Short-Term Debt Expected to Be Refinanced

In the past, short-term obligations that were expected to be refinanced on a long-term basis  were not included in current liabilities. Today, two criteria must be met for this type of obligation to be excluded from current liabilities:

(1) there must be an honest intent to refinance the obligation so that it will not result in a claim against current assets, and

(2) the ability to refinance the obligation must be demonstrated through either:
(i) actual refinancing of the obligation after the balance sheet date, or
(ii) entering into a financing agreement that clearly permits the refinancing on a long-term basis on terms that are readily determinable.

For example, imagine a business with short-term liabilities totally $150,000 between several credit cards, trade accounts payable, and bank overdraft. In order to settle these liabilities, after the balance sheet date the business is able to take out a loan for $125,000. The business will be allowed to recognize $125,000 of the $150,000 liability as a long-term liability. However, since it cannot recognize as a long-term liability more than it has proven it can refinance, it will still have to recognize $25,000 as a current liability.

Similarly, if the current liability is paid off after the balance sheet date with current assets, is must be recognized on the balance sheet as a current liability. For example, imagine the business above collects several accounts receivable in January worth $30,000. This is deposited in the bank eliminating the business's overdraft. The $30,000 must be recognized as a current liability on the balance sheet date. That is, even if the business gets the same $125,000 loan, it will have to recognize $30,000 not $25,000 as a current liability.

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