PROPOSED AMENDMENTS TO IAS-1
Issue of clarifying how entities classify debt, especially when it comes up for renewal was originally discussed in Annual Improvements to IFRSs (2010-2012 cycle) whereby amendments were proposed to clarify that a liability is classified as non-current if an entity expects, and has discretion, to refinance or roll-over the liability for at least 12 months (after reporting period end) with the same lender on similar terms. In 2013, however, IASB instead of doing so; refined the existing IAS-1 guidance as to when liabilities should be classified as current. Now IASB has published an exposure draft of proposed amendments to IAS-1; whereby general approach to classifying liabilities between current and non-current is aimed at.
- Classification between current and non-current based on entity’s right at the end of reporting period
|Current text : Para 69(d)
|Proposed text : Para 69(d)
|An entity shall classify a liability as current when it does not have an unconditional right to defer settlement of liability
|An entity shall classify a liability as current when it does not have a right at the end of reporting period to defer settlement of liability
Rights to defer settlement are rarely unconditional, because such rights are often conditional on compliance in future periods with covenants made by the borrower. In order to address this inconsistency, word ‘unconditional’ is deleted
Only rights in place at the reporting date should affect the classification of a liability.
When a right is subject to a condition, then whether the entity at the end of reporting period complies with that condition or not determines whether the right should affect classification.
Rights granted after the end of the reporting period should not affect the classification of a liability as at the end of the reporting period.
If there is a non-adjusting event in accordance with IAS 10 Events after the Reporting Period then it does not affect classification at the end of the reporting period
|Current text : Para 73
|Proposed text : Para 72R(a)
|If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non-current
|If an entity has the right to roll over an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non-current
If there is no arrangement in place at the end of the reporting period for rolling over the obligation, the entity does not consider the potential to refinance the obligation and classifies the obligation as current.
Para 74 to 76 are omitted and the content is now included in below renumbered paragraphs so that similar examples are grouped together:
Para 72R: examples of circumstances that create a right to defer settlement that exists at the end of the reporting period
Para 73R: examples of circumstances that do not create a right to defer settlement that exists at the end of the reporting period
- Settlement of liability linked with outflow of resources
|Current text : Para 69(d)
|Settlement of a liability refers to the transfer to the counterparty of cash, equity instruments, other assets or services that results in extinguishment of the liability.
Rollover of the borrowing does not constitute ‘settlement’ and would not result in the liability being classified as current. Thus it was important to link settlement of liability with outflow of resources
Many liabilities would be settled by the transfer of cash, some liabilities would be settled by the transfer of resources other than cash, such as goods or services (e.g. IFRS 15 Revenue from Contracts with Customers). In some cases even transfer of equity instruments to the counterparty of such a financial instrument.
- Retrospective transition
Amendments would be applied retrospectively and that early application should be permitted
This is in line with IAS-1 as:
- IAS 1 requires that if an entity changes the presentation or classification of items in its financial statements, it shall reclassify comparative amounts unless reclassification is impracticable;
- the retrospective application of the proposed amendments would not be onerous, because they deal solely with classification rather than recognition or measurement.
Article by Zeeshan Rafiq
BIO – Zeeshan Rafiq is a 30 year old Chartered Accountant from Pakistan. He is also a Certified Internal Auditor (IIA) and Masters in Economics. He is currently working as Chief Internal Auditor for a multinational textile manufacturer for 6 years with past experience in KPMG Pakistan. He occasionally writes on auditing and accounting matters and can be contacted at firstname.lastname@example.org