Deloitte comment letter on IASB’s proposed amendments to IAS 1 regarding the classification of debt with covenants

Published on: 23 Mar 2022

We have commented on the IASB's exposure draft Non-current Liabilities with Covenants — Proposed amendments to IAS 1 published in November 2021.

We support the Board’s actions to address the concerns raised about the amendments made to IAS 1 in 2020 (the ‘2020 Amendments’). Whilst we agree that the proposed amendment to paragraph 72A will resolve the concerns raised, we believe that other amendments proposed in the ED will give rise to new concerns and may not result in relevant information to the users of financial statements. 

We agree that an entity should not classify a liability as current merely  because it fails to comply at the reporting date with conditions that are, under the contractual arrangements, only tested at a later date. We agree with the result of this proposed deletion that applying paragraph 72A, a liability would be presented as non-current when an entity’s right to defer settlement for at least twelve months has substance and exists at the end of the reporting period. However, we believe that it would be important to provide guidance on what it means for the right to defer settlement for at least twelve months to have substance.

We disagree with the proposal in paragraph 76ZA(a) to present a separate line item in the statement of financial position comprised of liabilities that are subject to compliance with specified conditions within twelve months after the reporting period and are classified as non-current. We do not believe that this separate presentation would result in relevant information because most non-current debt arrangements require an entity to comply with various conditions either continually or at interim dates.

Finally, we are deeply concerned that paragraph 72C(b) would affect the classification of a broad scope of liabilities and would lead to a significant change to current practices. Indeed, it is typical for debt agreements to include a right for the lender to call the debt in case of certain events such as change in control over the borrower, material adverse change in the borrower’s financial condition, change in laws and other similar events. Generally, under current practice these rights of the lender do not affect the classification of the instrument by the borrower at all times. We strongly encourage the Board to consider whether this was the intended outcome. In fact, the Board may wish to reconsider whether this paragraph is needed since it does not appear to be added to address the concerns raised about the 2020 Amendments.

We suggest that it may be appropriate for the Board to limit the scope of the amendments made to IAS 1 to the changes proposed in paragraphs 72A, 72B(a) and 76ZA(b), subject to additional comments made in our detailed response. If the Board believes that this would not be an appropriate solution, an alternative solution must be sought and the effective date of the 2020 Amendments should be postponed until this is achieved.

Please click to download our full comment letter below.


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