Classification of Debt with Covenants as Current or Non-Current — Transition, Early Application and Due Process (Agenda Paper 12A)

At its meeting in June 2021, Board tentatively decided to propose narrow-scope amendments to IAS 1. The proposed amendments would modify the requirements introduced by Classification of Liabilities as Current or Non-current (the 2020 amendments) on how an entity classifies debt and other financial liabilities as current or non-current in particular circumstances. The proposed amendments would:

• Specify that conditions with which an entity must comply after the reporting period do not affect classification of a liability as current or non-current at the end of the reporting period
• Add presentation and disclosure requirements for non-current liabilities subject to conditions in the next 12 months
• Clarify situations in which an entity does not have a right to defer settlement for at least 12 months after the reporting period

The proposed amendments would also defer the effective date of the 2020 amendments to no earlier than 1 January 2024.

The objective of this session was to:

• Ask the Board whether it agrees with the staff’s recommendations on transition and early application of the proposed amendments
• Set out the steps in the IFRS Foundation Due Process Handbook that the Board has taken in developing the proposed amendments
• Ask the Board to confirm it is satisfied that it has complied with the applicable due process requirements
• Ask whether any Board member intends to dissent from the publication of the Exposure Draft

Staff recommendation

The staff recommended that the Board:

• Require entities to apply the proposed amendments retrospectively in accordance with IAS 8
• Not provide a transition exemption for first-time adopters
• Permit an entity to apply the amendments earlier than their effective date
• Set a comment period of no less than 120 days for the Exposure Draft

Board discussion

One Board member asked that the staff examine what the transition requirements meant for interim reports, especially with regard to the additional line item in the balance sheet as that referred to conditions at year end. The staff confirmed that they would look into that, also in terms of what it means for condensed reports.

The Vice Chair asked if the staff have thought about how big an exercise it would be for entities to go through all covenants if retrospective application is required. While not disagreeing with retrospective application, she wondered if there could be a simpler approach for covenants that are not monitored, for example as there is a very low risk of them being breached.

All Board members voted for the staff recommendation to require retrospective application and allow early adoption of the amendment.

Several Board members indicated that they are considering offering an alternative view on the separate presentation of non-current liabilities subject to conditions being met after year end. One of those Board members said that separate presentation unduly highlights those liabilities. Users might be misled by that presentation into thinking that a covenant is breached, while in fact it is not. That comment was echoed by another Board member saying that the ‘subject to conditions’ category is too broad and should be narrowed down to those that are in breach as at the reporting date, as otherwise the usefulness of the information is limited. The Vice Chair agreed that this would be desirable, however, it is very difficult to scope this.

The Vice Chair also said that given the smaller Board, too many alternative views might stop the document from being issued, which would be undesirable. In her view, one alternative view that addresses all the concerns of Board members would be preferable. To present an alternative view with regard to presentation is important as it will help get the right comments from constituents, but it should not prevent the document from getting published.

All Board members agreed with the recommended comment period, while two Board members indicated that they are considering offering an alternative view. All Board members agreed to give permission to ballot.

Supplier Finance Arrangements — Transition, Early Application and Due Process (Agenda Paper 12B)

At its meeting in June 2021, the Board decided to add a narrow-scope, disclosure-only, standard-setting project to its workplan related to supplier finance arrangements (for example, reverse factoring or similar arrangements). The project involves the Board proposing amendments to IAS 7 and IFRS 7.

The Board tentatively decided that, to meet the proposed disclosure objectives, entities be required to disclose:

• The key terms and conditions of a supplier finance arrangement
• At the start and end of the reporting period:
  • The aggregate amount of payables that are part of the arrangement
  • The aggregate amount of the payables disclosed for which suppliers have already received payment from the finance provider
  • The range of payment terms, expressed in time, of the payables disclosed
  • The range of payment terms, expressed in time, of trade payables that do not form part of the arrangement

The Board also tentatively decided to propose adding supplier finance arrangements as an example within the liquidity risk disclosure requirements in IFRS 7.

The objective of this session was to:

• Ask the Board whether it agrees with the staff’s recommendations on transition and early application of the proposed amendments
• Set out the steps in the IFRS Foundation Due Process Handbook that the Board has taken in developing the proposed amendments
• Ask the Board to confirm it is satisfied that it has complied with the applicable due process requirements
• Ask whether any Board member intends to dissent from the publication of the Exposure Draft

Staff recommendation

The staff recommended that the Board:

• Require entities to apply the proposed amendments retrospectively in accordance with IAS 8
• Not provide an exemption for first-time adopters
• Permit an entity to apply the proposed amendments earlier than the effective date
• Set a comment period of no less than 120 days for the Exposure Draft

Board discussion

One Board member said that the requirement to disclose the aggregated amount for which payment had already been received might be difficult to apply retrospectively as the data is not readily available. The staff acknowledged this but said they would like to expose it in that way and then reconsider at the finalisation date. If the final amendment is published before the beginning of the comparative period for initial application, the staff would be inclined to retain this requirement.

All Board members agreed with the staff’s recommendation on transition and the proposed comment period and also to permit early application. All Board members gave permission to ballot and no Board members intended to offer an alternative view.

IFRIC Update June 2021 (Agenda Paper 12C)

In this session, the staff presented the IFRIC Update from June 2021 and asked the Board members whether they have any comments on or questions about the document.

There were no comments on this paper.