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EITF ABSTRACTS
Issue No. 95-22
Title: Balance Sheet Classification of Borrowings Outstanding under Revolving Credit
Agreements That Include both a Subjective Acceleration Clause and a Lock-Box
Arrangement
Dates Discussed: November 15–16, 1995; November 18–19, 1998
References:
FASB Statement No. 6, Classification of Short-Term Obligations
Expected to Be Refinanced
FASB Statement No. 78, Classification of Obligations That Are Callable
by the Creditor
FASB Technical Bulletin No. 79-3, Subjective Acceleration Clauses in
Long-Term Debt Agreements
AICPA Accounting Research Bulletin No. 43, Chapter 3A, Working
Capital—Current Assets and Current Liabilities
ISSUE
Borrowings outstanding under certain revolving credit agreements are considered longterm 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
with the lender, whereby the borrower’s customers are required to remit payments
directly to the lender and amounts received are applied to reduce the debt outstanding. 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 Technical Bulletin 79-3.
If borrowings outstanding are
considered short-term obligations, and the borrower intends to refinance the obligation on
a long-term basis, Statement 6 applies and the debt would be classified as a current
liability because of the existence of the subjective acceleration clause.
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The issue is whether borrowings outstanding under a revolving credit agreement that
includes both a subjective acceleration clause and a requirement to maintain a lock-box
arrangement, whereby remittances from the borrower's customers reduce the debt
outstanding, are considered short-term obligations. This Issue does not apply to lock-box
arrangements that are maintained at the discretion of the borrower.
EITF DISCUSSION
At the November 15–16, 1995 meeting, the Task Force reached a consensus that
borrowings outstanding under a revolving credit agreement that includes both a
subjective acceleration clause and a requirement to maintain a lock-box arrangement,
whereby remittances from the borrower’s customers reduce the debt outstanding, are
considered short-term obligations. Task Force members observed that the effect of the
agreement's subjective acceleration clause on the balance sheet classification of
borrowings outstanding should be determined based on the provisions of Statement 6.
Accordingly, because of the subjective acceleration clause, the debt should be classified
as a current liability unless the conditions in paragraphs 10 and 11 of Statement 6 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.
At the November 18–19, 1998 meeting, the Task Force discussed whether borrowings
outstanding under a revolving credit agreement that includes both a subjective
acceleration clause and a requirement to maintain a "springing" lock-box arrangement,
whereby remittances from the borrower's customers are forwarded to the debtor's general
bank account and do not reduce the debt outstanding until and unless the lender exercises
the subjective acceleration clause, are also considered short-term obligations. The Task
Force reached a consensus that borrowings outstanding under a revolving credit
agreement that includes both a subjective acceleration clause and a requirement to
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maintain a "springing" lock-box arrangement are long-term obligations since the
remittances do not automatically reduce the debt outstanding without another event
occurring. Task Force members observed that the effect of the agreement's subjective
acceleration clause should be determined based on the provisions of Technical Bulletin
79-3.
The Task Force observed that the term lock-box arrangement, as used in the consensus
reached at the November 15–16, 1995 meeting, should refer 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 should be
considered a short-term obligation.
STATUS
No further EITF discussion is planned.
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