The proposed amendments to IAS 1, replacing the word ‘Discretion’ with ‘Right’

The International Accounting Standards Board (IASB) has published on 10 February 2015 the Exposure Draft of proposed amendments to IAS 1 Presentation of Financial Statements to clarify the criteria for the classification of a LIABILITY as either CURRENT or NON-CURRENT.

The proposals clarify that classification of liabilities as either current or non-current is based on the RIGHTS that are existence at the END OF THE REPORTING PERIOD. In order to make this clear, the IASB proposes :

1. replacing ‘DISCRETION’ in paragraph 73 of the Standard with ‘RIGHT’ to align it with the requirements of paragraph 69(d) of the Standard;
2. making it explicit in paragraph 69(d) and 73 of the Standard that only rights in place AT THE REPORTING DATE should affect the classification of a liability; and
3. deleting ‘UNCONDITIONAL’ from paragraph 69(d) of the Standard so that ‘an unconditional right’ is replaced by ‘a right’

The IASB also proposes making clear the link between the settlement of the liability and the outflow of resources from the entity by adding that settlement ‘refers to the transfer to the counterparty of cash, equity instruments, other assets or services’ to paragraph 69 of the Standard.

The IASB further proposes that guidance in the Standard should be reorganised so that similar examples are grouped together.

Finally, the IASB proposes that retrospective application should be required and that early application should be permitted.

Comments on the proposals in this Exposure Draft (to be received by 10 June 2015) should be submitted using one of the following methods :

• Electronically, by visiting the ‘Comment on a proposal’ page, which can be found at : go.ifrs.org/comment
• Email, by sending to : commentletters@ifrs.org
• Postal, by addressing to : IFRS Foundation, 30 Cannon Street, London EC4M 6XH, United Kingdom

Please click this link to access the Exposure Draft

Classifying Liability as CURRENT or NON-CURRENT

IAS 1 Presentation of Financial Statements states that an entity shall present current and non-current LIABILITIES as separate classification in its Statement of Financial Position except when a presentation based on liquidity provides information that is reliable and more relevant.

Paragraph 69 of IAS 1 states that an entity shall classify a liability as CURRENT when :

1. it expects to settle the liability in its normal operating cycle;
2. it holds the liability primarily for the purpose of trading;
3. the liability is due to be settled within twelve months after the reporting period; or
4. it does not have an unconditional right to defer settlement of the liability for at least 12 months  after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification

An entity shall classify ALL OTHER LIABILITIES as NON-CURRENT.

Some current liabilities, as stated within paragraph 70, such as trade payables and some accruals for employee and other operating costs, are part of the WORKING CAPITAL used in the entity’s NORMAL OPERATING CYCLE. An entity classifies such operating items as current liabilities even if they are due to be settled more than 12 months after the reporting period. The same normal operating cycle applies to the classification of an entity’s assets and liabilities. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 (twelve) months.

Further, paragraph 72 states that an entity classifies its financial liabilities as current when they are due to be settled within 12 months after the reporting period, even if :

1. the original term was for a period longer than 12 months, and
2. an agreement to refinance, or to reschedule payments, on a long-term basis is completed AFTER THE REPORTING PERIOD and before the financial statements are authorised for issue

If an entity expects, and has the DISCRETION, to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan facility, it classifies the obligation as NON-CURRENT, even if it would otherwise be due within a shorter period. However, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as CURRENT.

When an entity breaches a provision of a long-term loan arrangement ON or BEFORE the END OF REPORTING PERIOD with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, AFTER THE REPORTING PERIOD and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have an unconditional right to defer its settlement for at least 12 months after that date.

However, an entity shall classify the liability as non-current if the lender agreed BY THE END of the REPORTING PERIOD to provide a period of grace ending at least 12 months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

Latest, paragraph 76 of IAS 1 states that in respect of loans classified as CURRENT LIABILITIES, if the following events occur between the end of the reporting date and the date the financial statements are authorised for issue, those events are DISCLOSED as NON-ADJUSTING EVENTS in accordance with IAS 10 Events after the Reporting Period :

• refinancing on a long-term basis;
• rectification of a breach of a long-term loan arrangement; and
• the granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement ending at least 12 months after the reporting period

NOTE : On 10 February 2015 the IASB has published the Exposure Draft of Proposed Amendments to IAS 1 to clarify the criteria for the classification of a Liability as either Current or Non-current (HRD).