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Classification of liabilities as current or non-current (Amendments to IAS 1)

Date recorded:

Implications of proposals for particular facts and circumstances (Agenda Paper 29)

Background

The Exposure Draft Classification of Liabilities published in February 2015 (ED) proposed amendments to requirements in IAS 1 Presentation of Financial Statements. Those requirements relate to the classification of liabilities as current or non-current.

At its meeting in September 2018, the Board received an update on the status of the project and further work planned by staff. At this meeting, the Board will consider whether to revise any proposals in the ED in light of the concerns raised about the implication of the proposals for particular facts and circumstances.

One of the criteria for classifying a liability as current in IAS 1 is that the entity does not have a right to defer settlement of the liability for at least twelve months after the reporting period. In the ED, the IASB proposed to clarify that this assessment should be based on rights that are in existence at the end of the reporting period.

The IASB received a number of concerns and questions on this clarification. It was unclear to constituents how, applying the proposed wording, liabilities would be classified under certain facts and circumstances.

The staff have analysed some of the scenarios raised in the comment letters and concluded the following:

  • A lender’s right to require repayment on demand would result in classification of a liability as current even if the lender is unlikely to exercise that right.
  • An entity’s right to defer settlement of a liability for at least twelve months after the reporting period would affect the classification outcome even if:
    • the right to defer settlement arises from a right to roll over the liability on terms that are potentially uneconomic (unless the right lacks substance).
    • management does not intend, or does not expect, to exercise its right to defer settlement beyond twelve months.
    • the entity exercises an option to repay the liability early, after the end of the reporting period but before the financial statements are finalised.
    • management expects that the entity will breach a covenant after the reporting period, with the liability becoming repayable on demand if and when the breach occurs.
  • Classification of an existing loan with one lender is not affected by a refinancing agreement with another lender.
  • Depending on the facts and circumstances, obligations to provide warranty cover for periods of more than twelve months may need to be split between current and non-current components.

The staff think that, although some of the outcomes described above seemed counterintuitive to some respondents, they are consistent with the overall purpose of the statement of financial position. However, the staff think that it would be helpful to add some clarifications to the proposed amendments with regard to the above items.

Staff recommendation

The staff recommended that, as proposed in the ED, IAS 1 should require an entity to classify a liability as current if the entity does not have a right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period.

The staff also recommended:

  • (a) adding a reminder that an entity’s right to defer settlement must have substance.
  • (b) clarifying that an entity’s right to defer settlement is not affected by:
    • (i) management’s expectations about whether the entity will exercise that right.
    • (ii) settlement of a liability between the end of the reporting period and the date the financial statements are authorised for issue.
  • (c) adding a reminder that, although factors in paragraph 5(b) do not affect the classification of a liability, an entity may need to disclose information about them to comply with the disclosure requirements of IFRS Standards.

Board discussion

One Board member suggested to provide guidance on how to make the assessment of whether a liability is current or non-current at 31 December, when the testing of a covenant is, for example, in March of the following year. Another Board member asked about the difference between ‘uneconomic’ and ‘without substance’, to which the staff replied that ‘without substance’ is so unlikely that both parties would know from the onset that it will not occur, while ‘uneconomic’ can change over time. One Board member warned to be careful about any interaction with the concept of ‘economic compulsion’ in the Board’s Financial Instruments with Characteristics of Equity project. On the question of whether there was an implication of the revised Conceptual Framework on this project, the staff negated that as nothing in the Framework that is relevant to this project had changed.

One Board member asked whether a right to defer settlement could still result in a ‘current’ classification if the entity had no intention of exercising that right. The staff negated that and confirmed that management intent is not considered in the assessment. It is based on whether the entity could be forced to pay. The Board member disagreed with that view.

Another Board member asked whether the examples used in the appendix to the agenda paper would be used when drafting the final amendment. The staff negated that and said that those examples were used to test the proposals only.

Board decision

The Board voted in favour of all staff recommendations.

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