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

Date recorded:

Project update and next steps (Agenda Paper 22)

In November 2010 the Interpretations Committee received a request to clarify the requirements in IAS 1 Presentation of Financial Statements relating to the classification of a liability as current or non-current. The main problems raised in the request related to the terms ‘unconditional’ and ‘discretion’; conditions placed on exercising a right; and what constitutes ‘settlement’.

The IASB has issued two Exposure Drafts with proposals to amend IAS 1. The first was included in the 2010–2012 Annual Improvements cycle. The IASB decided not to finalise that proposal and issued a revised one in February 2015 (ED/2015/1 Classification of Liabilities (Proposed amendments to IAS 1)). ED/2015/1 proposed that the classification of a liability as either current or non-current should be based on the rights in place at the end of the reporting period.

In April 2016, the Board paused work on this project while it finalised revisions to the definitions of assets and liabilities in its Conceptual Framework for Financial Reporting. The Board finished that work in March 2018 so can now resume its discussions.

The staff are resuming work on this project with a view to the Board finalising the amendments proposed in the Exposure Draft. The staff plan to follow previous staff recommendations for further work by: testing the Exposure Draft proposals by reference to some of the specific facts and circumstances identified by respondents to the proposals; and considering further the guidance proposed on settlement by the transfer of equity to the counterparty. In considering these two matters the staff plan to consider whether and how the FASB guidance on grace periods differs from the Board’s proposals and whether the revisions to the Board’s Conceptual Framework have any implications.

Staff recommendation

The paper did not contain any staff recommendations. The staff ask whether the Board have any questions about the project or comments on the staff plans for further work.

Discussion

The Board discussed whether a narrow-scope amendment was still the appropriate approach or whether a more substantial revision of IAS 1 could be incorporated into the existing project on Primary Financial Statements. The staff confirmed that there were no anticipated changes to this particular part of IAS 1 as a result of the Primary Financial Statements project and therefore, if the classification of liabilities were to be added it would result in a substantial amount of work and tie up considerable resources for, as was agreed by the Board, only marginal benefits. Given there appeared to be only minor conflicts to be resolved from the previous Exposure Draft, it was agreed that the narrow-scope amendment should continue.

It was discussed that, although it assessed different aspects of classification, the Financial Instruments with Characteristics of Equity project should be considered whilst continuing work on the classification of liabilities.

Differences between the FASB guidance and the Board’s proposals were discussed including the fact that FASB defines “non-current” and then states that if a liability does not meet the definition then it is “current”, whereas under IFRS “current” is defined and then if a liability does not meet the definition it is “non-current”. It was suggested that this may be a preferable approach but that a change of this magnitude would only be possible if the scope of the project were no longer a narrow-scope amendment. It was also noted that under US GAAP a convertible bond would not be bifurcated whereas under IFRS it could be recognised as a debt and equity element and therefore the guidance under the different Standards may differ.

The Board agreed with the overall plan of the staff and were keen that the staff tested against the specific circumstances outlined in the proposal but also other relevant scenarios. The Board suggested that the staff should also consider whether any guidance should be given and that it should be clearly articulated what is trying to be captured with this amendment.

Decision

No decisions have been made.

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