Download Topic No. D-23 Topic: Subjective Acceleration Clauses and

Topic No. D-23
Topic: Subjective Acceleration Clauses and Debt Classification
Date Discussed:
July 12, 1990
An FASB staff representative announced that the FASB staff recently responded to the
following technical inquiry related to subjective acceleration clauses and debt classification.
Q—Are FASB Technical Bulletin No. 79-3, Subjective Acceleration Clauses in Long-Term
Debt Agreements, and FASB Statement No. 6, Classification of Short-Term Obligations
Expected to Be Refinanced, inconsistent in their treatment of subjective acceleration clauses in
debt agreements?
A—Statement 6 permits a short-term obligation to be excluded from current liabilities
provided the enterprise has the ability and intent to refinance the obligation on a long-term
basis. The existence of a financing agreement that clearly allows the short-term obligation to
be refinanced on a long-term basis is one means of demonstrating that ability. Statement 6
states, however, that a financing agreement can only be used as the basis for excluding the
short-term obligation from current liabilities if the financing agreement cannot be cancelled
by the lender based on a subjective acceleration clause. If a long-term debt agreement
contains a subjective acceleration clause, the Technical Bulletin indicates that neither
reclassification to current liabilities nor disclosure of the clause would be required so long as
acceleration of the due date is remote.
The FASB staff views the circumstances covered by Statement 6 and Technical Bulletin 79-3
as distinctly different. Under the Technical Bulletin, 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. Statement 6 covers circumstances in which the
obligation is by its terms short-term.
For that 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, Statement 6 requires a higher standard for a
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financing agreement that permits an enterprise to refinance a short-term obligation on a longterm basis than Technical Bulletin 79-3 requires for an existing long-term loan for which
early repayment might be requested.
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Not for redistribution
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