Following a significant number of responses to an IFRIC Tentative Agenda Decision, the IASB discussed the proposed 2020 amendments at its June 2021 board meeting where it decided to further amend IAS 1. The decision was made in order to resolve the unintended consequences of a current liability classification of long-term debt subject to conditions that are tested after the reporting date, if such conditions are not met at the reporting date.
Reminder of the amendments
Issued in January 2020, the original amendments (‘the 2020 amendments’) were intended to clarify the classification of liabilities in the statement of financial position as either current or non-current. The two key amendments are as follows:
- An amendment to paragraph 69(d) which clarifies that classification should be based on rights that are in existence at the end of the reporting period;
- A new paragraph 72A which clarifies that a right that is subject to complying with specific conditions only exists if those conditions are complied with at the end of the reporting period, even if compliance isn’t tested until a later date.
When are the amendments effective?
1 January 2023 at the earliest, with the IASB tentatively deciding at its June 2021 board meeting to push this back another year to 1 January 2024.
How is the issue only now coming to light when the amendments have already been made?
In December 2020, IFRIC decided to consider a case study involving borrowing covenants when it became aware that the amendments were giving rise to different interpretations in practice, specifically on how an entity determines whether it has ‘the right to defer settlement’ when a long-term liability is subject to a condition (for example, a debt covenant) and the borrower’s compliance with the condition is tested at a date after the reporting date.
In April 2021 following consultation on its Tentative Agenda Decision of December 2020, IFRIC concluded that its staff’s technical analysis of the application of the 2020 amendments to the case studies was correct. However, it recognised from the significant consultation feedback (36 responses including from the Big Four, local standard setters and large corporates) that there may be unexpected consequences in applying the 2020 amendments and certain new information is now available that was not specifically considered when the 2020 amendments were developed. Accordingly, IFRIC referred the matter to the IASB for reconsideration.
What was the issue?
The first amendment to IAS 1 wasn’t expected to have much impact in practice, as ‘an unconditional right’ in the original standard is generally interpreted to have a similar meaning to the meaning of ‘right’ in the amended standard. As such, a right conditional on compliance with covenants in future periods is considered ‘unconditional’ if the entity is in compliance with those conditions at the end of the reporting period.
However, the new paragraph 72A might have changed existing practice and lead to diversity, as whether compliance with future covenant tests is taken into account for the purpose of classification at the end of the reporting period is somewhat mixed.
How has the June 2021 IASB meeting resolved the issue?
Further to the referral of the IFRIC TAD to it for reconsideration, the following positions were taken at the June 2021 IASB meeting:
Classification and disclosure – 12 out of 13 board members agreed with this decision
The Board tentatively 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 (for example, the nature of and date by which the entity must comply with the condition);
- 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.
Separate presentation - 10 out of 13 board members agreed with this decision
The Board 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.
Further clarification – 12 out of 13 board members agreed with this decision
The Board tentatively decided to amend IAS 1 to clarify that an entity does not have a right to defer settlement at the reporting date when the related liability could become repayable within 12 months:
- at the discretion of the counterparty or a third party (for example, when a loan is callable by the lender at any time without cause); or
- if an uncertain future event occurs (or does not occur) and the event’s occurrence (or non-occurrence) is unaffected by the entity’s future actions (for example, when the liability is a financial guarantee or insurance contract liability).
Deferral of the effective date of the 2020 amendments – all 13 board members agreed
The Board tentatively decided to amend IAS 1 to defer the effective date of the 2020 amendments to no earlier than 1 January 2024.
In our view member firms should not be applying the IFRIC guidance on the basis that it relates to amendments to IAS 1 that at the date of the IFRIC April 2021 meeting, were pending the IASB’s reconsideration.
Since then, the IASB has tentatively agreed to make further amendments to IAS 1, and at a future meeting it will discuss the transition requirements for the proposed amendments, as well as the Board’s compliance with applicable due process steps.
Ultimately, the Board’s latest decision has moved this from being an issue of key concern to something that is for information only, given the effective date of 2024 and the softening to a presentation/disclosure outcome. Once the amendments to IAS 1 are re-exposed we will update you further.