Current or non-current loan

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JRSB
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Re: Current or non-current loan

Post by JRSB »

Interesting insight.
In my opinion the facts in the year being reporting, and at the year end, are most relevant to the user. Forward looking statements (as every investment circular warns us..) invite huge judgement and therefore bias, all of which deflects from the usefulness. Paired with disclosure of the key borrowing terms/covenants I think is enough.
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exIFRS
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Re: Current or non-current loan

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Oh, it took me ages, but I found a version of the smoke detector example (actually it was smoke filters). It is on page 26 of this document: https://www.ifrs.org/-/media/feature/me ... amples.pdf
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Re: Current or non-current loan

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the example is in substance identical to Example 6 to IAS 37, hm?

Funny because as I read the latest JRSB's post I see it being used to argue for both approaches :)
JRSB wrote: 28 Nov 2020, 22:43 In my opinion the facts in the year being reporting, and at the year end, are most relevant to the user. Forward looking statements (as every investment circular warns us..) invite huge judgement and therefore bias, all of which deflects from the usefulness. Paired with disclosure of the key borrowing terms/covenants I think is enough.
So I could say: You're right JRSB, you cannot use forward looking information. So if you don't comply with all the covenants that will be tested in next 12 months, you cannot use forward looking statements and say that you still have time to improve your ratios. But I know this is not what you meant :)

exIFRS, Can you please share your assessment of the IC scenario, but for the next year. I.e. at 31 Dec 20X2 the ratio is below 1.1 (1.1. is now the only applicable threshold), but the next testing date is on 30 June 20X3 (i.e. no testing at 31 Dec 20X2) - still non-current at 31 Dec 20X2?

I think the wording of those covenants is also important, i.e. whether they say "you must keep the ratio below 1.1 at all times but we will test it only on selected dates" or "you may keep your ratio above 1.1 except for 30 June each year when it must be below 1.1).
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Re: Current or non-current loan

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Well the IFRIC has met. Their conclusion seems to be summarised as "okay the staff are right, that is what the amendment will mean, BUT they are generally "not comfortable with it"". I am pleased that many of the comments raised in this comment thread were raised by members of the committee. They expect the Agenda Decision will come as a surprise to a lot of people, and that they will get a lot of feedback meaning they may need to revisit it. I will post a link to the discussion and the tentative decisions once they are posted.
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Re: Current or non-current loan

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Thank you for starting this interesting discussion here :)
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Re: Current or non-current loan

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Well the IFRIC Update is out, and it confirms that at report date, for a debt to be classified as non-current you must also comply with covenants that will only be tested in the future (up to 12 months presumably). The discussion went for quite some time, so the conclusion perhaps wasn't quite as cut and dried as presented in the meeting summary. It will be interesting to see what feedback the IFRIC gets on this conclusion, as the Committee invites comments on tentative agenda decisions. Interested parties may submit comments on the open for comment page by 15 February 2021.

Tentative Decision: https://www.ifrs.org/news-and-events/up ... mber-2020/

Video of discussion can be found here (it was the first item discussed in the 1 December session): https://www.ifrs.org/news-and-events/ca ... committee/
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Re: Current or non-current loan

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I see the basis used but I don't agree as it seems to ignore growth etc - eg you sign a big order the day after the year end but it doesn't impact if the future required ratio wasn't met at year end. Then that causes a false going concern issue (if current liability now makes things appear worrying) even though going concern assessment does take account of the big sale the day after year end
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Re: Current or non-current loan

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I agree, I really don't like the outcome. And it was pretty obvious a number of the Committee Members didn't either. So it now comes down to people providing feedback to the tentative agenda decision.
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Re: Current or non-current loan

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I wonder whether there was a case where a feedback to a tentative agenda decision actually changed Committee's final decision. I don't recall any example, but I don't follow those deliberations as closely as you. Do you recall such a case?
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Re: Current or non-current loan

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Do you disagree with the IC's conclusion for Case 2 as well?
https://www.ifrs.org/news-and-events/up ... er-2020/#1
a. the covenant requires a working capital ratio above 1.0 at each 31 March (ie the ratio is tested only once a year at 31 March). The loan becomes repayable on demand if the ratio is not met at any testing date.
b. the entity’s working capital ratio at 31 December 20X1 is 0.9. The entity expects the working capital ratio to be above 1.0 at 31 March 20X2.
[...]
Accordingly, the Committee concluded that the entity does not have the right at the end of the reporting period to defer settlement of the loan for at least twelve months after the reporting period.
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Re: Current or non-current loan

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Personally yes. If the entity believes it is (insert preferred level of confidence here [probable/highly probable/almost certain]) it will meet the test then I think it provides more reliable information that faithfully represents circumstances. Make them disclose it though, and let the auditor review it.
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Re: Current or non-current loan

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I do agree with the conclusion. The financial reporting is supposed to give a true and fair view of an entity's financial position as at the reporting date, based on historical records; not based on future events. Few exceptions to this principle have been created, notably credit impairments, where a view into the future is now reflected in the financial statements following the replacement of IAS 39 with IFRS 9. I do agree though that relevant disclosures should be included as part of IFRS 7's liquidity disclosures to provide the reader of the financial statements with useful information.
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Re: Current or non-current loan

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But isn't the ratio test a future event? We are not currently in breach.
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Re: Current or non-current loan

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thanks, I guess we've already exchanged our views on this topic, I was just curious whether your respective positions are the same in a more straightforward case (as opposed to different ratios on different dates agreed between the parties)
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Re: Current or non-current loan

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I disagree re Case 2 for the same reason that I noted.
I understand DJP point but isn't the problem then that half the information in the annual report is backwards looking and the other half forwards? Isn't one of the underlying concepts that the accounts must have predictive value to users?
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Re: Current or non-current loan

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but now you're disagreeing with the outcome of standard setting rather than the interpretation of existing IFRS I would say
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Re: Current or non-current loan

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most likely.
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Re: Current or non-current loan

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OK so that is another interesting discussion :)
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Re: Current or non-current loan

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In my opinion, it would be misleading to show the liability as non-current and thus imply that the entity does not have to repay it within 12 months when, all else equal, in 6 months' time the liability becomes payable on demand. Not to mention the difficulty (and risk) for the auditors to provide assurance that the entity will be able to improve its ratios and avoid breaching its covenants on the next testing date. I think it is more prudent to show the liability as current, and then provide more information in the notes (liquidity risk).
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Re: Current or non-current loan

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DJP, I share the same view :)
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Re: Current or non-current loan

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It will be interesting to see what happens next. And though I have personal views I can see there are two sides to the argument. Our split here mirrors many of the discussions I am hearing. I have already had two organisations approach me for input on their submissions, and we will see how many submissions the IFRIC get in response to the Tentative Agenda Decision. I'll certainly post again when there is more news (let's see if we can make this the longest topic string we have :-) )
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Re: Current or non-current loan

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do you recall whether IC has ever changed its tentative decision after receiving feedback?
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Re: Current or non-current loan

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I believe they have, but don't ask me to provide an example. They have definitely significantly reworded them based on feedback.
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Re: Current or non-current loan

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https://www.ifrs.org/news-and-events/up ... il-2021/#3
The Committee confirmed its agreement with the technical analysis and conclusions in the tentative agenda decision. Nonetheless, before finalising the agenda decision, the Committee decided to report to the Board [...] respondents’ comments on the outcomes and potential consequences of applying the amendments, highlighting those that might provide information the Board did not consider when developing the amendments.
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Re: Current or non-current loan

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an important update:

https://www.ifrs.org/news-and-events/up ... ne-2021/#6
The Board tentatively decided to amend IAS 1 so that:

a. 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

b. for non-current liabilities subject to conditions, an entity is required to disclose information about:
(i) the conditions (for example, the nature of and date by which the entity must comply with the condition);
(ii) whether the entity would comply with the conditions based on its circumstances at the reporting date; and
(iii) whether and how the entity expects to comply with the conditions by the date on which they are contractually required to be tested.
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