The IASB has issued Classification of Liabilities as Current or Non-current—Deferral of Effective Date, an exposure draft of a proposed change to IAS 1, with comments requested by June 3, 2020.
To recap the underlying subject matter, IAS 1.69 currently sets out four different circumstances in which an entity classifies a liability as current. The fourth of these arises when the entity “does not have an unconditional right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period.” Following the amendments issued earlier this year, this will refer instead to a situation where the entity “does not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period.” The change partly reflects a perceived inconsistency between the concept of the unconditional right, and the guidance that “if an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non‑current, even if it would otherwise be due within a shorter period.” That is, the references to expectation and discretion may suggest a zone of judgment in a way that “unconditional right” doesn’t. The amendments remove all those references, referring simply to rights, and explaining that an “entity’s right to defer settlement of a liability for at least twelve months after the reporting period must have substance and…must exist at the end of the reporting period.”
Other aspects of the amendments clarify that, for example, a bond that the holder may convert to equity before maturity is classified as current or noncurrent according to the terms of the bond, without considering the possibility of earlier settlement by conversion to equity. But if the conversion feature is classified as a liability because, say, of variable conversion terms, then the option to deliver shares would be taken into account in assessing the settlement terms, and in turn the classification as current or non-current.
As we noted when the amendments were issued, they already came with an extended application date of January 1, 2022, responding to the possibility that changes in classification as a result of the amendments might affect a company’s loan covenants, and thus require additional preparation time. This is how the IASB looks at that now:
- In April 2020 the Board discussed the effect of the covid-19 pandemic on financial reporting. The Board noted that the pandemic has created pressures that could delay the implementation of any changes in classification resulting from the application of these amendments. It could also delay the start and extend the duration of the renegotiation of loan covenants.
- The Board noted that deferring the effective date would delay the implementation of the improvements to the classification of liabilities that the amendments intend to bring about. However, the amendments clarify the requirements for presentation of liabilities instead of fundamentally changing the required accounting; recognition and measurement requirements are unaffected by the amendments. Consequently, the Board concluded that the advantages of a deferral during a time of significant disruption would outweigh the disadvantages. Therefore, to provide entities with operational relief, the Board decided to propose a one-year deferral of the effective date of the amendments to annual reporting periods beginning on or after January 1, 2023.
You might recall that this project has been around for a while – comments on the originating exposure draft were due by June 10, 2015. In 2016 work was delayed until after the Board had redeliberated the definitions of assets and liabilities in the Conceptual Framework exposure draft, starting up again in late 2018. So by the time we actually get to see financial statements reflecting the benefits of the amendments, it will have been close to a ten year journey. Of course, it’s hard to argue against pragmatism and flexibility. But I nearly always feel the same way about such proposals – if you don’t need the benefits of a certain proposal in 2022, when (sad to say) our use of financial reporting will still be heavily affected by the pandemic and its consequent pressures on issuers and investors, then why would you need them in 2023 when (let’s optimistically assume for the sake of argument) things are starting to get better. Put another way, don’t we need IFRS to be the best it can be now, not later?
I confess that I’m not particularly sympathetic either to the notion that our current problems have already made it intolerably onerous to meet an implementation date that’s still over a year and a half away. Accountants and auditors always neurotically complain of needing more time, even as companies demonstrate in other ways that they can respond rapidly to near-existential threats, and even as accounting firms emphasize their flexibility and responsiveness in their marketing. So I wouldn’t have been inclined to vote in favour of this deferral. A good thing for the accounting world then that I’m not on the IASB (as if…) and that it received the unanimous support of the fourteen people who are.
The opinions expressed are solely those of the author