close
Share with your friends

Classifying liabilities as current or non-current

Amendments could have a significant impact on classification of liabilities

Amendments could have a significant impact on classification of liabilities

Magnifying glass on green background

Changes to how companies classify liabilities could affect loan covenants.

To promote consistency in application and clarify the requirements on determining if a liability is current or non-current, the International Accounting Standards Board (the Board) has amended IAS®11.

Companies should revisit their loan agreements to determine whether the classification of their loan liabilities will change – for example, convertible debt may need to be reclassified as ‘current’. Any changes could have a knock-on effect on covenant compliance. With potentially significant impacts ahead, companies are encouraged to take action now.

Gabriela Kegalj
KPMG’s global IFRS presentation leader

Right to defer settlement must have substance

Under existing IAS 1 requirements, companies classify a liability as current when they do not have an unconditional right to defer settlement of the liability for at least twelve months after the end of the reporting period. As part of its amendments, the Board has removed the requirement for a right to be unconditional and instead, now requires that a right to defer settlement must have substance and exist at the end of the reporting period.

There is limited guidance on how to determine whether a right has substance and the assessment may require management to exercise interpretive judgement.

The existing requirement to ignore management’s intentions or expectations for settling a liability when determining its classification is unchanged.

Classification of rollover facilities may change

A company classifies a liability as non-current if it has a right to defer settlement for at least twelve months after the reporting period.

The Board has now clarified 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. 

This new requirement may change how companies classify rollover facilities, with some becoming non-current. As a result, the classification of certain economically-similar arrangements – e.g. term loans and rollover facilities – could become aligned, as illustrated in Example 1 (JPG 299 KB).

 

 

Convertible debt may become current

The amendments state that settlement of a liability includes transferring a company’s own equity instruments to the counterparty.

In light of this, the amendments clarify how a company classifies a liability that includes a counterparty conversion option, which could be recognised as either equity or a liability separately from the liability component under IAS 322 . Generally, if a liability has any conversion options that involve a transfer of the company’s own equity instruments, these would affect its classification as current or non-current. The Board has now clarified that – when classifying liabilities as current or non-current – a company can ignore only those conversion options that are recognised as equity.

Therefore, companies may need to reassess the classification of liabilities that can be settled by the transfer of the company’s own equity instruments – e.g. convertible debt.  

IAS 1

Click to enlarge graphic (JPG 135 KB)

Practice may change – e.g. convertible debt may become current – because companies may have interpreted the current requirements differently, see Example 2 (JPG 210 KB)

Effective date

The amendments apply retrospectively for annual reporting periods beginning on or after 1 January 2022. Earlier application is permitted.

Although the amendments are not effective until 2022, companies will need to consider including IAS 83 disclosures in their next annual financial statements.

Visit our IFRS Standards – Better communication in financial reporting page for more information on KPMG’s insights into making financial information more useful.

1 IAS 1 Presentation of Financial Statements

2 IAS 32 Financial Instruments: Presentation

3 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraphs 30-31 

© 2020 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved. KPMG IFRG Limited, registered in England No 5253019. Registered office: 15 Canada Square, London, E14 5GL, UK.

KPMG International Cooperative (“KPMG International”) is a Swiss entity.  Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.