470-10-45-14, the debt should be classified as a current liability.
470-10-55-9
In this Example, the obligation would be classified by the issuer as noncurrent only if the letter-of-credit arrangement meets the requirements of paragraph 470-10-45-14(b).
470-10-55-10
This Example provides an illustration of the guidance in paragraph 470-10-50-1 for disclosures for long-term borrowings and preferred stock with mandatory redemption requirements. This Example has the following assumptions.
470-10-55-11
Entity D has outstanding two long-term loans, one convertible debt, and one issue of preferred stock with mandatory redemption requirements. The first loan is a $100 million sinking fund debenture with annual sinking fund payments of $10 million in 19X2, 19X3, and 19X4, $15 million in 19X5 and 19X6, and $20 million in 19X7 and 19X8. The second loan is a $50 million note due in 19X5. The convertible debt has a principal amount of $70 million that is not convertible before maturity in 19X9. This convertible debt requires a 2 percent annual cumulative sinking fund payment of $1.4 million until settled. The $30 million issue of preferred stock requires a 5 percent annual cumulative sinking fund payment of $1.5 million until retired.
470-10-55-12
Entity D's disclosure might be as follows.
- Maturities and sinking fund requirements on long-term loans and convertible debt and sinking fund requirements on preferred stock subject to mandatory redemption are as follows (in thousands).
Long-term loans Preferred stock Convertible debt 19X2 " $10,000 " " $1,500 " " $1,400 " 19X3 " 10,000 " " 1,500 " " 1,400 " 19X4 " 10,000 " " 1,500 " " 1,400 " 19X5 " 65,000 " " 1,500 " " 1,400 " 19X6 " 15,000 " " 1,500 " " 1,400 "
470-10-55-13
The following Cases illustrate various scenarios for refinancing the current portion of long-term debt and notes payable as discussed in paragraphs :
- aEntity refinances on long-term basis the current maturity of long-term debt and notes payable (Case A).
- bLaws prohibit the transfer of funds (Case B).
- cEntity issues debentures to liquidate the debt (Case C).
- dEntity negotiates a revolving credit agreement (Case D).
- eEntity negotiates a revolving credit agreement with borrowing limits (Case E).
- fEntity refinances commercial paper (Case F).
- gCase illustrates balance sheet presentation (Case G).
470-10-55-14
The Cases in this Example do not comprehend all possible circumstances and do not include all the disclosures that would typically be made regarding long-term debt or current liabilities.
470-10-55-15
Cases A through G share all of the following assumptions:
- aEntity A's fiscal year-end is December 31, 19X5.
- bThe date of issuance of the December 31, 19X5, financial statements is March 31, 19X6; the Entity's practice is to issue a classified balance sheet.
- cAt December 31, 19X5, short-term obligations include $5,000,000 representing the portion of 6 percent long-term debt maturing in February 19X6 and $3,000,000 of 9 percent notes payable issued in November 19X5 and maturing in July 19X6.
- dThe Entity intends to refinance on a long-term basis both the current maturity of long-term debt and the 9 percent notes payable.
- eAccounts other than the long-term debt maturing in February 19X6 and the notes payable maturing in July 19X6 are as follows.
Current assets " $30,000,000 " Other assets " $50,000,000 " Accounts payable and accruals " $10,000,000 " Other long-term debt " $25,000,000 " Shareholders' equity " $37,000,000 "
- fUnless otherwise indicated, the Cases also assume that the lender or prospective lender is expected to be capable of honoring the agreement, that there is no evidence of a violation of any provision, and that the terms of borrowings available under the agreement are readily determinable.
470-10-55-16
The Entity negotiates a financing agreement with a commercial bank in December 19X5 for a maximum borrowing of $8,000,000 at any time through 19X7 with the following terms:
- aBorrowings are available at Entity A's request for such purposes as it deems appropriate and will mature three years from the date of borrowing.
- bAmounts borrowed will bear interest at the bank's prime rate.
- cAn annual commitment fee of 1/2 of 1 percent is payable on the difference between the amount borrowed and $8,000,000.
- dThe agreement is cancelable by the lender only if any of the following occur:
- 1The Entity's working capital, excluding borrowings under the agreement, falls below $10,000,000.
- 2The Entity becomes obligated under lease agreements to pay an annual rental in excess of $1,000,000.
- 3Treasury stock is acquired without the prior approval of the prospective lender.
- 4The Entity guarantees indebtedness of unaffiliated persons in excess of $500,000.
- 1
470-10-55-17
The Entity's intention to refinance meets the condition specified by paragraph 470-10-45-14. Compliance with the provisions listed in (d) of the preceding paragraph is objectively determinable or measurable; therefore, the condition specified by paragraph 470-10-45-14(b)(1) is met. The proceeds of borrowings under the agreement are clearly available for the liquidation of the 9 percent notes payable and the long-term debt maturing in February 19X6. Both obligations, therefore, would be classified as other than current liabilities.
470-10-55-18
Following are the liability section of Entity A's balance sheet at December 31, 19X5, and the related note disclosures required by this Subtopic, based on the information in paragraphs . Because the balance sheet is issued subsequent to the February 19X6 maturity of the long-term debt, the note describes the refinancing of that obligation.
"December 31, 19X5 " Current Liabilities: Accounts payable and accruals " $10,000,000 " Total Current Liabilities " 10,000,000 " Long-Term Debt: 9% notes payable (Note A) " 3,000,000 " (a) 6% debt due February 19X6 (Note A) " 5,000,000 " (a) Other long-term debt " 25,000,000 " Total Long-Term Debt " 33,000,000 " Total Liabilities " $43,000,000 " (a) "These obligations may also be shown in captions distinct from both current liabilities and long-term debt, such as Interim Debt, Short-Term Debt Expected to Be Refinanced, and Intermediate Debt."- Note A
- The Entity has entered into a financing agreement with a commercial bank that permits the Entity to borrow at any time through 19X7 up to $8,000,000 at the bank's prime rate of interest. The Entity must pay an annual commitment fee of 1/2 of 1 percent of the unused portion of the commitment. Borrowings under the financing agreement mature three years after the date of the loan. Among other things, the agreement prohibits the acquisition of treasury stock without prior approval by the bank, requires maintenance of working capital of $10,000,000 exclusive of borrowings under the agreement, and limits the annual rental under lease agreements to $1,000,000. In February 19X6, the Entity borrowed $5,000,000 at 8 percent and liquidated the 6 percent long-term debt, and it intends to borrow additional funds available under the agreement to refinance the 9 percent notes payable maturing in July 19X6.
470-10-55-19
A foreign subsidiary of the Entity negotiates a financing agreement with its local bank in December 19X5. Funds are available to the subsidiary for its unrestricted use, including loans to affiliated entities; other terms are identical to those cited in Case A. Local laws prohibit the transfer of funds outside the country.
470-10-55-20
The requirement of paragraph 470-10-45-14(b)(1) is met because compliance with the provisions of the agreement is objectively determinable or measurable. Because of the laws prohibiting the transfer of funds, however, the proceeds from borrowings under the agreement are not available for liquidation of the debt maturing in February and July 19X6. Accordingly, both the 6 percent debt maturing in February 19X6 and the 9 percent notes payable maturing in July 19X6 would be classified as current liabilities.
470-10-55-21
In this Case, the Entity issues $8,000,000 of 10-year debentures to the public in January 19X6. The Entity intends to use the proceeds to liquidate the $5,000,000 debt maturing February 19X6 and the $3,000,000 of 9 percent notes payable maturing July 19X6. In addition, assume the debt maturing February 19X6 is paid before the issuance of the balance sheet, and the remaining proceeds from the sale of debentures are invested in a U.S. Treasury note maturing the same day as the 9 percent notes payable.
470-10-55-22
Because the Entity refinanced the long-term debt maturing in February 19X6 in a manner that meets the conditions set forth in paragraph 470-10-45-14, that obligation would be excluded from current liabilities. In addition, the 9 percent notes payable maturing in July 19X6 would also be excluded because the Entity has obtained funds expressly intended to be used to liquidate those notes and not intended to be used in current operations. In balance sheets after the date of sale of the debentures and before the maturity date of the notes payable, the Entity would exclude the notes payable from current liabilities if the U.S. Treasury note is excluded from current assets (see paragraph 210-10-45-4).
470-10-55-23
If the debentures had been sold before January 1, 19X6, the $8,000,000 of obligations to be paid would be excluded from current liabilities in the balance sheet at that date if the $8,000,000 in funds were excluded from current assets.
470-10-55-24
If, instead of issuing the 10-year debentures, the Entity had issued $8,000,000 of equity securities and all other facts in this Case remained unchanged, both the 6 percent debt due February 19X6 and the 9 percent notes payable due July 19X6 would be classified as liabilities other than current liabilities, such as Indebtedness Due in 19X6 Refinanced in January 19X6.
470-10-55-25
In December 19X5 the Entity negotiates a revolving credit agreement providing for unrestricted borrowings up to $10,000,000. Borrowings will bear interest at 1 percent over the prevailing prime rate of the bank with which the agreement is arranged but in any event not less than 8 percent, will have stated maturities of 90 days, and will be continuously renewable for 90-day periods at the Entity's option for 3 years provided there is compliance with the terms of the agreement. Provisions of the agreement are similar to those cited in paragraph 470-10-55-16(d). Further, the Entity intends to renew obligations incurred under the agreement for a period extending beyond one year from the balance sheet date. There are no outstanding borrowings under the agreement at December 31, 19X5.
470-10-55-26
In this instance, the long-term debt maturing in February 19X6 and the 9 percent notes payable maturing in July 19X6 would be excluded from current liabilities because the Entity consummated a financing agreement meeting the conditions set forth in paragraph 470-10-45-14(b) before the issuance of the balance sheet.
470-10-55-27
Assume that the agreement cited in Case D included an additional provision limiting the amount to be borrowed by the Entity to the amount of its inventory, which is pledged as collateral and is expected to range between a high of $8,000,000 during the second quarter of 19X6 and a low of $4,000,000 during the fourth quarter of 19X6.
470-10-55-28
The terms of the agreement comply with the conditions required by this Subtopic; however, because the minimum amount expected to be available from February to December 19X6 is $4,000,000, only that amount of short-term obligations can be excluded from current liabilities (see paragraphs ). Whether the obligation to be excluded is a portion of the currently maturing long-term debt or some portions of both it and the 9 percent notes payable depends on the intended timing of the borrowing.
470-10-55-29
If the Entity intended to refinance only the 9 percent notes payable due July 19X6 and the amount of its inventory is expected to reach a low of approximately $2,000,000 during the second quarter of 19X6 but be at least $3,000,000 in July 19X6 and thereafter during 19X6, the $3,000,000 9 percent notes payable would be excluded from current liabilities at December 31, 19X5 (see paragraphs ).
470-10-55-30
In lieu of the facts given in paragraph 470-10-55-15(c) through (d), assume that during 19X5 the Entity entered into a contract to have a warehouse built. The warehouse is expected to be financed by issuance of the Entity's commercial paper. In addition, the Entity negotiated a standby agreement with a commercial bank that provides for maximum borrowings equal to the expected cost of the warehouse, which will be pledged as collateral. The agreement also requires that the proceeds from the sale of commercial paper be used to pay construction costs. Borrowings may be made under the agreement only if the Entity is unable to issue new commercial paper. The proceeds of borrowings must be used to retire outstanding commercial paper and to liquidate additional liabilities incurred in the construction of the warehouse. At December 31, 19X5, the Entity has $7,000,000 of commercial paper outstanding and $1,000,000 of unpaid construction costs resulting from a progress billing through December 31.
470-10-55-31
Because the commercial paper will be refinanced on a long-term basis, either by uninterrupted renewal or, failing that, by a borrowing under the agreement, the commercial paper would be excluded from current liabilities. The $1,000,000 liability for the unpaid progress billing results from the construction of a noncurrent asset and will be refinanced on the same basis as the commercial paper and, therefore, it would also be excluded from current liabilities (see paragraph 470-10-45-13).
470-10-55-32
The following are two methods of presenting liabilities in Entity A's balance sheet at December 31, 19X5, assuming the Entity intends to refinance the 6 percent debt maturing in February 19X6 and the 9 percent notes payable maturing in July 19X6 but has not met the conditions required by this Subtopic to exclude those obligations from current liabilities.
Alternative 1 "December 31, 19X5" Current Liabilities: Accounts payable and accruals " $10,000,000 " "Notes payable, due July 19X6" " 3,000,000 " 6% debt due February 19X6 " 5,000,000 " Total Current Liabilities " 18,000,000 " Long-Term Debt " 25,000,000 " Total Liabilities " $43,000,000 " Alternative 2 "December 31, 19X5" Current Liabilities: Accounts payable and accruals " $10,000,000 " Short-term debt expected to be refinanced: "Notes payable, due July 19X6" " $3,000,000 " 6% debt due February 19X6 " 5,000,000 " " 8,000,000 " Total Current Liabilities " 18,000,000 " Long-Term Debt " 25,000,000 " Total Liabilities " $43,000,000 "
470-10-55-33
This Example illustrates the guidance in paragraph 470-10-45-15.
470-10-55-34
This Example has the following assumptions:
- aAn Entity has issued $3,000,000 of short-term commercial paper during the year to finance construction of a plant.
- bAt June 30, 1976, the Entity's fiscal year end, the Entity intends to refinance the commercial paper by issuing long-term debt. However, because the Entity temporarily has excess cash, in July 1976 it liquidates $1,000,000 of the commercial paper as the paper matures.
- cIn August 1976, the Entity completes a $6,000,000 long-term debt offering.
- dLater during the month of August, it issues its June 30, 1976, financial statements.
- eThe proceeds of the long-term debt offering are to be used to do all of the following:
- 1Replenish $1,000,000 in working capital
- 2Pay $2,000,000 of commercial paper as it matures in September 1976
- 3Pay $3,000,000 of construction costs expected to be incurred later that year to complete the plant.
- 1
470-10-55-35
The $1,000,000 of commercial paper liquidated in July would be classified as a current liability in the Entity's balance sheet at June 30, 1976. The $2,000,000 of commercial paper liquidated in September 1976 but refinanced by the long-term debt offering in August 1976 would be excluded from current liabilities in balance sheets at the end of June 1976, July 1976, and August 1976. It should be noted that the existence of a financing agreement at the date the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) rather than a completed financing at that date would not change these classifications.
470-10-55-36
At the end of August 1976, $2,000,000 of cash would be excluded from current assets or, if included in current assets, a like amount of debt would be classified as a current liability.
470-10-60Relationships
Source downloaded: .Record version 181f2ef32abc. Effective date must be checked in the source.
Balance Sheet
470-10-60-1
For classification guidance on a liability representing the underfunded status of a single-employer defined benefit postretirement plan, see Subtopic 715-20.
Interest
470-10-60-3
For guidance on the appropriate accounting if the face amount of a note does not reasonably represent the present value of the consideration given or received in the exchange, see paragraphs .
Leases
470-10-60-4
For guidance on the classification of obligations under leases, see paragraphs .
470-10-S00StatusSEC
Source downloaded: .Record version f48a63feb4d4. Effective date must be checked in the source.
470-10-S00-1
The following table identifies the changes made to this Subtopic.
470-10-S15Scope and Scope ExceptionsSEC
Source downloaded: .Record version ad5ada039e6e. Effective date must be checked in the source.
Compensating Balance Arrangements
470-10-S15-1
See paragraph 210-10-S99-2, SAB Topic 6.H.1, for SEC Staff views on the applicability of the disclosure requirements pertaining to compensating balances and short-term borrowing arrangements.
470-10-S35Subsequent MeasurementSEC
Source downloaded: .Record version d9a02ab5e354. Effective date must be checked in the source.
Debt Issue Costs in Conjunction with a Business Combination
470-10-S35-1
See paragraph 340-10-S99-2, SAB Topic 2.A.6, Question 2, for SEC Staff views on the amortization of debt issue costs for interim "bridge financing."
470-10-S45Other Presentation MattersSEC
Source downloaded: .Record version dd20a52dc8e7. Effective date must be checked in the source.
Subsidiary's Loan Payable
470-10-S45-1
See paragraph 470-10-S99-4, SEC Observer Comment: Classification of Subsidiary's Loan Payable in Consolidated Balance Sheet when Subsidiary's and Parent's Fiscal Years Differ, for SEC Staff views on the presentation of such loans.
Long-Term Debt
470-10-S45-2
See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.22, for presentation requirements for bonds, mortgages, and other long-term debt. See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.23, for the presentation of long-term indebtedness to related parties.
Construction Loans
470-10-S45-3
See paragraph 470-10-S99-3, SAB Topic 6.H.2, for SEC Staff views on the classification of revolving loans pertaining to construction of long-term projects.
Subordinated Debt
470-10-S45-4
See paragraph 470-10-S99-2, SAB Topic 4.A, for SEC Staff views on the presentation of subordinated debt.
470-10-S50DisclosureSEC
Source downloaded: .Record version bc3b370bbeb0. Effective date must be checked in the source.
Disclosure of Long-Term Obligations
470-10-S50-1
See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.22, for disclosure requirements for bonds, mortgages, and other long-term debt.
470-10-S50-2
See paragraph 235-10-S99-1, Regulation S-X Rule 4-08(f), for disclosure requirements for changes in bonds, mortgages, and other long-term debt.
Short-Term Obligations
470-10-S50-3
See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.19(b), for disclosure requirements pertaining to short-term obligations.
Defaults
470-10-S50-4
See paragraph 235-10-S99-1, Regulation S-X Rule 4-08(c), for disclosure requirements relating to defaults.
Repurchase and Reverse Repurchase Agreements
470-10-S50-5
See paragraph 235-10-S99-1, Regulation S-X Rule 4-08, for disclosure requirements for repurchase and reverse repurchase agreements.
Guarantors and Issuers of Guaranteed Securities Registered or Being Registered
470-10-S50-6
See paragraph 470-10-S99-1, Regulation S-X Rule 3-10, for requirements applicable to financial statements of guarantors and issuers of guaranteed securities registered or being registered.
470-10-S50-7
See paragraph 470-10-S99-1A, Regulation S-X Rule 13-01, for disclosure requirements about guarantors and issuers of guaranteed securities registered or being registered.
Affiliates Whose Securities Collateralize Securities Registered or Being Registered
470-10-S50-8
See paragraph 470-10-S99-1B, Regulation S-X Rule 13-02, for disclosure requirements about a registrant's affiliates whose securities collateralize any class of securities registered or being registered.
470-10-S65Transition and Open Effective Date InformationSEC
Source downloaded: .Record version 5367736e46c5. Effective date must be checked in the source.
470-10-S65-1
Paragraph superseded on 08/19/2021 after the end of the transition period stated in SEC Release No. 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities.
470-10-S99SEC MaterialsSEC
Source downloaded: .Record version 7c601dc9f634. Effective date must be checked in the source.
SEC Rules, Regulations, and Interpretations
470-10-S99-1
The following is the text of Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered (17 CFR 210.3-10).
- (a) If an issuer or guarantor of a guaranteed security that is registered or being registered is required to file financial statements required by Regulation S-X with respect to the guarantee or guaranteed security, such financial statements may be omitted if the issuer or guarantor is a consolidated subsidiary of the parent company, the parent company's consolidated financial statements have been filed, and the conditions in paragraphs (a)(1) and (2) of this section have been met:
- (1) The guaranteed security is debt or debt-like; and
- (i) The parent company issues the security or co-issues the security, jointly and severally, with one or more of its consolidated subsidiaries; or
- (ii) A consolidated subsidiary issues the security or co-issues the security with one or more other consolidated subsidiaries of the parent company, and the security is guaranteed fully and unconditionally by the parent company; and
-
- (2) The parent company provides the disclosures specified in §210.13-01.
-
- (b) For the purposes of this section and §210.13-01:
- (1) The “parent company” is the entity that:
- (i) Is an issuer or guarantor of the guaranteed security;
- (ii) Is, or as a result of the subject Securities Act registration statement will be, an Exchange Act reporting company; and
- (iii) Consolidates each subsidiary issuer and/or subsidiary guarantor of the guaranteed security in its consolidated financial statements.
-
- (2) A security is “debt or debt-like” if it has the following characteristics:
- (i) The issuer has a contractual obligation to pay a fixed sum at a fixed time; and
- (ii) Where the obligation to make such payments is cumulative, a set amount of interest must be paid.
-
- Note 1 to paragraph (b)(2). Neither the form of the security nor its title will determine whether a security is debt or debt-like. Instead, the substance of the obligation created by the security will be determinative.
- Note 2 to paragraph (b)(2). The phrase “set amount of interest” is not intended to mean “fixed amount of interest.” Floating and adjustable rate securities, as well as indexed securities, may meet the criteria specified in paragraph (b)(2)(ii) of this section as long as the payment obligation is set in the debt instrument and can be determined from objective indices or other factors that are outside the discretion of the obligor.
- (3) A guarantee is “full and unconditional,” if, when an issuer of a guaranteed security has failed to make a scheduled payment, the guarantor is obligated to make the scheduled payment immediately and, if it does not, any holder of the guaranteed security may immediately bring suit directly against the guarantor for payment of all amounts due and payable.
-
- [65 FR 51707, Aug. 24, 2000, as amended at 73 FR 952, Jan. 4, 2008; 73 FR 1009, Jan. 4, 2008; 74 FR 18615, Apr. 23, 2009; 85 FR 21999, Apr. 20, 2020]
470-10-S99-1A
The following is the text of Regulation S-X Rule 13-01, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered (17 CFR 210.13-01).
- (a) For each guaranteed security subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and for each guaranteed security the offer and sale of which is being registered under the Securities Act of 1933, for which the registrant is the parent company (as that term is defined in §210.3-10(b)(1)) of one or more subsidiaries that issue or guarantee the guaranteed security, provide the following disclosures to the extent material:
- (1) A description of the issuers and guarantors of the guaranteed security;
- (2) A description of the terms and conditions of the guarantees, and how payments to holders of the guaranteed security may be affected by the composition of and relationships among the issuers, guarantors, and subsidiaries of the parent company that are not issuers or guarantors of the guaranteed security;
- (3) A description of other factors that may affect payments to holders of the guaranteed security, such as contractual or statutory restrictions on dividends, guarantee enforceability, or the rights of a noncontrolling interest holder;
- (4) Summarized financial information as specified in §210.1-02(bb)(1) of each issuer and guarantor of the guaranteed security as follows, with an accompanying note that briefly describes the basis of presentation:
- (i) The summarized financial information of each such issuer and guarantor consolidated in the parent company's consolidated financial statements may be presented on a combined basis with the summarized financial information of the parent company;
- (ii) Intercompany balances and transactions between issuers and guarantors whose summarized financial information is presented on a combined basis shall be eliminated;
- (iii) The summarized financial information shall exclude subsidiaries that are not issuers or guarantors. An issuer's or guarantor's investment in a subsidiary that is not an issuer or guarantor shall not be presented. An issuer's or guarantor's amounts due from, amounts due to, and transactions with any of the following shall be presented in separate line items:
- (A) Subsidiaries that are not issuers or guarantors; and
- (B) Related parties;
- (iv) If the information provided in response to the requirements of this section (e.g., factors that may affect payments to holders of the guaranteed security) is applicable to one or more, but not all, issuers and/or guarantors, separately disclose the summarized financial information applicable to those issuers and/or guarantors. In limited circumstances (i.e., where the separate financial information applicable to those issuers and/or guarantors can be easily explained and understood), narrative disclosure may be provided in lieu of the separate summarized financial information otherwise required by this paragraph (a)(4)(iv);
- (v) Disclose this summarized financial information as of and for the most recently ended fiscal year and year-to-date interim period included in the parent company's consolidated financial statements; and
- (vi) Notwithstanding that a parent company may omit this summarized financial information if not material, it may also be omitted if one of the following in paragraphs (a)(4)(vi)(A) through (D) of this section is true and disclosed. However, paragraph (a)(4)(vi)(A) does not apply if separate disclosure of summarized financial information applicable to one or more, but not all, issuers and/or guarantors is required by paragraph (a)(4)(iv) of this section. For the purposes of this section, a finance subsidiary is a subsidiary that has no assets or operations other than those related to the issuance, administration and repayment of the security being registered and any other securities guaranteed by its parent company:
- (A) The assets, liabilities and results of operations of the combined issuers and guarantors of the guaranteed security are not materially different than corresponding amounts presented in the consolidated financial statements of the parent company;
- (B) The combined issuers and guarantors, excluding investments in subsidiaries that are not issuers or guarantors, have no material assets, liabilities or results of operations;
- (C) The issuer is a finance subsidiary of the parent company, the parent company has fully and unconditionally guaranteed the security, and no other subsidiary of the parent company guarantees the security; or
- (D) The issuer is a finance subsidiary that co-issued the security, jointly and severally, with the parent company, and no other subsidiary of the parent company guarantees the security;
- (5) In a Securities Act registration statement filed in connection with the offer and sale of the guaranteed security, if the parent company acquired a significant business after the date of the parent company's most recent balance sheet included in its consolidated financial statements and the acquired business, one or more of the acquired business's subsidiaries, or the acquired business and one or more of its subsidiaries are issuers or guarantors of the guaranteed securities, disclose pre-acquisition summarized financial information as specified in paragraph (a)(4) of this section for each such issuer or guarantor. The acquired business is significant if it meets any of the conditions specified in the definition of significant subsidiary in §210.1-02(w), substituting 20 percent for 10 percent each place it appears therein, based on a comparison of the most recent annual financial statements of the acquired business and the parent company's most recent annual consolidated financial statements filed at or prior to the date of acquisition. The determination of whether a business has been acquired shall be made in accordance with the guidance set forth in §210.11-01(d). Acquisitions of a group of related businesses shall be treated as if they are a single business acquisition for purposes of this comparison. The determination of whether a group of businesses are related shall be made in a manner consistent with §210.3-05(a)(3);
- (6) Any financial and narrative information about each guarantor if the information would be material for investors to evaluate the sufficiency of the guarantee; and
- (7) Sufficient information so as to make the financial and non-financial information presented not misleading.
-
- (b) The parent company may elect to provide the disclosures required by this section in a footnote to its consolidated financial statements or alternatively, in management's discussion and analysis of financial condition and results of operations described in §229.303 (Item 303 of Regulation S-K) of this chapter. If not otherwise included in the consolidated financial statements or in management's discussion and analysis of financial condition and results of operations, the parent company must include the disclosures in its prospectus immediately following “Risk Factors,” if any, or otherwise, immediately following pricing information described in §229.105 (Item 105 of Regulation S-K) of this chapter.
470-10-S99-1B
The following is the text of Regulation S-X Rule 13-02, Affiliates Whose Securities Collateralize Securities Registered or Being Registered (17 CFR 210.13-02).
- The requirements of this section shall apply to each security registered or being registered that is issued on or after January 4, 2021, and to each registered security issued and outstanding before January 4, 2021, for which the registrant had prior to that date provided the financial statements specified in §210.3-16.
- (a) For each security subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and for each security the offer and sale of which is being registered under the Securities Act of 1933, that is collateralized by a security of the registrant's affiliate or affiliates, provide the following disclosures to the extent material:
- (1) A description of the securities pledged as collateral and the affiliates whose securities are pledged as collateral;
- (2) A description of the terms and conditions of the collateral arrangement, including the events or circumstances that would require delivery of the collateral;
- (3) A description of the trading market for the affiliate's security pledged as collateral or a statement that there is no market;
- (4) Summarized financial information as specified in §210.1-02(bb)(1) of each affiliate whose securities are pledged as collateral as follows, with an accompanying note that briefly describes the basis of presentation:
- (i) The summarized financial information of each such affiliate consolidated in the registrant's financial statements may be presented on a combined basis;
- (ii) Intercompany balances and transactions between affiliates whose summarized financial information is presented on a combined basis shall be eliminated;
- (iii) An affiliate's amounts due from, amounts due to, and transactions with any of the following shall be presented in separate line items:
- (A) The registrant;
- (B) Any of the registrant's subsidiaries not included in the summarized financial information of the affiliate(s); and
- (C) Related parties;
- (iv) If the information provided in response to the requirements of this section (e.g., the trading market for the affiliate's security pledged as collateral or a statement that there is no market) is applicable to one or more, but not all, affiliates, separately disclose the summarized financial information applicable to those affiliates. In limited circumstances (i.e., where the separate financial information applicable to those affiliates can be easily explained and understood), narrative disclosure may be provided in lieu of the separate summarized financial information otherwise required by this paragraph (a)(4)(iv);
- (v) Disclose this summarized financial information as of and for the most recently ended fiscal year and year-to-date interim period included in the registrant's consolidated financial statements; and
- (vi) Notwithstanding that a registrant may omit this summarized financial information if not material, it may also be omitted if one of the following in paragraph (a)(4)(vi)(A) or (B) of this section is true and disclosed. However, paragraph (a)(4)(vi)(A) does not apply if separate disclosure of summarized financial information applicable to one or more, but not all, affiliates is required by paragraph (a)(4)(iv) of this section:
- (A) The assets, liabilities and results of operations of the combined affiliates whose securities are pledged as collateral are not materially different than the corresponding amounts presented in the consolidated financial statements of the registrant; or
- (B) The combined affiliates whose securities are pledged as collateral have no material assets, liabilities or results of operations;
- (5) In a Securities Act registration statement filed in connection with the offer and sale of the collateralized security, if the registrant acquired a significant business after the date of the registrant's most recent balance sheet included in its consolidated financial statements and the acquired business, one or more of the acquired business's subsidiaries, or the acquired business and one or more of its subsidiaries are affiliates whose securities collateralize the registrant's collateralized security, disclose pre-acquisition summarized financial information as specified in paragraph (a)(4) of this section for each such affiliate. The acquired business is significant if it meets any of the conditions specified in the definition of significant subsidiary in §210.1-02(w), substituting 20 percent for 10 percent each place it appears therein, based on a comparison of the most recent annual financial statements of the acquired business and the registrant's most recent annual consolidated financial statements filed at or prior to the date of acquisition. The determination of whether a business has been acquired shall be made in accordance with the guidance set forth in §210.11-01(d). Acquisitions of a group of related businesses shall be treated as if they are a single business acquisition for purposes of this comparison. The determination of whether a group of businesses are related shall be made in a manner consistent with §210.3-05(a)(3);
- (6) Any financial and narrative information about each such affiliate if the information would be material for investors to evaluate the pledge of the affiliate's securities as collateral; and
- (7) Sufficient information so as to make the financial and non-financial information presented not misleading.
-
- (b) The registrant may elect to provide the disclosures required by this section in a footnote to its consolidated financial statements or alternatively, in management's discussion and analysis of financial condition and results of operations described in §229.303 (Item 303 of Regulation S-K) of this chapter. If not otherwise included in the consolidated financial statements or in management's discussion and analysis of financial condition and results of operations, the registrant must include the disclosures in its prospectus immediately following “Risk Factors,” if any, or otherwise, immediately following pricing information described in §229.105 (Item 105 of Regulation S-K) of this chapter.
- [85 FR 22001, Apr. 20, 2020]
SEC Staff Guidance
470-10-S99-2
The following is the text of SAB Topic 4.A, Subordinated Debt.
- Facts: Company E proposes to include in its registration statement a balance sheet showing its subordinate debt as a portion of stockholders' equity.
- Question: Is this presentation appropriate?
- Interpretive Response: Subordinated debt may not be included in the stockholders' equity section of the balance sheet. Any presentation describing such debt as a component of stockholders' equity must be eliminated. Furthermore, any caption representing the combination of stockholders' equity and only subordinated debts must be deleted.
470-10-S99-3
The following is the text of SAB Topic 6.H.2, Classification of Short-term Obligations—Debt Related to Long-Term Projects.
- Facts: Companies engaging in significant long-term construction programs frequently arrange for revolving cover loans which extend until the completion of long-term construction projects. Such revolving cover loans are typically arranged with substantial financial institutions and typically have the following characteristics:
- 1. A firm long-term mortgage commitment is obtained for each project.
- 2. Interest rates and terms are in line with the company's normal borrowing arrangements.
- 3. Amounts are equal to the expected full mortgage amount of all projects.
- 4. The company may draw down funds at its option up to the maximum amount of the agreement.
- 5. The company uses short-term interim construction financing (commercial paper, bank loans, etc.) against the revolving cover loan. Such indebtedness is rolled over or drawn down on the revolving cover loan at the company's option. The company typically has regular bank lines of credit, but these generally are not legally enforceable.
- Question: Under FASB ASC Subtopic 470-10, Debt—Overall, will the classification of loans such as described above as long-term be acceptable?
- Interpretive Response: Where such conditions exist providing for a firm commitment throughout the construction program as well as a firm commitment for permanent mortgage financing, and where there are no contingencies other than the completion of construction, the guideline criteria are met and the borrowing under such a program should be classified as long-term with appropriate disclosure.
470-10-S99-4
The following is the text of SEC Observer Comment: Classification of Subsidiary's Loan Payable in Consolidated Balance Sheet when Subsidiary's and Parent's Fiscal Years Differ.
- Issues periodically occur related to classification of a subsidiary's loan payable in a consolidated balance sheet when the subsidiary's and parent's fiscal years differ. For example, assume that a consolidated balance sheet prepared as of February 29, 1988, comprised of the parent company's balance sheet as of that date and the subsidiary's balance sheet as of December 31, 1987. The subsidiary's balance sheet included a material loan payable to a bank due January 31, 1989. The SEC staff would expect the debt in this case to be classified as current because to do otherwise would result in a material misclassification.