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Accounting Article

The end is in FASB's sights: new FASB statements clarify accounting practices for debt extinguishment, severance costs, and pension disclosure

In Apri1 2002, the FASB issued a statement designed to provide more consistent and credible accounting for the extinguishment of debt, certain capital leases, and other items.

Statement of Financial Accounting Standards (SFAS) No. 145 (Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections) calls for all entities, including healthcare organizations, to recognize fewer extinguishments of debt transactions as extraordinary and recognize more consistently modified capital leases as sale-leaseback contracts. Healthcare financial managers should recognize that these new provisions could impair certain financial ratios, causing violations of certain loan covenants, which could require obtaining waivers or modifications from their bankers or other lenders.

Previously, SFAS No. 4 (Reporting Gains and Losses from Extinguishment of Debt) and SFAS No. 64 (Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements) required that all gains and losses from extinguishments of debt be classified as extraordinary gains and losses. In a recent four-year period, the FASB found that 11 percent of companies reported extraordinary items, and more than 90 percent of those reports related to debt extinguishments (Accounting Trends and Techniques--2001, New York: AICPA)...

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