October 28, 2019

Shayne Kuhaneck
Acting Technical Director
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116

Dear Mr. Kuhaneck:

PricewaterhouseCoopers LLP appreciates the opportunity to respond to the FASB's proposed Accounting Standards Update, Debt (Topic 470) Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent), (the "Exposure Draft").

We agree that the current guidance for determining whether debt should be classified as current or noncurrent in a classified balance sheet is complex and should be simplified. We support the proposed principle that an entity should classify debt as noncurrent if (1) it is contractually due to be settled more than one year after the balance sheet date or (2) the entity has the contractual right to defer settlement for at least one year from the balance sheet date. We believe a strict contractual approach, with only a narrow exception for covenant violations that are waived after the balance sheet but before issuance of the financial statements, is a model that can be consistently applied. We commend the Board on being responsive to comments received on the original exposure draft issued.

We appreciate the Board's efforts to explore an approach that would consider contractually-linked financing arrangements. We understand the challenge of balancing the concerns of preparers with the Board's objective to simplify the guidance in this area. Therefore, we understand why the Board rejected such an approach. We considered the application of the proposed principles to redeemable instruments that are subject to remarketing agreements (e.g., variable rate demand obligations (VRDOs)). We believe that the application of the proposed principles could lead to a conclusion that such instruments are eligible for noncurrent classification, because, in a typical arrangement, the issuer of a VRDO can only be forced to settle the obligation prior to its maturity date if there is a failed remarketing, which is a contingent event. Under today's guidance, there is a specific example addressing these instruments that requires these types of instruments to be reported as current despite the remarketing arrangement. However, we note that the Exposure Draft would eliminate this example. Instead, the Exposure Draft proposes a principles-based approach focused solely on when the issuer can be contractually forced to settle the debt. We note that diversity in practice could develop if the FASB does not clarify how the principles in the Exposure Draft should be applied to VRDOs. We recommend adding an example illustrating the application of the guidance to the VRDO fact pattern.

Additionally, we do not believe that the proposed guidance is clear on how a debt instrument that must be settled with issuer's own equity should be classified and believe additional guidance should be added to the codification. We observe that the definition of current liabilities in ASC 210 only includes obligations whose liquidation is reasonably expected to require the use of existing resources classified as current assets, or the creation of other liabilities. Therefore, an entity may conclude that a debt instrument required to be settled in shares is a noncurrent liability because equity shares are neither current assets of the company nor represent another liability.

We believe traditional convertible debt (when an investor has an option to convert the debt into common shares prior to its maturity or receive the principal payment in cash at its maturity) should be classified solely based on when the debt is due to be settled in cash (i.e., the ability to convert to equity prior to its maturity date does not impact classification). We also believe that a debt instrument that settles in a variable number of shares with a monetary value that is based solely or predominantly on a fixed dollar amount should be classified based on when the debt is due to be settled even if the form of settlement is in shares. We believe this principle will result in an assessment similar to the one considered by a preferred stock issuer based on the guidance in ASC 480-10-25-14.

The appendix to this letter contains our detailed responses to the Questions for Respondents in the Exposure Draft. It includes additional observations and in some cases expands on our comments above.

If you have any questions, please contact David Schmid at (973) 997-0768 or Scott Tornberg at (415) 572-8860.

Sincerely,

PricewaterhouseCoopers LLP

Question 1: Proposed paragraph 470-10-45-23 would preclude an entity from considering an unused long-term financing arrangement (for example, a letter of credit) in determining the classification of a debt arrangement. Would that proposed requirement simplify the guidance without diminishing the usefulness of the financial statements? Why or why not?

We believe the proposed amendments will significantly reduce complexity in this area as the current guidance requires an assessment of management's intentions and the financial capability of the lender, as well as a careful review of the financing arrangement to ensure that it meets the specific conditions set forth in the guidance. This includes an assessment of whether the agreement includes any subjective acceleration clauses, which can be challenging in some cases.

We believe the question on diminishing the usefulness of the financial statements is best answered by the users of financial statements.

Question 2: The Board considered and rejected both of the following approaches in determining the classification of debt when an entity has unused long-term financing arrangements that require an entity to:

In both approaches, the debt classification might change from a current liability to a noncurrent liability. (See paragraphs BC29–BC35 in this proposed Update for further information.) Is there any additional information about the expected costs and benefits, simplification of classification guidance, or operability of applying those approaches that the Board should be aware of?

We do not support approach (a). We believe this would result in an entity being required to arbitrarily classify any contractually short-term debt instrument as noncurrent to the extent of the aggregate amount of all undrawn long-term financing commitments at the balance sheet date.

We appreciate the Board's efforts to explore approach (b) and we understand the challenge of balancing the concerns of preparers that have financing arrangements that are contractually linked to their debt arrangements with the Board's objective to simplify the guidance in this area. Therefore, we understand why the Board rejected a contractual linkage approach. We understand that this approach was primarily considered to address the classification of variable rate demand obligations (VRDOs).

We considered the application of the proposed principles within the Exposure Draft to certain VRDOs and believe it could lead to a conclusion that such instruments could be eligible for noncurrent classification as, in a typical arrangement, the issuer of the VRDO can only be forced to settle the obligation prior to its maturity if there is a failed remarketing, which is a contingent event.

Our understanding is that under a typical arrangement, VRDOs are issued with long-term contractual maturities. However, they have a feature that a holder can exercise in conjunction with the periodic reset of the interest rate. If a holder exercises this feature, a remarketing agent will then begin efforts to sell that holder's bonds to another investor. If the remarketing is successful, the remarketing agent will arrange for the sale, whereby the bonds would be transferred from the existing investor to the new investor (with the remarketing agent acting in its capacity as a broker dealer). Practice generally considers this to be a transaction among lenders. If the remarketing agent is unable to find buyers after going through the remarketing process, only then does the issuer "effectively settle" the debt.

There is specific guidance under current GAAP for these instruments included in Example 2 in ASC 470-10-55. This guidance indicates that these types of instruments are required to be reported as current despite the remarketing arrangement. The proposed guidance eliminates this example and instead is focused solely on contractual maturity and when the issuer can be forced to settle the debt. We note that diversity in practice may develop if the FASB does not clarify how the principles in the Exposure Draft should be applied to these arrangements. We recommend adding an example illustrating the application of the guidance to the VRDO fact pattern.

Question 3: Proposed paragraph 470-10-45-24 would provide classification guidance in scenarios in which an entity violates a provision of a long-term debt arrangement and the debt arrangement provides a grace period. Is that proposed guidance clear and understandable? Why or why not?

Yes, we believe the proposed paragraph is clear that when an entity violates a provision of a long-term debt arrangement and the arrangement provides a grace period extending beyond the balance sheet date, the debt is noncurrent so long as the criteria in ASC 470-10-45-22 are met.

Question 4: Proposed paragraph 470-10-45-22 includes a principle for classifying debt as a noncurrent liability in a classified balance sheet. Would the guidance in that proposed paragraph be operable for an entity that has a debt arrangement with contractual terms that require settlement entirely through the issuance of equity?

We do not believe the proposed paragraph is clear on how an instrument that must be settled with the issuer's equity should be classified. The definition of current liabilities in ASC 210 only includes obligations whose liquidation is reasonably expected to require the use of existing resources classified as current assets, or the creation of other liabilities. Therefore, an entity may conclude that a debt instrument required to be settled in shares is a noncurrent liability because equity shares are neither current assets of the company nor do they represent another liability.

Additionally, we note that there are several different types of debt instruments that can be settled with an issuer's own shares. For example, traditional convertible debt arrangements have a stated contractual maturity when an issuer may be required to repay the debt in cash, but an investor has an option to convert the debt into a fixed number of shares. Other share-settled debt arrangements require settlement in a variable number of shares with a monetary value that is based solely or predominantly on a fixed dollar amount. We understand from paragraph 21 in the Basis for Conclusions of the Exposure Draft that the Board intends to have different classification outcomes depending on the settlement mechanisms. It appears, the Board intends for traditional convertible debt to be classified based on when the instrument is required to be settled in cash (i.e., the contractual maturity) and that the timing of an investor's ability to convert the debt to equity would not impact classification. It also appears the intent is for debt arrangements that include contractual terms that require settlement entirely in shares to be classified on the basis of when the liability is contractually due regardless of the form of settlement. We believe the Board should clarify the proposed guidance within the codification on how debt settled entirely in shares should be classified and address how those instruments are different from traditional convertible debt.

We agree that traditional convertible debt should be classified solely based on when the debt is due to be settled in cash (i.e., the ability to convert to equity prior to its maturity date should not impact classification). We also believe that a debt instrument that settles in a variable number of shares with a monetary value that is based solely or predominantly on a fixed dollar amount should be classified based on when the debt is due to be settled, even if the form of settlement is in shares. We believe this principle will result in an assessment similar to the one considered by a preferred stock issuer based on the guidance in ASC 480-10-25-14.

Question 5: Proposed paragraph 470-10-50-9 would require that an entity disclose additional information in the period in which the entity violates a provision of a long-term debt arrangement about the violation and the terms of the grace period. Would the proposed requirements provide decision-useful information? Why or why not?

We believe this question is best answered by financial statement users.

Question 6: The objective of this project is to reduce the cost and complexity for preparers and auditors when determining whether debt should be classified as current or noncurrent in the balance sheet while providing financial statement users with more consistent and transparent information. Given the additional changes in this revised proposed Update, will that objective be achieved? For example, would the expected benefits of the proposed amendments justify the expected costs? Why or why not?

We agree that the proposed guidance will reduce complexity. However, we believe the question on cost is best answered by preparers.