Liability classification amendments to IAS 1, issued by the IASB, may in practice result in presentational changes of loans and borrowings

The International Accounting Standards Board (“IASB”) has issued narrow-scope Amendments to IAS 1 Presentation of Financial Statements (“IAS 1”) – Classification of Liabilities as Current or Non-current. The amendments clarify the requirements for classifying liabilities, such as debts, loans and borrowings, as current or non-current. Whilst the amendments clarify current requirements, and do not substantially change them and are therefore not expected to have a significant impact on entities’ financial statements, the amendments may in practice lead to reclassification changes in certain circumstances.

Key areas of change

The amendments affect all entities with liabilities, particularly loans and borrowings that are subject to conditions or where management has previously classified a liability based on when it expected to settle the liability. They do not, however, affect the recognition or measurement of liabilities; they affect only the presentation in the balance sheet/statement of financial position.

In the main, the amendments clarify four key areas; two of which may result in reclassification adjustments in practice:

Assessment date – Clarifying, explicitly, that classification must be assessed based on the entity’s situation as at the end of the reporting period.

Settlement after the reporting period – Clarifying that an entity’s right to defer settlement must not be affected by the actual settlement of a liability between the end of a reporting period and the date the financial statements are authorised for issue.

Right to defer settlement – Clarifying that the right to defer settlement no longer needs to be ‘unconditional’ and hence an entity may have a liability that is subject to compliance with specific conditions, but simply the existence of these conditions does not affect classification. Assessment of compliance with the conditions must be done at the end of the reporting period, even if the lender does not assess whether the entity is in compliance with the conditions at this date.

In practice, care needs to be taken when applying this amendment and may, in certain cases, result in a change from previous practices.

Expectation and discretion – Clarifying that an entity’s right to defer settlement, where there is the right to roll over an obligation under an existing loan facility, must not be affected by managements’ expectations about whether a right will be exercised.

In practice, this amendment may result in a change from previous practice because there is no longer the need to consider management’s intentions when making a classification. For example, if a loan meets the criteria (i.e. based on contractual rights) to be classified as non-current, it must be classified in this way even if management intends or expects the entity to settle the loan within twelve months after the end of the reporting period (or even if the entity has settled the loan between the end of the reporting period and the date when the financial statements are authorised for issue). Where this is the case, entities are encouraged to disclose information about the timing of settlement to enable users to understand the impact of the loan on the entity’s financial position.

When the amendments become effective

The amendments are effective date for accounting periods beginning on or after 1 January 2022 with early application permitted. The amendments must be applied retrospectively.