Changes to classification of liabilities – not coming so soon to financial statements near you, part two

The IASB has issued Classification of Liabilities as Current or Non-current—Deferral of Effective Date, amendments to IAS 1

I recapped the underlying subject matter at the time of the exposure draft – basically it relates to classifying a liability as current under IAS 1.69 based on the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period, and to removing some lack of clarity in the wording. The amendments were issued with an extended application date of January 1, 2022, responding to the possibility that resulting changes in classification might affect a company’s loan covenants, and thus require additional preparation time. In an exposure draft of a few months ago, the Board noted that “the effect of the covid-19 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 “concluded that the advantages of a deferral during a time of significant disruption would outweigh the disadvantages” and so proposed a one-year deferral of the effective date of the amendments to annual reporting periods beginning on or after January 1, 2023.

I quixotically wrote at the time that I didn’t support the deferral, noting among other things:

  • 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’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.

But, obviously, most commentators were in favour of the idea, and saw no reason to say much more than that. I was pleased that I wasn’t entirely alone in opposition to it – for one, a representative from ETY, seemingly based in Burkina Faso, wrote that “there is no specific explanation in the ED that strongly motivates and supports why an exception is required in the current case… in our view, this like of deferral of the effective date rises concerns on the next steps in case of a second wave of the COVID-19 pandemic (not excluded by health scientists): what will prevent from cascading deferrals?” Hey ETY, it’s you and me against the world!

Some respondents took the opportunity to point out another issue. I’ll quote Deloitte’s summary:

  • … there appear to be diverse views on application of the requirements in IAS 1:72A that “if the right to defer settlement is subject to the entity complying with specified conditions, the right exists at the end of the reporting period only if the entity complies with those conditions at the end of the reporting period.” For example, the right to defer payment of a liability may be subject to an entity’s working capital being in excess of a certain threshold on 31 March only. If the entity has a 31 December 20X0 reporting date, some are of the view that if the working capital is below the required threshold at 31 December 20X0, the liability should be classified as current at that date because the condition, being the working capital amount, is not met at that date. Others are of the view that the working capital amount at 31 December 20X0 is not relevant to the classification of the liability at that date because the “condition” referred to in IAS 1:72A is the working capital amount at 31 March. Still others believe that the conditions for long-term classification cannot be met at December 31 20X0 because there is a test that must be met at March 31 20X1, the outcome of which is uncertain; some wonder whether, at December 31 20X0, the entity might need to project the outcome of the test at March 31 20X1 in order to support long-term classification at December 31 20X0.

BDO noted a similar problem and suggested making an amendment to clarify that the first approach set out there is the correct one, along with the following possible addition to the basis of conclusions: “The board noted that, if an entity’s compliance with a debt to equity covenant in a loan agreement is only contractually tested for compliance as at an entity’s year-end, in preparing an interim financial statement in accordance with IAS 34, Interim financial reporting, an entity assesses compliance with that covenant as at the interim reporting period and classifies the loan as current or non-current based on the results of assessing covenant compliance as at the interim reporting period.”

But the IASB, as is their habit, just stuck with the job they’d set out do, so we’ll have to wait and see if that other issue goes anywhere…

The opinions expressed are solely those of the author

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