IAS 1 amendment - Clarification of disclosure of liabilities
Alan Simpson CA highlights recent amendment by the IASB to IAS 1 (Presentation of Financial Statements) and how it may affect an organisation's financial statements.
On 23 January 2020 the International Accounting Standards Board (IASB) issued a limited amendment to IAS1 (in sections 1:69 and 1:73) to clarify the criteria used in determining the classification on the balance sheet (“statement of financial position”) of a liability as non-current: where an entity has the right to postpone settlement of the liability for at least 12 months after the reporting date.
The type of liability which this amendment affects will be mostly loans due by an organisation to a counterparty and not, for example, trade creditors or accruals. The amendment states that the decision on whether a liability should be classified as being either current or non-current hinges on what was the contractual position existing as at the end of the reporting period and not on whether management intends to exercise a right to defer settlement of the liability.
Rights, which permit payment to be deferred, are regarded as valid if the terms of any lending covenants have been complied with at the end of the reporting period.
The amendment is effective for accounting periods beginning on or after 1 January 2022, but earlier application is allowed.
For example, an organisation which has a loan of £1.5m due to a counterparty. The terms of repayment of this loan are not fixed by a formal repayment schedule but instead are variable as when the loan was advanced, the counterparty granted the borrower the option in writing to exercise the right to defer repayment instalments for at least 12 months.
This option still stands, therefore, as a result of the amendment, the borrower, in preparing its financial statements to the end of the reporting period of 31 December 2022, should classify this loan as a non-current liability in these financial statements.
Some scenarios outlined
Scenario 1: At its reporting date of 31 December 2022, AB Ltd has a loan liability to a counterparty of £5m. This loan is repayable on 30 days’ notice being given by the counterparty and there is no contractual right to defer repayment. It will thus be classified in full as a current liability in AB’s financial statements. (definition in IAS 1 “a liability whose settlement the entity does not have an unconditional right to defer for at least 12 months after the reporting period...”)
Scenario 2: At its reporting date of 31 December 2022, CD Ltd has a loan liability to a counterparty of £5m. The contractual agreement in existence at that date with the counterparty is that CD may defer repayment of the loan, with the first instalment then being due on 30 June 2024. Management of CD intend to exercise this option and the loan will thus be classified as a non-current liability in the financial statements at that date (as there is a right existing at the balance sheet date to defer settlement of this liability for at least 12 months).
Scenario 3: At its reporting date of 31 December 2022, EF Ltd has a loan liability to a counterparty of £5m. The agreement in existence at that date with the counterparty is that the loan is repayable in 10 annual instalments commencing 30 June 2023. As at the reporting period ended 31 December 2022, £500,000, representing the repayment due within one year, will be classified in the financial statements as a current liability. The remaining £4.5m, being due in more than 12 months from the reporting date, will be classified as a non-current liability.
The amendment affects only the classification of liabilities as current or non-current in the balance sheet/statement of financial position and not their amount, timing or recognition in the financial statements. It applies retrospectively (per IAS 8) therefore an entity shall adjust all comparative amounts presented in the financial statements affected by the amendment for each prior period presented.