IASB amends IAS 1 to clarify debt classification
24 Jan 2020
The International Accounting Standards Board (IASB) has issued limited amendments to IAS 1 Presentation of Financial Statements to clarify how to classify debt and other liabilities as current or non-current, to promote greater consistency
24 Jan 2020
The changes are intended to provide a more general approach to the classification of liabilities under IAS based on the contractual arrangements in place at the reporting date.
The amendments aim to help companies determine whether, in the statement of financial position, debt and other liabilities with an uncertain settlement date should be classified as current (due or potentially due to be settled within one year) or non-current. The amendments include clarifying the classification requirements for debt a company might settle by converting it into equity.
The amendments in Classification of Liabilities as Current or Non-Current (Amendments to IAS 1) only affect the presentation of liabilities in the statement of financial position.
They do not change the amount or timing of recognition of any asset, liability income or expenses, or the information that entities disclose about those items.
Instead, they clarify that the classification of liabilities as current or non-current should be based on rights that are in existence at the end of the reporting period.
The wording in all affected paragraphs has been aligned so that it refers to the ‘right’ to defer settlement by at least 12 months and makes explicit that only rights in place ‘at the end of the reporting period’ should affect the classification of a liability.
They also make clear that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability, and make clear that settlement refers to the transfer to the counter party of cash, equity instruments, other assets or ser vices.
Since the amendments clarify, but do not change, existing requirements, they are not expected to affect companies’ financial statements significantly.
However, IASB says they could result in companies reclassifying some liabilities from current to non-current, and vice versa; this could affect a company’s loan covenants.
To give companies time to prepare for the amendments, the changes will be effective from accounting periods starting 1 January 2022. Early application of the amendments is permitted.