After receiving comments from various stakeholders following an initial proposal in 2017, on Sept. 13, the FASB rereleased proposed Accounting Standards Update, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent). The standard applies to all for-profit and not-for-profit companies that have outstanding debt and prepare a classified balance sheet separating current and noncurrent financial statement accounts. The updated standard is designed to simplify the process for determining the classification of debt and other debt instruments. Presently, the process to determine the proper classification of debt is complex, costly, and considered difficult for users of the financial statements to understand. The updated standard is more understandable and simplified for users and preparers alike.

FASB’s proposed standard and how it differs from current standards

The proposed standard would require entities to recognize debt as noncurrent if either of these two situations exists as of the balance sheet date:

  • The liability is due to be settled more than one year (or one operating cycle, if longer) after the balance sheet date.
  • The entity has a contractual right to defer settlement of the liability for a period of greater than one year after the balance sheet date.

This differs substantially from existing standards in two primary ways. First, present standards allow a company to classify debt as noncurrent when it was refinanced as long-term or refinanced as equity securities after the balance sheet date but before the financial statements were issued. To be consistent with accounting for other subsequent events, neither of those situations exist as of the balance sheet date, and therefore, the proposed standard would not allow reclassification and the debt would remain as current. Second, current GAAP allows short-term debt that has an associated financing agreement that meets certain standards to be classified as noncurrent. Under the proposed standard, companies would no longer be able to consider financing agreements when determining balance sheet classification. Essentially, entities must assess debt classification independent of other arrangements and only based on the events that exist as of the balance sheet.

Violations of debt covenants would continue to be an exception to the general standard and would require immediate classification as noncurrent, regardless of the two situations listed above.

An implementation date has not been set and the FASB is still taking comments through Oct. 28, 2019. We do not anticipate the CPA Exam will reflect this proposed update in the near future.

The standards and the AICPA

While the Financial Accounting Standards Board is the standard-setting body in the United States, the AICPA decides whether to include those updates on the CPA Exam. As of now, the AICPA has not announced any new CPA Exam changes related to these pronouncements.

However, as an accounting professional and a candidate for the CPA Exam, it’s always a good idea to stay aware of the latest happenings in the accounting industry, if for no other reason than you’ll likely be working with these changes in your career someday. Staying on top of standard updates will help you know what to expect on the CPA Exam and it will also make you a stand-out candidate on job interviews.

What to do when major CPA Exam changes are announced

The rapid succession of standard creation and updates in 2019 means that major CPA Exam changes are forthcoming and will include these updates in future years. By staying in the know regarding any major accounting standards’ changes, as well as any major changes announced by the AICPA, you can be prepared for any CPA Exam changes in the future.

The absolute best way to know that the materials you’re studying are current and accurate is to make sure you get a review course that includes free, automatic updates to your exam prep materials. Surgent includes these updates with every package at no extra charge, so you’ll always have the most relevant material for the exam section you’re taking.

When major exam changes are announced, Surgent provides both the content and formatting for the current exam as well as the newly announced exam. You have the option to study either the old materials or the new materials depending on when you’re taking your exam. This ensures you won’t have any interruptions to your studies and guarantees you will have access to relevant changes when you need them.

Generally Accepted Accounting Principles are changing rapidly due to a variety of factors, from stakeholder security to the introduction of more technology within the business environment. Staying on top of these changes will not only make you a better CPA Exam candidate but also a better future CPA.

Make sure that the CPA review course you choose stays up to date with the latest AICPA changes to the exam. Choose Surgent CPA Review today!