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Full disclosure: Debt · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC.
• 0:07
  SPEAKER_03: Welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_03: I'm Heather Horn.
• 0:12
  SPEAKER_03: Thanks for tuning in to the next episode in our full disclosure summer series, a show all about presentation and disclosure from the top of the financial statements down to the last footnote.
• 0:22
  SPEAKER_03: While it may sound like accounting 101, I guarantee you'll learn something new every episode.
• 0:29
  SPEAKER_03: Today's focus, disclosures of debt.
• 0:32
  SPEAKER_01: I keep in mind when I'm drafting by disclosures that the purpose and intent of a lot of these disclosures, which is to give users of financial statements kind of an idea of number one, what your obligations are.
• 0:45
  SPEAKER_02: Just really making sure you have transparent disclosure around all your obligations so the reader really understands, you know, what you you've committed to pay.
• 0:54
  SPEAKER_03: Those are my guests, Chip Curry, PwC National Office Partner, and Suzanne Stefani, a director in our national office who focuses on debt-related issues.
• 1:04
  SPEAKER_03: Like many topics in accounting, dealing with debt presentation and disclosure is something that's a lot more complicated than it may initially seem.
• 1:12
  SPEAKER_03: So get ready as we cover the complexities, some of the rules, and touch on standard setting updates to be aware of.
• 1:19
  SPEAKER_03: With that, let's get started.
• 1:24
  SPEAKER_03: Suzanne, thanks so much for joining me to talk about disclosure of debt.
• 1:28
  SPEAKER_03: And I think this is something where dealing with presentation disclosure in this area is something I think many, many new accountants is something they have to deal with, but it's something I think that's a lot more complicated than it often may seem on the surface.
• 1:42
  SPEAKER_03: And in particular, given that so many companies present classified balance sheets, it's always very important to make sure you know we get the classification right here.
• 1:52
  SPEAKER_03: So, Chip, maybe to start things off, I'm gonna do this podcast a little bit differently and we're gonna start with standard setting because I know that the FASP has been working on a standard setting project about the balance sheet classification of debt for several years, but there's been some recent developments.
• 2:08
  SPEAKER_03: So can you fill us in?
• 2:09
  SPEAKER_01: Yeah, so so maybe just taking a step back for a second.
• 2:13
  SPEAKER_01: So the model for classifying debt on, you know, so we're talking about liabilities between you know current and non-current is based on some principles.
• 2:21
  SPEAKER_01: But there were a lot of rules that have developed over a lot of years to deal with very specific fact patterns that were raised to the uh to the standard setters.
• 2:30
  SPEAKER_01: So way back in 2014, um, a project was added to the board's agenda as part of their the simplification initiative to try to address some of the more complex areas in debt classification.
• 2:44
  SPEAKER_01: A lot of the complexity and in the rules um come from because sometimes the the classification uh rules and consider subsequent events, so events after the balance sheet date, but sometimes they don't.
• 3:00
  SPEAKER_01: And and in this part of the rules, there's really not an overarching principle.
• 3:05
  SPEAKER_01: So, what the project was to establish was an to create an overall principle where you sort of look at the facts and circumstances sort of at the balance sheet date and eliminate a lot of that you know subsequent event.
• 3:17
  SPEAKER_01: I use the term was in the past tense because uh back in April, the FASB determined that there was really no simple fix and they uh they dropped the project.
• 3:28
  SPEAKER_03: All right.
• 3:28
  SPEAKER_03: Well, I know I think I had Suzanne on the webcast at least five times to talk about this.
• 3:32
  SPEAKER_03: So, Suzanne, we're gonna have to find a new topic for you to come on and talk about.
• 3:36
  SPEAKER_03: So um, all right, well, let's jump into some classification then.
• 3:40
  SPEAKER_03: And as I sort of alluded to in the beginning, I know that there's a lot more to balance declassification of debt than just looking at payments occurring in the next 12 months and making them current, and then payments after 12 months are non-current.
• 3:53
  SPEAKER_03: So let's cover a few of the more complex areas.
• 3:56
  SPEAKER_03: And uh, Suzanne, let's start with one where I know we get a lot of questions, which is if you have short-term debt, but you actually refinance it to long-term after the balance sheet date, does that impact classification?
• 4:11
  SPEAKER_02: Yeah, we do get a lot of questions on this, and yes, it does.
• 4:14
  SPEAKER_02: So you can have contractually short-term debt at the balance sheet date be classified as non-current if a company has both the intent and the ability to refinance it on a long-term basis.
• 4:27
  SPEAKER_02: So if you think about intent, that's kind of a that is a company-based assertion.
• 4:30
  SPEAKER_02: They didn't assert that they have the intent to do this.
• 4:33
  SPEAKER_02: And then when you you have to think about ability.
• 4:36
  SPEAKER_02: So there's two ways to demonstrate the ability to refinance it on a long-term basis.
• 4:41
  SPEAKER_02: One, um, a little more straightforward would be would be the actual, actual long-term issuance of either debt or equity after the balance sheet, but before the financials are issued.
• 4:52
  SPEAKER_02: So you you issue that and you take the proceeds from that issuance and actually pay off that short-term debt before the financials are issued, then you can get to non-current uh debt for that contractually short-term debt.
• 5:06
  SPEAKER_02: The other way is a little more complex.
• 5:09
  SPEAKER_02: So it's if you have a financing agreement in place by the time the financials are issued that the company intends to use to cover a short-term obligation, you could get to non-current.
• 5:20
  SPEAKER_02: But the thing is, the financing agreement has to meet certain conditions.
• 5:24
  SPEAKER_02: One, of course, it has to be a long-term agreement.
• 5:27
  SPEAKER_02: There can't be any violations of covenants.
• 5:29
  SPEAKER_02: The lender has to be capable of honoring the agreement.
• 5:33
  SPEAKER_02: But the big one is it can't be canceled for subjective reasons.
• 5:38
  SPEAKER_02: And that's where most of the focus is.
• 5:40
  SPEAKER_02: So usually or a lot of times, a lot of these financing agreements will have something called a subjective acceleration clause.
• 5:48
  SPEAKER_02: Usually you'll see it as a material adverse change clause.
• 5:52
  SPEAKER_02: Um, so it'll have something like an event of default if there's a material adverse change in the business, but it's very subjective and there's no real definition of that.
• 6:02
  SPEAKER_02: You could see it as you'd have to make a rep that there's been no material adverse change in the business when you go to draw down on the financing agreement.
• 6:11
  SPEAKER_02: So if a financing agreement has one of these things, it's it could be canceled for a subjective reason.
• 6:16
  SPEAKER_02: You're not able to use it to support non-current classification.
• 6:21
  SPEAKER_02: And that is kind of where we see most of the questions coming in on this.
• 6:25
  SPEAKER_03: So, Suzanne, let me clarify one thing.
• 6:28
  SPEAKER_03: So you said at the beginning that to classify contractually short-term debt as non-current, you have to have the intent and the ability to refinance on a long-term basis.
• 6:38
  SPEAKER_03: And the way to show that is if you actually issue long-term debt or if you have a financing agreement that meets these very specified criteria.
• 6:47
  SPEAKER_03: But you know, what if I I know I could put one of those in place because I've talked to my banker or whatever else, but I haven't put one of those in place?
• 6:55
  SPEAKER_03: Would that work?
• 6:56
  SPEAKER_03: Because I still am saying I have the intent.
• 6:59
  SPEAKER_02: No, it's not enough.
• 7:00
  SPEAKER_02: So um you could have the intent, but you wouldn't have the ability if you don't actually have one of these agreements in place.
• 7:07
  SPEAKER_02: So that won't work.
• 7:08
  SPEAKER_01: I mean, the way the way I think about putting those two things together is ability means like intendability is obviously satisfied if you've done it, right?
• 7:17
  SPEAKER_01: If I've refinanced it.
• 7:20
  SPEAKER_01: Ability means that I have 100% control over the ability to borrow.
• 7:26
  SPEAKER_01: And intent means that I'm going to actually use that ability to refinance the short-term debt.
• 7:33
  SPEAKER_01: So that's how I think about those two things in the context of the of the rules that Suzanne just went through.
• 7:39
  SPEAKER_03: Okay, so just being able to call up your banker and say that you want a loan is is not enough.
• 7:43
  SPEAKER_03: So I think that's uh good reminders on that.
• 7:46
  SPEAKER_03: All right, so let me do another scenario here.
• 7:49
  SPEAKER_03: So then what if I have sort of reverse situation?
• 7:52
  SPEAKER_03: And Chip, I'll go to you for this.
• 7:54
  SPEAKER_03: Is if I have a situation that I have debt that's contractually long term at the balance sheet date, but then I pay that debt off after the balance sheet date, but before the financial statements are issued, what happens in those circumstances?
• 8:08
  SPEAKER_01: So if the debt is contractually long term, so you know, greater than 12 months, and subsequent to the balance sheet date, I decide to pay it off and I actually do pay it off, we would classify that as non-current on the balance sheet.
• 8:24
  SPEAKER_01: Um so this is one of those situations where we would not push a subsequent event back to determine the accounting as of 1231.
• 8:34
  SPEAKER_01: What we would do though is we would disclose that as a subsequent event.
• 8:39
  SPEAKER_03: And what if I wanted to classify it as current?
• 8:43
  SPEAKER_01: You would uh you would still have to classify it as non-current because what we would focus on is what are the contractual rights and obligations that exist at the balance sheet date.
• 8:52
  SPEAKER_03: All right, I think that's really helpful to clarify.
• 8:54
  SPEAKER_03: So then let me ask another twist.
• 8:56
  SPEAKER_03: And what if I have a plan and I announce this plan to prepay contractually long-term debt before the balance sheet date?
• 9:04
  SPEAKER_03: So, for example, like I exercise a call right before the balance sheet date, but the repayment will happen after the balance sheet date.
• 9:11
  SPEAKER_03: What does that do to classification?
• 9:13
  SPEAKER_01: Well, I know I always get in trouble when I say this on these podcasts, but but the answer is it depends.
• 9:18
  SPEAKER_01: Ah, chip.
• 9:20
  SPEAKER_01: So again, similar to the earlier question, what we're looking at is at the balance sheet date, what are the legal rights and obligations?
• 9:27
  SPEAKER_01: So, in some cases, if a company like exercises a call option, they they make the uh the the notification that they're gonna call that debt, that notification becomes a legally binding, they can't reverse that decision and they have to call the debt and therefore pay it off within that 12 months.
• 9:46
  SPEAKER_01: In that case, we would classify it as current because at the balance sheet day, I am legally committed to pay it off.
• 9:54
  SPEAKER_01: If, on the other hand, I just now it's my intent or I make notifications, but I can back out of the notification, I can revoke the notification, then in that case it would remain non-current because I'm not legally obligated to repay the debt at the balance sheet date.
• 10:13
  SPEAKER_01: Now, in that situation, similar to the question you just asked, if I actually did pay it off after the balance sheet date, that would be a subsequent event disclosure.
• 10:21
  SPEAKER_03: Perfect.
• 10:22
  SPEAKER_03: And then another area, Suzanne, where I can't probably count the number of times you and I have talked about this, but it's dealing with covenant violations and waivers.
• 10:30
  SPEAKER_03: So what are some of the big uh considerations there?
• 10:33
  SPEAKER_02: Yeah, so of course, if you have a violation at the balance sheet date and you didn't get a waiver, and the lender would have the right to demand repayment for the violation, then that would have to be current.
• 10:44
  SPEAKER_02: But I think where it gets a little more tricky is when you have a violation at the balance sheet date, but you get a waiver right before you issue the financials.
• 10:52
  SPEAKER_02: It's not just an automatic non-current, you still have to think through some things.
• 10:57
  SPEAKER_02: So it's it would still actually be current, even if you got the waiver.
• 11:02
  SPEAKER_02: If a same or more restrictive covenant has to be met in the year following the balance sheet date, and it's probable that those covenants will not be met.
• 11:11
  SPEAKER_02: When you think about violations after the balance sheet date, that's where we also get some questions.
• 11:17
  SPEAKER_02: So if you think you're gonna have a violation after the balance sheet date, or maybe you even did, that actually generally won't impact your classification at the balance sheet date.
• 11:27
  SPEAKER_02: But of course, you should disclose if there's you know a material violation that happened.
• 11:32
  SPEAKER_03: All right.
• 11:32
  SPEAKER_03: So that's helpful, Suzanne.
• 11:34
  SPEAKER_03: And definitely on the topic of debt classification, people can go check out our past podcasts on this topic.
• 11:39
  SPEAKER_03: But I know there's other costs related to debt that people often ask questions about.
• 11:44
  SPEAKER_03: And in particular, when you have debt issuance costs, so the you know, the cost you actually incur to raise the debt itself, where should those be reported on the balance sheet?
• 11:53
  SPEAKER_02: Yeah, so if we're talking about debt issuance costs, those are costs that are direct and incremental to the debt issuance that are able to be capitalized.
• 12:02
  SPEAKER_02: And they should be presented as a reduction to the carrying amount of the debt on the balance sheet when you have term debt.
• 12:09
  SPEAKER_02: Then of course they're amortized into income as an adjustment to interest expense based on the effective interest method.
• 12:16
  SPEAKER_03: All right.
• 12:17
  SPEAKER_03: For any of you old-time accountants like me, when Suzanne first said this, I was really questioning her because it's not what I remembered.
• 12:25
  SPEAKER_03: But Suzanne, you clarified that this is semi-recent standard setting that made this change.
• 12:32
  SPEAKER_02: Yeah, it was an ASU issued back in 2015.
• 12:35
  SPEAKER_02: Because they were, you're right, they used to be presented as an asset.
• 12:38
  SPEAKER_02: But after this ASU came out, the term debt issuance costs are now part of the carrying amount of the debt.
• 12:44
  SPEAKER_03: All right.
• 12:44
  SPEAKER_03: As I said, semi-recent depends on your definition.
• 12:47
  SPEAKER_03: And and just to clarify, the current classification is that you're reducing the carrying amount if there this we meet this criteria being direct and incremental.
• 12:56
  SPEAKER_03: So thank you for that.
• 12:57
  SPEAKER_03: All right, so then let's move on to the income statement.
• 13:00
  SPEAKER_03: So I know the the biggest question we get here is around debt extinguishment charges.
• 13:05
  SPEAKER_03: And Chip, going to you, how would we classify those on the income statement?
• 13:10
  SPEAKER_01: Yeah, so maybe first just a quick comment on what's included in the gain or loss on extinguishment calculations.
• 13:16
  SPEAKER_01: So it includes, you know, write-off of any unamortized debt issuance costs, um, any debt discount or premium, that also will obviously impact the um the amount of gain or loss upon extinguishment.
• 13:29
  SPEAKER_01: So neither the debt guidance in the codification or some of the SEC guidance specifies where in the income statement you put gains and losses.
• 13:39
  SPEAKER_01: A really long time ago, they used to be extraordinary items, but that was taken out of the literature a long time ago.
• 13:45
  SPEAKER_01: And so now, I mean, there might be more than one acceptable approach.
• 13:49
  SPEAKER_01: I mean, some of the common approaches that we see are to classify that gain or loss as a separate line in the income statement, typically right after like interest expense, or some classify the gain or loss on extinguishment within interest expense, and then they disclose that amount along with the other components of interest expense in their footnotes.
• 14:09
  SPEAKER_03: Okay.
• 14:10
  SPEAKER_03: So, Chip, that's helpful.
• 14:11
  SPEAKER_03: And I think key reminder here is whatever approach a company takes, they need to make sure they apply it consistently.
• 14:17
  SPEAKER_03: So then we did balance sheet income statements.
• 14:19
  SPEAKER_03: Let's move on to the cash flow statement.
• 14:21
  SPEAKER_03: And Suzanne, of course, I have to go to you for this because I know that's your favorite statement.
• 14:26
  SPEAKER_03: And um, let's just run through a bunch of questions that I know we get commonly, starting with how should you present debt extinguishments in the cash flow statement?
• 14:35
  SPEAKER_02: Okay, so when we're talking about debt extinguishments here, I assume you're talking about when you don't have a restructuring, right?
• 14:41
  SPEAKER_02: It's just like a pure repayment of debt extinguishing.
• 14:46
  SPEAKER_02: So basically, when you do that, of course, the repayment of principal is going to go as a financing outflow.
• 14:53
  SPEAKER_02: Any repayment of interest would be operating.
• 14:56
  SPEAKER_02: And then all the costs associated with the extinguishment, like prepayment penalties or third-party costs, would all go through financing.
• 15:03
  SPEAKER_03: All right.
• 15:04
  SPEAKER_03: And then what about costs for debt restructuring?
• 15:06
  SPEAKER_03: And for this purpose, we can assume that the lender is the same before and after.
• 15:11
  SPEAKER_02: Yeah.
• 15:11
  SPEAKER_02: So when you have a debt restructuring and the lender is the same before and after, you would do this, it's called the 10% test, where you would do this test to figure out if you have an accounting extinguishment or modification.
• 15:24
  SPEAKER_02: So that's different than what I just spoke about before, which was just kind of a traditional straight um payoff.
• 15:30
  SPEAKER_02: So if you had an extinguishment, you would have done this 10% test and the change in cash flows would have been 10% or greater.
• 15:37
  SPEAKER_02: If you have that, any creditor fees or third-party fees you pay for that transaction would go through financing.
• 15:44
  SPEAKER_02: But if you have a modification, it's a little different.
• 15:48
  SPEAKER_02: The creditor fees will go through financing, but any third-party fees will go through operating cash flows.
• 15:54
  SPEAKER_03: All right.
• 15:55
  SPEAKER_03: And then another question I know we get is around gross for SNEP presentation, in particular when you have a revolver with lots of borrowings and repayments.
• 16:03
  SPEAKER_03: So, how should those be presented?
• 16:05
  SPEAKER_02: Yeah, so when you think about the guidance in the cash flows for cash flows, it does permit netting only in certain circumstances.
• 16:13
  SPEAKER_02: You know, it says gross cash flows are are generally, you know, a better representation, but it permits netting when the cash flows have a quick turnover, um, they occur in large volumes, and they have a short maturity.
• 16:27
  SPEAKER_02: So that means less than 90 days.
• 16:29
  SPEAKER_02: So the thing with revolvers is they do rarely qualify for net reporting because usually that contractual maturity, like every time you draw down of each individual borrowing, is usually greater than 90 days, even though you may be borrowing and paying down maybe daily, but you're not required to do so.
• 16:49
  SPEAKER_02: So you won't be able to net, basically.
• 16:52
  SPEAKER_02: So that would mean a company would show all the borrowings in one line as a financing inflow for the period and all of the repayments in another line as a financing outflow.
• 17:02
  SPEAKER_03: All right.
• 17:02
  SPEAKER_03: So another place where that contractual maturity is becomes very important.
• 17:05
  SPEAKER_03: So something to pay attention to.
• 17:07
  SPEAKER_03: All right.
• 17:08
  SPEAKER_03: So then let's turn to disclosures.
• 17:10
  SPEAKER_03: And I think, Chip, last time you and I talked about disclosures, you were giving me a laundry list of disclosures on debt and equity security.
• 17:16
  SPEAKER_03: So hopefully this list will be a little bit shorter.
• 17:19
  SPEAKER_03: Uh, but what are some of the basic disclosures that we should be thinking about related to debt?
• 17:24
  SPEAKER_01: Yeah, so this might come off a little bit like a laundry list, but we'll we'll try to keep it at a little bit of a uh a higher level.
• 17:30
  SPEAKER_01: Um and for those who are interested in the complete list of things, I would look at chapter 12 of our financial statement presentation guide.
• 17:38
  SPEAKER_01: And there's obviously also our disclosure checklist tool, which is another great thing to look at.
• 17:42
  SPEAKER_01: So maybe to hit on a couple.
• 17:44
  SPEAKER_01: The first kind of disclosures that you'll see are about some of the terms, and some of them are designed to give you information about liquidity.
• 17:54
  SPEAKER_01: So there's a the five-year table where you kind of list out over a five-year period sort of your aggregate maturities that you have, um, as well as any sinking fund requirements.
• 18:05
  SPEAKER_01: And that's designed to give readers of financial statements an idea of when your debt's coming due and when there are required payments.
• 18:12
  SPEAKER_01: Um, you need to disclose things about like the existence of subjective acceleration clauses.
• 18:17
  SPEAKER_01: Suzanne talked about some of those a little bit earlier, where a bank can sort of exercise those and cause you to repay the instrument early.
• 18:25
  SPEAKER_01: And then there's a general disclosure about, you know, sort of the existence of the different rights or privileges that exist in security.
• 18:31
  SPEAKER_01: So think calls, call prices, any conversion terms and things like that.
• 18:37
  SPEAKER_01: For those of you out there that are SEC filers, regulation SX has a number of additional disclosures.
• 18:43
  SPEAKER_01: So, you know, general characteristics around the type of the debt, including its interest rate, um the specific maturity date.
• 18:49
  SPEAKER_01: So that would be in addition to the five-year table.
• 18:52
  SPEAKER_01: Any contingent payment terms of these debt agreements would be would need to be disclosed?
• 18:58
  SPEAKER_01: Priority.
• 18:58
  SPEAKER_01: That's a good one.
• 18:59
  SPEAKER_01: So is it senior debt, is it subordinate debt, where in the in the priority structure does it does it stand?
• 19:05
  SPEAKER_01: Um it also requires you to disclose the amount and terms of any unused commitments for long-term financing, um, whether they have MAC clauses or not.
• 19:15
  SPEAKER_01: Um, Suzanne talked about some of those a little bit earlier in the context of bounty classification.
• 19:20
  SPEAKER_01: Um, any significant changes in the amount of authorized or issued amounts of debt is something you have to disclose under the SEC rules.
• 19:28
  SPEAKER_01: Um, and then there's a whole list of other things that I won't go into for regulation SX requires for short-term obligations.
• 19:36
  SPEAKER_01: Now, maybe pivoting off of and back to everybody's disclosure requirements, a couple of other ones.
• 19:42
  SPEAKER_01: One, any assets that are pledged as collateral against your debt, you need to disclose the debt that there are assets pledged as collateral and what are they?
• 19:50
  SPEAKER_01: There's a lot of specific disclosures on some of the more um specific financings like participating in mortgage loans or owned share lending arrangements.
• 19:58
  SPEAKER_01: And we also won't go into details, but there's a number of other disclosures for more complex instruments like convertible debt uh or mandatorily redeemable preferred stock.
• 20:08
  SPEAKER_03: All right.
• 20:08
  SPEAKER_03: Good job not making that sound like too much of a laundry list.
• 20:11
  SPEAKER_03: Although I will say I had to laugh when you started because uh you started by saying, I have a couple.
• 20:17
  SPEAKER_03: And I did get into an argument with my children last night, in fact, about the definition of the word couple versus few versus some versus many.
• 20:25
  SPEAKER_03: And I can definitively tell you couple is two.
• 20:28
  SPEAKER_03: So you definitely had more than two there, but maybe we can think about how you group them.
• 20:32
  SPEAKER_01: So in any event, yeah, that's that that was probably in the many category.
• 20:36
  SPEAKER_03: I believe so.
• 20:37
  SPEAKER_01: But I I I I misspelled, I I lulled people into a false sense of confidence that there's only gonna be two.
• 20:43
  SPEAKER_03: Definitely good.
• 20:43
  SPEAKER_03: Kept people listening.
• 20:44
  SPEAKER_03: So, all right, so then let's go into some of the more specific disclosures because I know there's different types of events and circumstances we can have.
• 20:52
  SPEAKER_03: And let's go to you, Suzanne.
• 20:55
  SPEAKER_03: And how about a case if you have uh contractually short-term debt uh that you classified as non-current due to either the post-balance sheet date refinancing or the intent and ability to use a long-term financing arrangement?
• 21:09
  SPEAKER_03: So basically, if you have the circumstance that we talked about in the first question, what do you need to disclose?
• 21:15
  SPEAKER_02: Yeah, so there are some specific disclosures required here.
• 21:19
  SPEAKER_02: So it basically has to be clear to the financial statement readers, right?
• 21:23
  SPEAKER_02: How much of the debt is in that's in non-current is really contractually short, short-term debt that has been, you know, subsequently refinanced or expected to be refinanced on a long-term basis.
• 21:35
  SPEAKER_02: So generally, you need to provide a general description of the financing agreement in place or the terms of any new obligation or equity issuance that was um that happened or is it expected to happen after the balance sheet date.
• 21:50
  SPEAKER_03: All right.
• 21:50
  SPEAKER_03: And then Chip, I'll go to you for your circumstance.
• 21:52
  SPEAKER_03: And what about a situation where you have contractually long term debt that's paid off after the balance sheet date?
• 21:59
  unknown: Yeah.
• 22:00
  SPEAKER_01: We talked about earlier.
• 22:01
  SPEAKER_01: Um, if you have at the balance sheet date, you have contractually long-term debt, it's going to be non-current.
• 22:06
  SPEAKER_01: And then what we would do if it gets paid off after the balance sheet date, we would disclose that as a subsequent event.
• 22:11
  SPEAKER_01: And and the disclosure would include, you know, both the debt has been paid off, but also uh likely include some like what would the source of the funds, for example, if there was like a subsequent refinancing or anything like that, that would be a subsequent event.
• 22:24
  SPEAKER_01: And typically you would see those two things disclosed together.
• 22:27
  SPEAKER_03: And Chip, I realized it was very specific in my question about contractually long-term debt, but I'm guessing you would still make these disclosures even if you had short-term debt, or I guess maybe it would depend on facts and circumstances.
• 22:39
  SPEAKER_01: I think it would depend on facts and circumstances.
• 22:41
  SPEAKER_01: And you know, we'd evaluate it like most subsequent event disclosures as a material event to the company, things like that.
• 22:47
  SPEAKER_03: All right.
• 22:48
  SPEAKER_03: So at least rule of thumb, start with the idea you're going to disclose.
• 22:50
  SPEAKER_03: So and then, Suzanne, another one that we talked about covenant violations.
• 22:54
  SPEAKER_03: What do you need to disclose there?
• 22:56
  SPEAKER_02: Yeah, so there's some.
• 22:58
  SPEAKER_02: So you'd have to disclose any circumstances surrounding any debt that has a covenant violation at the balance sheet date, and also disclose any violations that happened or expected to happen after the balance sheet date.
• 23:10
  SPEAKER_02: You should also disclose that, including a discussion, kind of if there's any adverse consequences related to the failure.
• 23:18
  SPEAKER_02: Um, now there are a uh and now I'm confused about few or a couple, but there are some specific public company requirements uh to disclose again from the from the SX about defaults and violations.
• 23:34
  SPEAKER_02: So you'd have to disclose the facts and amounts concerning any default in principle or interest or redemption provisions with respect to any debt or any covenant violation of any agreement when it when a default has occurred.
• 23:47
  SPEAKER_02: Also, if a default or violation exists, but the uh default has been waived, you would describe, basically disclose the details of that waiver and how long that waiver goes for.
• 23:59
  SPEAKER_03: Great.
• 23:59
  SPEAKER_03: And then definitely it's with all things, any material subsequent events related to debt should be disclosed.
• 24:05
  SPEAKER_03: We sort of talked about that.
• 24:06
  SPEAKER_03: So I'm guessing if you issued debt as well, right?
• 24:09
  SPEAKER_03: All right.
• 24:09
  SPEAKER_03: So then with for anything else on disclosure or other things related to debt, definitely check out chapter 12 of the financial statement presentation guide.
• 24:18
  SPEAKER_03: But I do want to pivot to another discussion that I feel like has come up often that we've spent time talking about.
• 24:24
  SPEAKER_03: And that is in the area of structured payables and specifically where we're seeing companies that are working with the intermediary to arrange like a trade payable program.
• 24:34
  SPEAKER_03: So, Chip, if you could explain what I mean when I say structured payable, and then let's talk about a little bit about presentation and disclosure.
• 24:42
  SPEAKER_01: Yeah, sure.
• 24:43
  SPEAKER_01: So a structured payable program, it typically involves like a financial institution or another intermediary settling amounts that are owed to an entity supplier.
• 24:54
  SPEAKER_01: So they're the ones that are actually going to pay the suppliers.
• 24:57
  SPEAKER_01: And that the entity actually pays the intermediary.
• 25:00
  SPEAKER_01: So think about it as there's a financial institution or other intermediary standing between you and your suppliers with respect to payments.
• 25:08
  SPEAKER_01: You know, why do you hear so much about these programs and why why do people talk about them?
• 25:13
  SPEAKER_01: Well, I mean, there's a couple of potential benefits, right?
• 25:16
  SPEAKER_01: So um the purchaser, so the entity dealing with their vendors, they they might be able to benefit through from a program like this because the vendors might have a greater willingness to accept extended payment terms.
• 25:28
  SPEAKER_01: You can also benefit from improved administration of supplier payments, where you have an intermediary standing in between dealing with all your suppliers for you.
• 25:37
  SPEAKER_01: And the supplier uh has um some increased liquidity too, because they they might have the option to be paid earlier by the intermediary than they would have been had they been dealing with the purchaser specifically.
• 25:49
  SPEAKER_01: And so, really, from an accounting perspective, what the key question is, is when you enter on one of these relationships and like a third party sort of inserts itself between you and your supplier, has your payables or your obligations changed so much that they're not really vendor payables or accounts payable anymore?
• 26:11
  SPEAKER_01: They're really debt.
• 26:12
  SPEAKER_01: So, what we've really done is borrow money from the bank and have the bank pay our suppliers.
• 26:17
  SPEAKER_01: And so that's really what the question comes up from an accounting perspective.
• 26:21
  SPEAKER_01: It's it's a very judgmental area.
• 26:23
  SPEAKER_01: The SEC has given some speeches on the topic over the years, and it's based very much on the specific facts and circumstances of the arrangement, the nature of the company's relationship with its vendors.
• 26:36
  SPEAKER_01: Chapter 11 of our financial statement presentation guide has a whole list of indicators that you could consider in determining what the appropriate balance sheet classification for these types of programs are.
• 26:48
  SPEAKER_01: Um now, currently, and this is might be where some of the noise that you've been hearing, Heather, is is there's no specific disclosure requirements for when companies enter into these programs.
• 27:00
  SPEAKER_03: So, Chip, one thing, you know, I was made a big point at the beginning of talking about structured payable programs, but I do know these also go by lots of other names.
• 27:09
  SPEAKER_03: So just for the benefit of our listeners, to make sure they're kind of thinking of this the right way, what are some of the other kind of terms we hear used to describe these types of arrangements?
• 27:20
  SPEAKER_01: And the two that I hear most frequently are like structure payable or vendor payable arrangements, but they go through many, many different names.
• 27:28
  SPEAKER_01: And a lot of the times they're being marketed to people by financial institutions and banks that serve as the intermediaries.
• 27:35
  SPEAKER_01: So I think really the important thing to focus on is are you entering into a relationship where somebody is sort of sticking themselves in between, you know, like you and your vendors?
• 27:47
  SPEAKER_03: All right, very helpful.
• 27:48
  SPEAKER_03: And I think to your point then on the disclosures, what you know we've been hearing is that definitely the SEC has weighed in and asked for more transparent disclosures in terms of these programs, key terms, and because you know we hear that the users really want to understand the impact of these programs on liquidity and what events could limit a company's ability to take advantage.
• 28:11
  SPEAKER_03: So I think your point about making sure you really understand what your arrangement and is arrangement is is definitely key.
• 28:17
  SPEAKER_03: But in addition, Suzanne, because of all the attention on this, the I know the FASBE recently took up a project.
• 28:24
  SPEAKER_02: Yeah, so the FASBE took up a project to determine if there should be certain required disclosures for these programs because, like Chip said, right now there's no specific disclosure requirements under US GAP.
• 28:36
  SPEAKER_02: So the board met at the end of June to just start discussing this project.
• 28:41
  SPEAKER_02: They came up with kind of a general scope of who would be in the scope of this guidance.
• 28:47
  SPEAKER_02: Basically, it'd be based on a general description of the program, and you would we would use buyer's confirmation of the invoices as an indicator to figure out if you're in the scope.
• 28:57
  SPEAKER_02: And so they're really on the stage of kind of talking about what disclosures they would require.
• 29:02
  SPEAKER_02: And though there'll be more to come on this because eventually they'll issue an exposure draft and um put all those requirements out.
• 29:10
  SPEAKER_02: But right now it's it's kind of in the startup phase.
• 29:12
  SPEAKER_03: All right.
• 29:13
  SPEAKER_03: And so I think the key thing for now is for people to keep an eye on it.
• 29:16
  SPEAKER_03: And then if you do have these programs, we would definitely encourage companies to make sure they're following the SEC's uh guidance to be transparent on disclosures here.
• 29:26
  SPEAKER_03: So that's a lot that we covered.
• 29:29
  SPEAKER_03: I do have a couple final wrap-up questions.
• 29:31
  SPEAKER_03: So the first one is just as you guys both take a step back and think about all of these disclosures and you know, the accounting in this area, because we did catch touch a little on that.
• 29:43
  SPEAKER_03: What is your sort of overarching message that you would give from a preparer point of view?
• 29:48
  SPEAKER_03: And maybe Chip, I'll go to you first for that.
• 29:51
  SPEAKER_01: Well, I mean, I guess what I would do is when keep I keep in mind when I'm drafting by disclosures the the purpose and intent of a lot of these disclosures, which is to give um users of financial statements kind of an idea of, you know, number one, what your obligations are, um, but also, you know, kind of a sense of what is the terms of those uh obligations and a little bit of sense of, you know, you know, therefore what your liquidity is.
• 30:17
  SPEAKER_01: Now, some of that stuff, obviously, for public companies and liquidity disclosures will be an MDNA, but I think just keeping in mind that that's what a lot of these things are about is to understand the rights and obligations that you've you've given to other people and kind of what the commitments are on you that are helpful when you try to tackle them.
• 30:36
  SPEAKER_03: Great.
• 30:36
  SPEAKER_03: Thank you.
• 30:37
  SPEAKER_03: And Suzanne?
• 30:38
  SPEAKER_02: Yeah, I mean, I agree with Chip.
• 30:40
  SPEAKER_02: It's just really making sure you have transparent disclosure around all all your obligations so the reader really understands, you know, what you you've committed to pay.
• 30:49
  SPEAKER_02: And I guess going back to kind of classification as current versus non-current, it's just you know, really make sure you're you get into those debt agreements and you really understand what type of clauses you have in there, um, because you don't want to end up finding you have something kind of buried in there that that trips you up for classification.
• 31:07
  SPEAKER_03: All right, that's helpful.
• 31:08
  SPEAKER_03: And then final question for you, and this is my stump the specialist question.
• 31:12
  SPEAKER_03: What was the first standard that talked about debt classification or debt disclosures?
• 31:17
  SPEAKER_03: I have one in mind, but I don't know if it's the right answer.
• 31:20
  SPEAKER_02: I I think it's fast six.
• 31:22
  SPEAKER_02: I don't know because I'm just going by the numbering, but that is that was the one I had in mind.
• 31:26
  SPEAKER_02: That's actually what I talked about today, which is uh refinancing um contractually short-term debt on a long-term basis.
• 31:34
  SPEAKER_02: So even though it was issued, I think, in the 70s, we still get questions about it today.
• 31:38
  SPEAKER_02: Chip, you agree?
• 31:40
  SPEAKER_01: I I don't know, but I I my bet would have been there would have been an ARB or an APB before the FASB that would talk about some of the debt and debt disclosures.
• 31:51
  SPEAKER_01: Um but it's always interesting of asking the person that grew up in financial services that doesn't have classified balance sheets, you know, questions about accounting standards relating to classified balance sheets.
• 32:03
  SPEAKER_01: But that would have been my guess.
• 32:04
  SPEAKER_01: It would have been an APB or an ARB.
• 32:06
  SPEAKER_03: Uh likely excuse, Chip.
• 32:08
  SPEAKER_03: But I was gonna ask if there's an ARB.
• 32:10
  SPEAKER_03: So we will check the answer and we will share it.
• 32:12
  SPEAKER_03: Uh I'll share it in my final close.
• 32:14
  SPEAKER_03: But definitely interesting to think that FAS six is really still, you know, applicable today.
• 32:20
  SPEAKER_03: So as always, pleasure to have you guys on.
• 32:22
  SPEAKER_03: Thanks so much for joining me.
• 32:26
  SPEAKER_03: That does it for today.
• 32:27
  SPEAKER_03: Thanks for tuning in.
• 32:29
  SPEAKER_03: And for those of you keeping score at home, Chip correctly answered my stump the specialist question on what the first standard to talk about debt classification or disclosures was.
• 32:39
  SPEAKER_03: ARB 43, chapter 3A, covers current liability classification, which would cover debt, and that was issued in June 1953.
• 32:49
  SPEAKER_03: That was issued before Fast 6, which was issued in May 1975.
• 32:54
  SPEAKER_03: So, way to go chip.
• 32:56
  SPEAKER_03: Although, to be fair, ARB43 is often a very good guest.
• 33:00
  SPEAKER_03: In any event, join me back here every Tuesday and Thursday for new podcast episodes, and so that you never miss an episode of Follow PWC's podcast series wherever you listen to your content.
• 33:10
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• 33:20
  SPEAKER_03: For PWC, I'm Heather Horn.
• 33:22
  SPEAKER_03: Thanks for tuning in.
• 33:28
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