More changes proposed for classifying liabilities as current or non-current

The International Accounting Standards Board (IASB) recently issued ED/2021/9 (ED 316 in Australia) to clarify that if the right to defer settlement for at least 12 months after reporting date were subject to the entity complying with conditions after the reporting period, then those conditions would not affect whether the right to defer settlement exists at reporting date. More information is contained in IFRB 2021/13.

Example

Entity XYZ has a 31 December 20X1 year-end. It has a loan, repayable 31 December 20X6, which is subject to the following covenants:

  • At 31 December 20X1, Entity XYZ must maintain a working capital ratio of 1.0
  • At 30 June 20X2, Entity XYZ must maintain a working capital ratio of 1.1.

In other words, Entity XYZ is a seasonal business.

At 31 December 20X1, Entity XYZ had a working capital ratio of 1.05. Management expects to comply with the covenant at 30 June 20X2.

Analysis

IAS 1, paragraph 69(d) requires that an entity classify a liability as CURRENT if it does not have the right at the end of the reporting period to defer settlement for at least 12 months after the reporting period.

The original amendments, paragraph 72A, also required that the right to defer settlement existed at the end of the reporting period. This caused confusion in the above fact pattern because Entity XYZ complies with the covenant at 31 December 20X1 by having a working capital ratio of 1.05 instead of 1.0. However, at 31 December 20X1, on a ‘look forward’ basis, it does not meet the working capital ratio required at 30 June 20X2, i.e. having a working capital ratio of 1.1.

In April 2021, the IFRS Interpretations Committee published a tentative agenda decision, suggesting that the entity’s right to defer settlement for at least 12 months after the reporting period is subject to the entity complying, at reporting date, with all loan covenants to be tested within 12 months after reporting date. This would result in Entity XYZ having to classify the loan as CURRENT at 31 December 20X1.

The narrow scope amendments proposed in ED/2021/9 would result in Entity XYZ classifying the loan as a NON-CURRENT LIABILITY at 31 December 20X1 because it complies with the covenant at 31 December 20X1.

The future covenant, to be tested at 30 June 20X2, does not affect whether the entity will be able to defer settlement for at least 12 months after the reporting period.

Additional disclosures

ED/2021/9 proposes additional presentation and disclosure requirements as follows:

  • The balance sheet must include a separate line item for ‘non-current liabilities subject to conditions in the next 12 months’
  • The notes should include information to enable users to assess the risk that the non-current liability could become payable within 12 months, including:
    • Conditions (covenants) that the entity is required to comply with (e.g. nature and date on which the entity must comply with them)
    • Whether entity would have complied with the conditions based on circumstances at reporting date
    • Whether and how the entity expects to comply with the conditions after the end of the reporting period.

Deferral to 1 January 2024

ED/2021/9 also proposes to defer the application date for changes to the classification requirements of current and non-current liabilities to annual periods beginning on or after 1 January 2024 (including these proposed amendments).

Comments close

The Australian Accounting Standards Board is seeking comments by 3 February 2022 and the IASB by 21 March 2022.

More information

Please refer to our International Financial Reporting Bulletins for more information on these upcoming changes:

  • IFRB 2020/01 summarises the original amendments to the requirements for classifying liabilities as current or non-current
  • IFRB 2021/13 explains the proposed changes discussed above.

Need help?

Classifying liabilities as current or non-current can be complex. Please contact a member of BDO’s IFRS & Corporate Reporting team if you require assistance.

Subscribe to Corporate Reporting Insights

SUBSCRIBE

This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances.

BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not give any warranty as to the accuracy, reliability or completeness of information contained in this article nor do they accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it, except in so far as any liability under statute cannot be excluded. Read full Disclaimer.