IAS 1 Amendments - Classification of Liabilities as Current or Non-current

On 10 February 2015, the IASB published the ED/2005/1 Classification of Liabilities and requested comments by 10 June 2015. The proposed amendments were designed to improve presentation in financial statements by clarifying the criteria for the classification of a liability as either current or non-current. The proposed amendments intend to:

• clarify that the classification of a liability as either current or non-current is based on the entity’s rights at the end of the reporting period; and
• make clear the link between the settlement of the liability and the outflow of resources from the entity.

EFRAG Comment Letter

EFRAG published its draft comment letter on 24 March 2015 and its final comment letter on 22 June 2015.  EFRAG agreed with the IASB’s objective to clarify the requirements in IAS 1 Presentation of Financial Statements on classification of liabilities and remove some inconsistencies in the terms used in the Standard. In EFRAG’s view, the proposals in the ED were likely to result in greater consistency in applying the principles in IAS 1 and therefore in relevant financial information.

EFRAG also recommended, to avoid further diversity in practice, that the IASB provides additional guidance in situations where the rights to defer settlement of a liability are subject to conditions that occur and are assessed after the end of the reporting period and in situations where liabilities can be settled through the issuance of shares at the option of the counterparty.

Finally, EFRAG suggested that the IASB further explores whether current guidance always provides the most relevant information including in circumstances when rights to defer settlement are not substantive as of the reporting period. It seems most appropriate if the IASB looked at this issue as part of its ongoing activities in the Disclosure Initiative project.

On 29 July 2015, EFRAG published its feedback statement, summarising responses received to its draft comment letter, on the IASB's Exposure Draft.

At its December 2015 meeting, the IASB discussed the feedback on the Exposure Draft Classification of Liabilities (Proposed amendments to IAS 1).

At its April 2016 meeting, the IASB decided that the remaining redeliberations of the comments received  will be held back until after the IASB has redeliberated the definitions of assets and liablities in the Conceptual Framework exposure draft. 

Published amendment and upcoming discussions

After the issuance of the DEA, the IFRS IC were informed that stakeholders could find it difficult to determine whether it has ‘the right to defer settlement’ when a long-term liability is subject to a condition and the borrower’s compliance with the condition is tested at dates after the end of the reporting period. Therefore, at its December 2020 meeting the IFRS IC discussed this matter by use of examples and published a Tentative Agenda Decision.

​On 22 June 2021 the IASB tentavely​ decided to amend IAS 1 so that: ​​

• it specifies that if the right to defer settlement for at least 12 months is subject to an entity complying with conditions after the reporting period, then those conditions would not affect whether the right to defer settlement exists at the end of the reporting period (the reporting date) for the purposes of classifying a liability as current or non-current; and 
• for non-current liabilities subject to conditions, an entity is required to disclose information about:
• the conditions;
• whether the entity would comply with the conditions based on its circumstances at the reporting date; and  
• whether and how the entity expects to comply with the conditions by the date on which they are contractually required to be tested.
  

The IASB tentatively decided to amend IAS 1 to require that an entity present separately in its statement of financial position ‘non-current liabilities subject to conditions in the next 12 months’. This line item would include liabilities classified as non-current for which the right to defer settlement for at least 12 months is subject to the entity complying with conditions after the reporting date. 

The IASB confirmed deferring the effective date of the amendments by at least one year so that they apply to annual reporting periods beginning no earlier than on or after 1 January 2024.​

Publication of the new amendment

In November 2021 the IASB published ED/2021/9 Non-current Liabilities with Covenants (proposed amendments to IAS 1). The amendment aims to improve the information an entity provides when its right to defer settlement of a liability for at least twelve months is subject to compliance with conditions, in addition to addressing concerns about the classification of such a liability as current or non-current. The amendment specifically addresses the concerns that were raised as part of the IFRS IC submissions with regard to covenants that are specifically negotiated due to seasonality reasons where compliance is required within 12 months after the reporting period end. Such specified conditions (e.g., covenants) are not affecting the right to defer payment for a liability for at least 12 months after the reporting period resulting in non-current classification of the liability. Additionally, to such specified conditions the IASB also addresses other conditions where current classifiaction should be required from their perspective (e.g., financial guarantees and insurance liabilities). Moreover, the amendment requires a separate presentation of those liabilities and also certain dislcosures, also from a forward-looking perspective. The proposals suggest initial application of the the "old" and the "new" amendment in 2024.

EFRAG Comment Letter

EFRAG has published its Comment Letter on 29 March 2022. EFRAG supports the ED's requirement to classify liabilities with covenants as non-current when compliance is required after the reporting period end. However, EFRAG has concerns about other aspects of the proposals that regulate the classification of liabilities with "other conditions" as current or non-current and thus recommends to the IASB to delete the respective paragraph while requesting the IASB to further consider paragraph 72C(a) in the light of the amendment focusing on covenants. Otherwise the paragraphs link to discretation of repayment could lead to divergent interpretations. EFRAG recommends that the IASB consider the broader issue, also for other conditional provisions, from a conceptual perspective. EFRAG disagrees with a separate presentation on the face of the statements of financial position for liabilities with covenants where compliance is required within 12 months after the reporting period end and with parts of the disclosures under paragraph 76ZA(b)(iii) that require an entity to dislcose forward-looking information. EFRAG has concerns that the scope of disclosures, same as for separate persentation, is too broad, thus disclosures should be required only where uncertainties above a probability threshold, that will have to be defined, exist.

In November 2022, the IASB published the Amendmenst to IAS 1 Non-current Liabilities with Covenants. EFRAG issued its Draft Endorsement Advice on the IAS 1 amendments in December 2022 and requests comments until 1 March 2023.

EFRAG endorsement advice