The general rule in IFRS 18.96 / IAS 1.60 requires entities to classify assets and liabilities as current or non-current in the statement of financial position. This distinction is essential for effective liquidity management: entities should ensure they hold sufficient current assets to settle current liabilities, such as accounts payable and short-term debt. Otherwise, they will face liquidity pressures.
The current/non-current classification also enables investors and other stakeholders to perform ratio analysis, including the current ratio (current assets divided by current liabilities) and the quick ratio.
Let’s dive in.
Liabilities
Under IFRS 18.101-102 / IAS 1.69, an entity classifies a liability as current if it meets any of the following conditions:
- It anticipates settling the liability within its normal operating cycle;
- It primarily holds the liability for trading purposes;
- The liability is due for settlement within 12 months after the reporting period; or
- It does not have a right to defer settlement of the liability for a minimum of 12 months after the reporting period.
If none of these conditions are met, the liability is classified as non-current.
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A right to defer settlement
Under IFRS 18.101(d) / IAS 1.69(d), a liability is classified as current if an entity doesn’t have a right to defer settlement of the liability for at least 12 months after the reporting period. Therefore, unlike assets, the classification of liabilities as current or non-current isn’t determined by the entity’s expectations about when it will settle the liability, but by the existence, or absence, of a right to defer settlement for at least a year.
For example, a provision for claims and litigation will be classified as current because the entity typically lacks a right to defer settlement, as settlement will be decided by the legal proceedings. The fact that those proceedings may last several years doesn’t change the fact that the entity has no right to defer settlement.
Conversely, if an entity plans to settle a liability within a year of the reporting date, but the contractual due date falls more than a year after the reporting date, the liability is classified as non-current. In fact, even if the liability is actually settled after the end of the reporting period but before the financial statements are authorised for issue, it will still qualify as non-current at the reporting date (IFRS 18.B104 / IAS 1.75A). The early repayment will be disclosed as a non-adjusting event after the reporting period instead (IFRS 18.B105(d) / IAS 1.76(d)).
Example: Revolving credit facility
Suppose Entity A arranges a revolving credit facility (RCF) with a bank on 1 June 20X1. The RCF permits Entity A to draw down up to $2 million and keep drawing and repaying the outstanding balance at any time up to the $2 million limit. The RCF expires on 30 May 20X4 but carries a covenant requiring Entity A to maintain a debt-to-EBITDA ratio below 3.
On 10 November 20X1, Entity A draws down $1.5 million to cover high marketing expenses expected in the upcoming peak commercial season. This amount remains outstanding at the annual reporting date of 31 December 20X1, with the debt-to-EBITDA ratio staying below the required level.
December 20X1 proves very successful on the commercial front, and Entity A repays the outstanding balance in January 20X2, before the authorisation of the financial statements for 20X1. However, Entity A classifies the $1.5 million liability under the RCF as non-current at 31 December 20X1 because it has the right to delay settlement for at least 12 months after the reporting period, i.e. until 30 May 20X4, when the RCF expires. The early repayment is disclosed as a non-adjusting event in the notes.
Covenants
Many financing agreements contain covenants. Their presence doesn’t automatically require the classification of a liability as current. Their impact on the current/non-current classification can be summarised as follows (IFRS 18.B100 / IAS 1.72B):
- A covenant affects whether the right to defer settlement exists at the end of the reporting period if an entity is required to comply with the covenant on or before the end of the reporting period. This remains the case even if compliance with the covenant is tested only after the reporting period. For example, a covenant might be based on the entity’s financial position at the end of the reporting period but assessed for compliance only after the reporting period.
- A covenant doesn’t affect the right to defer settlement at the end of the reporting period if an entity is required to comply with the covenant only after the reporting period. For instance, a covenant relates to a loan payable but is based on the entity’s financial position six months after the end of the reporting period.
If an entity breaches a covenant of a long-term loan on or before the reporting date, causing the liability to become payable on demand, it classifies the liability as current, even if the lender subsequently agrees not to demand repayment before the financial statements are authorised for issue. This is because, at the reporting date, the entity does not have the right to defer settlement for at least 12 months. However, the liability is classified as non-current if, by the reporting date, the lender has granted a grace period of at least 12 months during which the entity can remedy the breach and the lender cannot demand immediate repayment (IFRS 18.B102-B103 / IAS 1.74-75). Any such event happening after the reporting date but before authorisation of the financial statements should be disclosed (IFRS 18.B105(b)-(c) / IAS 1.76(b)-(c)).
If an entity’s right to defer settlement of a non-current liability is subject to the entity complying with covenants within 12 months after the reporting period, it must provide additional disclosures about these covenants, including circumstances that indicate the entity may have difficulty complying with them (IFRS 18.B106 / IAS 1.76ZA).
Rollovers
A rollover refers to the renewal of a loan. Instead of repaying the debt at maturity, an entity ‘rolls it over’ into a new loan. When an entity has the right to roll over an obligation under an existing loan facility for at least 12 months after the reporting period, the liability is classified as non-current (IFRS 18.B101 / IAS 1.73).
Meaning of settlement
The classification of a liability revolves around its settlement, which is the transfer of cash, other economic resources, or the entity’s own equity instruments to the counterparty, resulting in the extinguishment of the liability (IFRS 18.B107 / IAS 1.76A).
However, if the terms of a liability could, at the option of the counterparty, result in its settlement by the transfer of the entity’s own equity instruments, this fact doesn’t affect current/non-current classification if the entity recognises that option as an equity component of a compound financial instrument (IFRS 18.B108 / IAS 1.76B).
As mentioned earlier, rolling over an existing liability does not constitute settlement, as there is no transfer of economic resources.
Assets
An asset is classified as current if it meets any of the following conditions (IFRS 18.99 / IAS 1.66):
- The entity expects to realise the asset, or intends to sell or consume it, within its normal operating cycle;
- The asset is primarily held for trading purposes;
- The entity anticipates realising the asset within 12 months after the reporting period; or
- The asset is cash or a cash equivalent, unless the use of the asset is restricted for at least 12 months after the reporting period.
If none of these conditions are met, the asset is classified as non-current.
Assets acquired for resale
Assets typically classified as non-current cannot be reclassified as current unless they meet the criteria for being classified as held for sale under IFRS 5. A similar restriction applies to assets of a class normally regarded as non-current (e.g., PP&E) that are purchased solely for resale (IFRS 5.3, 11).
Deferred tax
Deferred tax assets or liabilities should never be classified as current (IFRS 18.98 / IAS 1.56). Instead, entities are required to disclose in the accompanying notes the portion of the deferred tax balance expected to be recovered or settled within or beyond 12 months (IFRS 18.97 / IAS 1.61).
Operating cycle
An entity’s operating cycle is the time interval between the acquisition of assets for processing and their conversion into cash. If the entity’s normal operating cycle is not clearly identifiable, it is presumed to be 12 months (IFRS 18.B95 / IAS 1.68). All assets used or sold, or liabilities settled, within an operating cycle are classified as current, even if this exceeds 12 months.
Inventories and trade receivables are typically realised within one operating cycle, while trade payables and short-term employee benefits are typically settled within it. Conversely, all types of borrowings and bank overdrafts are not considered liabilities settled as part of the normal operating cycle. The same operating cycle applies to the classification of an entity’s assets and liabilities (IFRS 18.B96-B97 / IAS 1.70-71).
Current and non-current portions of a single asset or liability
Financial assets and liabilities of a long-term nature are split into current/non-current portions based on the maturity of cash flows (IFRS 18.B95, B98 / IAS 1.68, 72). For assets and liabilities such as deferred tax and inventories, one line item combines amounts expected to be recovered or settled within and beyond 12 months. In these scenarios, an entity is required to separately disclose amounts expected to be recovered or settled within or beyond 12 months (IFRS 18.97 / IAS 1.61).
Presentation based on liquidity
As an exception to the current/non-current classification, entities may adopt presentation based on liquidity if it provides a more useful structured summary of the financial position of the entity (IFRS 18.96 / IAS 1.60). This method is mainly used by financial institutions because they don’t have a clearly identifiable operating cycle (IFRS 18.B91 / IAS 1.63).
A mixed approach is permitted when an entity has diverse operations (IFRS 18.B92 / IAS 1.64).