Non-Current Liabilities with Covenants (Proposed Amendments to IAS 1)

Timeline

In November 2021 the IASB published its Exposure Draft ED/2021/9 Non-current Liabilities with Covenants (Proposed Amendments to IAS 1).

The IASB’s comment deadline is 21 March 2022.

Background

The Exposure Draft 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 (e.g. covenants) in addition to addressing concerns about the classification of such a liability as current or non-current.

The proposed amendments would specify that conditions with which an entity must comply within twelve months after the reporting period do not affect classification of a liability as current or non-current. Instead, entities would present separately, and disclose information about, non-current liabilities subject to such conditions.

The Exposure Draft also proposes deferring the effective date of the amendment Classification of Liabilities as Current or Non-Current (Amendments to IAS 1) to at least 1 January 2024.

Final Comment Letter

The UKEB support a number of the proposals in the ED as they will lead to clearer classification and disclosure of non-current liabilities with covenants that will assist users’ decision making. The Board agreed with:

the proposed amendments to paragraph 72A removing the requirement to classify debt as a current liability where the entity is in technical breach of covenants for which compliance is to be tested at a future date.
the principle in paragraph 72B that the classification of a liability as current or non-current should be based on conditions that exist at the end of the reporting period, even if that compliance is only tested later.
the objective of enhancing disclosure about non-current liabilities in the notes to the financial statements to provide useful information that enables users of financial statements to assess the risk that a liability classified as non-current could become repayable within twelve months, as proposed in paragraphs 76ZA(b) and 76ZA(b)(i). However, they suggested paragraphs 76ZA(b)(ii) – (iii) are deleted as they did not consider that they are directly relevant to the disclosure objective.

However, the Board are concerned about some of the proposals in the ED as follows:

They do not support the specific requirement for separate presentation in the Statement of Financial Position (paragraph 76ZA(a)). The Board believe that the current general requirements in IAS 1 Presentation of Financial Statements are sufficient.
The Board is concerned about the potential for unintended consequences of some elements of the ED’s proposals. These include (but are not limited to):
- The meaning of “specified conditions” (paragraph 72B). If the term is meant to have a particular meaning it needs to be defined, otherwise they suggest “conditions” should be used.
- The application of paragraph 72C(b) when determining if a liability is current. The Board has encountered significant diversity in interpreting the intent of this paragraph and suggest paragraph 72C is deleted in its entirety.

Given that the ED is aimed at addressing specific concerns arising from the as yet unimplemented 2020 Amendments to IAS 1, to enable timely completion of the project the Board suggest that the IASB only proceed with amending paragraphs 72A, 72B and enhancing disclosure on conditions that could be breached leading to earlier repayment of non-current liabilities. Further standard setting should happen only if there is evidence of significant diversity in practice.