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IAS 1 — Current/non–current classification of liabilities

Date recorded:

In May 2012, the IASB published Exposure Draft ED/2012/1 Annual Improvements to IFRSs 2010-2012 Cycle which proposed to amend IAS 1 Presentation of Financial Statements to clarify that a liability is classified as non-current if an entity expects, and has discretion, to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan facility with the same lender, on the same or similar terms.

The Staff provided an analysis of comment letters received on the proposal to amend IAS 1, which noted that many respondents disagreed with the proposed amendment regarding the ‘same or similar terms’ notion. These respondents believed that the derecognition requirements for financial liabilities in IFRS 9 Financial Instruments/IAS 39 Financial Instruments: Recognition and Measurement are not consistent with the classification principles for financial liabilities in IAS 1. In particular, they believed that the notion of ‘settlement’ in paragraph 69(d) of IAS 1 (on which classification is based) is different from the notion of ‘extinguishment’ in IFRS 9/IAS 39 (on which derecognition of financial liabilities is based). They think that a liability should be classified on the basis of the requirement to transfer cash. Respondents also noted that if the classification requirements for financial liabilities in IAS 1 are tied to the derecognition requirements for financial liabilities in IAS 39/IFRS 9, the assessment of whether the terms are substantially different will include a quantitative analysis based on the ‘10 per cent test’. Those respondents did not believe this test was appropriate for classification purposes and would be burdensome to apply. Beyond these more general comments, specific concerns were raised regarding the terms ‘same lender’ and ‘same or similar terms’.

 

The Staff asked the Interpretation Committee to:

  • agree to recommend that the IASB does not confirm the proposed amendment to IAS 1 in its current form?
  • agree to recommend to the IASB that it should amend IAS 1 as part of a narrow-scope project?
  • agree to rediscuss this issue in a future meeting and to make some recommendations to the IASB about the scope of the project and the ways to address the issues regarding the classification of liabilities as current or non-current?

One Committee member agreed that the quantitative test was not appropriate for classification purposes.  This Committee member preferred that the Annual Improvement is finalised but without the quantitative analysis to determine whether there are same or similar terms.

Another Committee member supported going ahead with the Annual Improvement.  She noted that guidance should not be provided on what is meant by “substantially different” and preparers should use judgement.  This view was not shared by another member who noted that guidance on what are same or similar terms would be beneficial.

Another Committee member noted that maybe the Staff needed perform more work on the non-current/current classification.  He noted that some of the respondents had mentioned that cash outflow within the next 12 months is an indicator.  This Committee member also noted that the discussion was around non-current liabilities and not just non-current financial liabilities and hence he was of the opinion that tying in the derecognition rules for financial liabilities was not the best approach as the issue was not just related to non-current financial liabilities.

The Chair presented two options

  • Option1 – go ahead with the amendment but remove all of the linkages with the derecognition guidance in IAS 39
  • Option 2 – Staff recommendation – not go ahead with the Annual Improvements and the Staff do more work on the classification (a more comprehensive review of the classification).

The majority of the Interpretations Committee tentatively agreed with Option 2 (i.e. the Staff recommendation).

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