IAS 1 - Classification of liabilities as current or non-current

[nguyenlong]

In January 2020, IASB issued an amendment to IAS 1. As I read the amendment, something confused me:

Paragraph 69 of the standard said that:

"An entity shall classify a liability as current when:
(a) it expects to settle the liability in its normal operating cycle;"

And paragraph 75A of the amended standard said that:

"Classification of a liability is unaffected by the likelihood that the entity will exercise its right to defer settlement of the liability for at least twelve months after the reporting period. If a liability meets the criteria in paragraph 69 for classification as non-current, it is classified as non-current even if management intends or expects the entity to settle the liability within twelve months after the reporting period, or even if the entity settles the liability between the end of the reporting period and the date the financial statements are authorised for issue. However, in either of those circumstances, the entity may need to disclose information about the timing of settlement to enable users of its financial statements to understand the impact of the liability on the entity’s financial position (see paragraphs 17(c) and 76(d))." emphasis added

So the standard said that if you expect to settle the liability in normal operating cycle, then it should be classified as current. But it also said that the liability should be classified as non-current, regardless of its expectation to settle the liability.

I'm at a loss. Could anyone kindly explain the meaning behind those paragraph for me.
Thank you all in advance.

For example, in June 2020 I have a loan that ended in June 2021. I also have the option to rollover the loan for another year, which I dont intent to exercise. At 31 December 2020, should I classified the loan as current or non-current.

And if classified as non-current, why the condition in paragraph 69 (a) does not met?

[exIFRS]

The wording is unfortunately a little ambiguous in paragraph 69 which makes this potentially confusing. Effectively the first test is, is the liability current. A liability is current if it is part of your operating cycle (paragraph 70) no matter how long you have to pay it, or if you have to pay it within one year etc.

What paragraph 75A is saying is if it doesn't meet the definition of current, it non-current, even if you plan on paying it back early, it is still non-current, you have the right to defer payment if you want to.

So you have to read them in order, first decide if it is current, if not it must non-current, even if you plan on paying back earlier.

[Marek Muc]

Normal operating cycle is a separate category, see para. 68 and 70. Debt does not fall into liabilities settled in normal operating cycle, so ignore this criterion in your analysis.

In your example, the intent is important under current IAS 1, so this liability is a current one (see para IAS 1.73 before amendments). But after the IAS 1 amendments become effective (or adopted early), it will be a non-current liability according to para.75A that you cited.

[nguyenlong]

Thank you, mr. exIFRS and mr. Marek for your comments. It clears my confusion.

[Leo]

We also have an RCF settled at a monthly frequency and rollover within 5 years.

We have treated this RCF as current, no matter we don't intend to roll it over.

However, as said Murek, in 2022, when the new IAS1 amendment will apply, our RCF might become non-current depending on whether the right to roll over has substance. that will be based on the company's own judgment.

[Marek Muc]

What do you mean Leo when you say that RCF is settled monthly? Do you have to get bank's approval to use RCF each month?

[Leo]

Hi Marek

I’d like to say that the Rcf is roll over every month. Until 2025.

Thank you.

[Marek Muc]

If the existing RCF facility is valid until 2025, then it seems to be a non-current liability, because you do have 'an unconditional right to defer settlement of the liability for at least twelve months after the reporting period'.

Do other members use RCFs? How do you approach current / non-current classification?

[Leo]

Hi Marek,

I found a link here. Might explain.

https://assets.kpmg/content/dam/kpmg/xx ... .99999.jpg

Keep me updated please.

Thank you.

[Marek Muc]

thanks for the link,
they say that RCF is classified as current because the rollover is conditional upon meeting covenants...
I don't like this reasoning, because this would mean that mere existence of covenants triggers a liability to be classified as current (if you breach covenants, you usually have to repay immediately...)
but IAS 1.74 implies that it is only when covenants are breached at the reporting date a liability is classified as current, so I see it like this: if you don't breach your covenants at the reporting date, you don't classify a liability as current if the repayment date is beyond 12 months

In case of your RCF, what conditions do you have to fulfil to be able to keep the RCF drawn down until 2025?

[exIFRS]

I agree with you Marek, I think the logic is flawed in the example provided. Almost every loan is conditional in some sense, most become immediately due if, for example, you miss a payment. But I think this is the reason the IFRS changed the language, not because they wanted to change the outcome, but because some readers were misinterpreting the intention. The key point was that the other party did not have the current right to require payment within the next 12 months.

[Marek Muc]

thanks for your opinion, exIFRS
you're right that, apart from breaching covenants, virtually every loan agreement can become immediately due because of other contractual provisions

[Marek Muc]

PS. I've just added an example with RCF to our knowledge base, any feedback appreciated
https://ifrscommunity.com/knowledge-bas ... on-current

[JRSB]

"Interest in charged " = is

[Marek Muc]

oops, thanks