Non-current Liabilities with Covenants (IAS 1)—Cover paper (Agenda Paper 12A)

In November 2021, the IASB published Exposure Draft ED/2021/9 Non-current Liabilities with Covenants, which proposed amendments to IAS 1. The comment period ended on 21 March 2022. In this meeting, the IASB began its redeliberations of the proposals in the ED.

Non-current Liabilities with Covenants (IAS 1)—Classification as current or non-current (Agenda Paper 12B)

The purpose of this paper was to summarise feedback on the proposals on the classification of liabilities with covenants as current or non-current (including the proposed clarification in paragraph 72C of the ED) and provide the staff’s analysis of that feedback and recommendations for the IASB.

Staff recommendation

Based on the staff’s analysis in the paper, the staff recommended that the IASB:

• Finalise the proposed amendments to paragraph 72A of IAS 1 and the addition of paragraph 72B—that is, confirm that only covenants with which an entity must comply on or before the reporting date would affect a liability’s classification as current or non-current
• Not provide further clarification or application guidance on determining whether a right to defer settlement has substance or applying paragraphs 74–75 of IAS 1
• Not finalise the proposed clarification in paragraph 72C about situations in which an entity would have no right to defer settlement; instead, specify that the proposed requirements in paragraph 72B apply only to liabilities arising from loan arrangements

IASB discussion

There was no significant discussion on this paper. IASB members expressed general agreement with the recommendations. One IASB member asked whether paragraph 72C would be completely deleted, which the staff confirmed. Another IASB member suggested to make it clear that a breach after the reporting date would be a non-adjusting event and would not be taken into account when determining whether a liability is current or non-current.

IASB decision

All IASB members voted in favour of the staff recommendations

Non-current Liabilities with Covenants (IAS 1)—Separate presentation and disclosure (Agenda Paper 12C)

The purpose of this paper was to summarise feedback on the proposals to require an entity to present separately, and disclose information about, non-current liabilities with covenants and provide the staff’s analysis of that feedback and recommendations for the IASB.

Staff recommendation

Based on the staff’s analysis in the paper, the staff recommended that the IASB:

• Not finalise the proposal to require an entity to present separately non-current liabilities with covenants. Instead, the staff recommend requiring an entity to disclose the carrying amount of such liabilities in the notes
• Finalise the proposal to require an entity to disclose information about non-current liabilities with covenants, with some modifications—specifically, the staff recommended requiring that, when an entity classifies liabilities arising from loan arrangements as non-current and those liabilities are subject to covenants, the entity disclose information that enables investors to assess the risk that the liabilities could become repayable within 12 months, including:
  • The covenants with which the entity is required to comply (including, for example, their nature and the date on which the entity must comply with them)
  • Facts and circumstances that indicate the entity may have difficulty complying with covenants when it is required to do so—for example, the fact that it has taken actions during or after the reporting period to avoid or mitigate a potential breach. Facts and circumstances could also include the fact that the entity would not have complied with the covenants based on its circumstances at the reporting date

IASB discussion

IASB members discussed what the disclosures would look like and whether the staff wanted to specify that. Especially, there was a question around whether the existing disclosure practice would have to change in response to the amendment. Some IASB members thought that the existing disclosure practice already covered the information required.

One IASB member suggested to add guidance on how materiality applies to the proposed disclosure requirements. Respondents to the ED raised concerns about producing many pages of information on covenants unless the materiality application is clarified. The IASB member acknowledged that the application guidance already exists in form of Practice Statement 2, however, a cross-reference might be problematic given the non-mandatory status of the Practice Statement. It would therefore be more sensible to add application guidance based on the Practice Statement to the Standard. Alternatively, a cross-reference could be provided in the Basis for Conclusions (BC) to the amendment.

The staff expressed concern about adding mandatory application guidance on materiality in a particular circumstance as this would be without precedence and could potentially change the definition of materiality. The IASB member replied that caution should be exercised and guidance should be drafted very close to the Practice Statement. Other IASB members supported the addition of application guidance. The guidance should state that the depth of disclosures should be governed by the risk. If a covenant is close to being breached, more information should be disclosed.

The Chairman highlighted that adding the guidance to the BC would not make it mandatory, while adding it to the Standard would. He rejected a cross-reference to the Practice Statement as it is a non-mandatory document.

IASB decision

7 IASB members supported adding application guidance on materiality to the BC, while 3 supported adding such guidance to the Standard.

All IASB members supported the staff recommendation.

Non-current Liabilities with Covenants (IAS 1)—Transition and effective date deferral (Agenda Paper 12D)

The purpose of this paper was to summarise feedback on the proposals on transition for the amendments and the proposal to defer the effective date of the amendments in Classification of Liabilities as Current or Non-current, issued in January 2020 (2020 amendments) and provide the staff’s analysis of that feedback and recommendations for the IASB.

Staff recommendation

Based on the staff’s analysis in the paper, the staff recommended that the IASB:

• Require an entity to apply the proposed amendments retrospectively in accordance with IAS 8
• Allow an entity to early adopt the proposed amendments or the 2020 amendments only if the entity early adopts both amendments at the same time
• Defer the effective date of the 2020 amendments to align it with the effective date of the proposed amendments (to be decided at a future meeting, but no earlier than annual reporting periods beginning on or after 1 January 2024)

IASB discussion

One IASB member urged the staff to finalise the amendment by the end of 2022. The staff responded that they will bring back the final topics in July and the plan is to finalise before the end of the year.

IASB decision

All IASB members supported the staff recommendation.