IAS 1 — Current/non-current classification of liabilities

Date recorded:

The IASB considered Agenda Paper 20, which addresses the development of a general approach to the classification of liabilities that is based on an assessment of the arrangement(s) in existence at the reporting date. The first issue is whether having an unconditional right to defer settlement as per paragraph 69 of IAS 1 Presentation of Financial Statements is different from having the discretion to refinance or roll over an obligation as per paragraph 73.

After performing outreach and consultation, the Interpretations Committee recommended amending IAS 1 as part of the Annual Improvements project 2010 -2012 cycle as follows:

If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility with the same lender, on the same or similar terms, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period.

The IASB discussed this in September 2011 and approved it subject to the Basis of conclusions being extended to clarify what “same or similar terms” meant. Subsequently, this was clarified in the Annual improvements 2010-2013 Exposure Draft (ED). The ED raised three further areas of concern:

  1. syndicated lending
  2. linkage of settlement of the liability with cash outflows
  3. significance of management’s expectations in the classification of liabilities.

In September 2013, the IASB asked staff to develop a more general approach to the classification of liabilities that is based on the contractual arrangements in place at the reporting date.

Based on Staff’s analysis, at the October 2013 meeting, the first question staff asked the IASB was if they agree that the classification of a liability as non-current depends on whether there is a contractual arrangement in existence at the reporting date whereby the entity will not be required to settle the liability within the next 12 months.

In relation to this question, the Board agreed with staff.  A member requested clarification of the examples in appendix 1 of the paper as follows: example 4 should state the period of 12 months and example 6 needs to disclose the terms of the loan, the breach and waiver.

The second part of the discussion in October 2013 was around further analysis staff performed and their recommendations as follows:

  1. delete ‘unconditional’ from paragraph 69(d) and paragraph 74
  2. replace ‘discretion’ with ‘right’ in paragraph 73
  3. insert ‘settled by the transfer of cash or other assets’ into paragraph 69(d) in place of settle
  4. insert ‘at the reporting date’ into paragraph 69(d)
  5. clarify the distinction between existing loans and loans from a new lender in paragraph 73.

Delete ‘unconditional’ from paragraph 69(d) and paragraph 74

The board generally agreed with the staff proposal.

Replace ‘discretion’ with ‘right’ in paragraph 73

The board agreed with staff’s proposal.

Insert ‘settled by the transfer of cash or other assets’ into paragraph 69(d) in place of settle

Insert ‘at the reporting date’ into paragraph 69(d)

Clarify the distinction between existing loans and loans from a new lender in paragraph 73

A member commented that staff should consider in their paper the items that are classified as liabilities but would be settled in equity (e.g. a variable number of shares) and within 12 months.

The principle when classifying a liability as current or non-current is based on whether the principal amount is paid within 12 months or after 12 month. A member highlighted that when a company has the right to refinance its loan but the terms are determined by the bank, that right to refinance seems to be worthless. Staff said in this case management would have to exercise their judgement to determine what rights the company has and the effect on the classification of the loan. Another member highlighted that this would create new and additional problems.

A member said the real issue to be resolved is that the standard is inconsistent in the classification of a liability when looking at the relevant paragraphs in IAS 1 on current liabilities and non –current liabilities. In addition, consideration must be given to post balance sheet events. Management intent is important as are the terms of the loan.

The board agreed with staff that debt expected to be refinanced with the same lender on the same or similar terms should be classified as non-current debt.

Another member raised the question to the board that if a loan with a bank had material adverse covenants that are outside the control of the entity should this be classified as conditional. Another question raised was if a company was refinancing its loan with the same lender but the terms were materiality different to the former.  With the first question, the board generally agreed that this would involve management’s judgement and should be considered within the scope of IAS 10 Events After the Reporting Period. With the latter, the board agreed that the refinanced loan should be treated as a new loan and therefore the current balance should be treated as a current liability.

A further comment was that if a company obtains a waiver before the reporting date which leads to a material change in the terms then disclosure of this would be required.

Some members disagreed with the table presented by staff in their paper (paragraph number 91) in particular with scenario b and c. The views reflected by staff seemed to contradict the ideas behind IAS 10. In addition, a board member pointed out that paragraph 69A of IAS 1 deals with these sorts of situations i.e. the treatment of conditions that were known at the balance sheet date should be taken into account when considering the classification of liabilities. Staff disagreed as they felt that the conditions at balance sheet take precedence and only disclosure was required.

The board generally agreed that post balance sheet events need to be considered but IAS 1 should only go the extent of providing a link to IAS 10. The discursive elements should be in IAS 10.

A board member highlighted the use of the word “expects” in IAS 1 is leading to differences in view amongst the board and in practice. Staff highlighted that this word is used thorough IAS 1 and therefore this issue shouldn’t be taken further.

Staff summarised the conclusions from the meeting as follows:

  • the word “discretion” is to be replaced with “rights”
  • the concept “same or similar terms” should be retained in the standard
  • the classification as current or non-current should assess the conditions that existed at the balance sheet date and this should take into consideration the requirements of IAS 10
  • the board were split as to whether liabilities should be classified as current or non-current where material post balance sheet events lead to a breach of loan covenants but at the balance sheet date the covenants were not breached
  • staff are to bring back further analysis on this topic after hearing the board’s view to another board meeting for the issues that were unresolved.

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