KPMG global IFRS presentation deputy leader
Further amendments to IAS 1 Presentation of Financial Statements and a deferral of the effective date of the amendments published in 2020 are being considered by the International Accounting Standards Board (the Board).
The amendments, published in January 2020 (the 2020 amendments), aim to promote consistency in application and clarify the requirements on determining if a liability is current or non-current. However, the application of the 2020 amendments to debt with future conditions (e.g. a financial covenant) raised additional questions – in particular, around the new requirement for a hypothetical test of compliance at the reporting date. [IAS 1.72A]
Following feedback, the Board discussed this issue at its June 2021 meeting. It tentatively decided to amend IAS 1 and to defer the effective date of the 2020 amendments to no earlier than 1 January 2024. An exposure draft is expected in Q4 20211.
Companies are discouraged from early adoption of the 2020 amendments and should rather wait to see how these developments unfold, given the current status of the amendments and the Board’s tentative decision to revisit them.
Concerns around application of hypothetical test
Certain aspects of the 2020 amendments have been helpful – for example, how to determine the classification of a liability that has conversion options that involve a transfer of the company’s own equity instruments (i.e. convertible debt).
However, the application of the 2020 amendments to debt with future conditions raised additional questions – in particular around the application of a hypothetical test of compliance introduced by the amendments.
A company classifies a liability as non-current if it has a right to defer settlement for at least 12 months after the reporting period.
The 2020 amendments suggest that a right to defer exists only if the company complies with conditions specified in the loan agreement at the end of the reporting period, even if the lender does not test compliance until a later date – i.e. based on a hypothetical test at the reporting date.
How the new requirements (in particular IAS 1.72A) will apply to debt with future conditions is unclear. The 2020 amendments may change current practice and result in more debt being classified as current.
The apparent controversy is that the use of a hypothetical test would mean that the classification of debt for accounting purposes at the reporting date may not reflect the contractual rights and obligations of the contracted parties.
This issue was discussed by the IFRS Interpretations Committee (the Committee), which issued a tentative agenda decision (TAD) Classification of Debt with Covenants as Current or Non-current in December 2020. However, in view of the comments received, the Committee decided to refer the matter to the Board.
Classification of debt with future conditions – Changes are expected
At its June 2021 meeting, the Board considered the comments from respondents to the TAD, particularly regarding the potential mismatch between the accounting classification and the contractual terms of the loan. The Board tentatively decided, among other decisions, to amend IAS 1 as follows:
- to specify that if the right to defer settlement for at least 12 months is subject to a company 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;
- to include additional disclosure requirements for non-current liabilities subject to conditions; and
- to require that a company present separately in its statement of financial position ‘non-current liabilities subject to conditions in the next 12 months.’
An exposure draft is expected in Q4 2021.
Effective date likely to be deferred
In view of these developments, companies should carefully consider if early adoption of the 2020 amendments is appropriate.
Although the 2020 amendments will be revisited, while they are still in place, companies will need to consider including IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors disclosures for issued but not yet effective amendments in their next annual financial statements. [IAS 8.30-31]
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1 A project was added to the IFRS Foundation work plan in June 2021.
2 Currently, the effective date of the 2020 amendments is for annual reporting periods beginning on or after 1 January 2023. These amendments have not been endorsed in the EU.
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