Refinancing Short Term Obligations

Question 1

What are the two conditions that must be met in order to reclassify a current liability to non-current?

Answer 1

1. ) Intent - Intent to refinance must be proven. Ex. through board of director’s meeting minutes
2. ) Ability - 3 ways to meet this
   a. ) Actually refinance on a long-term basis before issuance of its financial statements
   b. ) Enter into a noncancelable refinancing agreement supported by a viable lender. The agreement must extend more than one year
   c. ) Issue equity securities replacing the debt

Question 2

Where must the details of a refinancing arrangement be disclosed in the financials?

Answer 2

In the footnotes.

Question 3

Are there any differences between U.S. GAAP and IFRS in regards to reclassifying a current liability to noncurrent?

Answer 3

Yes, the firm must show its ability to refinance BEFORE the BS date.

Question 4

Why would a firm want to reclassify a liability from current to noncurrent?

Answer 4

To improve their liquidity position and reduce the perceived immediate riskiness of the firm