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Question 16Q

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 691

Short Answer

What evidence is necessary to demonstrate the ability to consummate the refinancing of short-term debt?

The ability to consummate the refinancing of short-term debt can be demonstrated as follows:

  • By actually refinancing the short-term debt, and
  • By entering into a financing agreement.
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Step by Step Solution

Meaning of Short-term Debt

Short-term debt is the type of current liabilities which is the financial obligation of the business which is expected to be repaid within one year. Examples of short-term debts are accounts payable, wages, and bank-provided loans.

Evidence necessary to demonstrate the ability to consummate the refinancing of short-term debt

The evidence required to demonstrate the ability to consummate the refinancing of short-term debt includes:

  • By refinancing the short-term debt through the issuance of long-term debt or equity securities after the balance sheet date and before its issue. A basic statement by the board of directors that it can perform refinancing is insufficient to sort the short-term debt as long-term debt.

  • By entering into a financing agreement that allows the firm to refinance the debt on a long-term basis on terms that are easily ascertainable.

  • Have capability under current financing agreements that can be applied to refinance the short-term debt.

Substituting a short-term debt with another short-term debt after the balance sheet date but before the issuance of the balance sheet is insufficient to demonstrate an ability to refinance the short-term debt on a long-term basis. Total current liabilities shall be indicated in classified balance sheets. If a short-term debt is not included in current liabilities, the financial statement notes shall comprise an explanation of the financing agreement and the terms of any debt incurred or estimated to be incurred or equity securities issued or anticipated to be issued due to refinancing.

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