The International Accounting Standards Board (IASB) recently issued ED/2021/9 (ED 316 in Australia) to clarify that if the right to defer settlement for at least 12 months after reporting date were subject to the entity complying with conditions after the reporting period, then those conditions would not affect whether the right to defer settlement exists at reporting date. More information is contained in IFRB 2021/13.
Entity XYZ has a 31 December 20X1 year-end. It has a loan, repayable 31 December 20X6, which is subject to the following covenants:
In other words, Entity XYZ is a seasonal business.
At 31 December 20X1, Entity XYZ had a working capital ratio of 1.05. Management expects to comply with the covenant at 30 June 20X2.
Analysis
IAS 1, paragraph 69(d) requires that an entity classify a liability as CURRENT if it does not have the right at the end of the reporting period to defer settlement for at least 12 months after the reporting period.
The original amendments, paragraph 72A, also required that the right to defer settlement existed at the end of the reporting period. This caused confusion in the above fact pattern because Entity XYZ complies with the covenant at 31 December 20X1 by having a working capital ratio of 1.05 instead of 1.0. However, at 31 December 20X1, on a ‘look forward’ basis, it does not meet the working capital ratio required at 30 June 20X2, i.e. having a working capital ratio of 1.1.
In April 2021, the IFRS Interpretations Committee published a tentative agenda decision, suggesting that the entity’s right to defer settlement for at least 12 months after the reporting period is subject to the entity complying, at reporting date, with all loan covenants to be tested within 12 months after reporting date. This would result in Entity XYZ having to classify the loan as CURRENT at 31 December 20X1.
The narrow scope amendments proposed in ED/2021/9 would result in Entity XYZ classifying the loan as a NON-CURRENT LIABILITY at 31 December 20X1 because it complies with the covenant at 31 December 20X1.
The future covenant, to be tested at 30 June 20X2, does not affect whether the entity will be able to defer settlement for at least 12 months after the reporting period.
ED/2021/9 proposes additional presentation and disclosure requirements as follows:
ED/2021/9 also proposes to defer the application date for changes to the classification requirements of current and non-current liabilities to annual periods beginning on or after 1 January 2024 (including these proposed amendments).
The Australian Accounting Standards Board is seeking comments by 3 February 2022 and the IASB by 21 March 2022.
Please refer to our International Financial Reporting Bulletins for more information on these upcoming changes:
Classifying liabilities as current or non-current can be complex. Please contact a member of BDO’s IFRS & Corporate Reporting team if you require assistance.