As a general rule, assets and liabilities are presented as current and non-current in the statement of financial position (IAS 1.60).
Current / non-current classification of liabilities
General criteria for liabilities
An entity classifies a liability as current when (IAS 1.69):
- it expects to settle the liability in its normal operating cycle;
- it holds the liability primarily for the purpose of trading;
- the liability is due to be settled within twelve months after the reporting period; or
- it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.
If none of the above criteria is met, a liability is classified as non-current.
Amendment to IAS 1
In 2020, the IASB issued an amendment to IAS 1 clarifying requirements for classifying liabilities as current or non-current. Original effective date of this amendment was set on 1 January 2022, but it was then deferred to 1 January 2023 (and can be deferred further to 2024 – see section on covenants). According to the IASB, these amendments clarify, but do not change, requirements of IAS 1.
More discussion about this amendment can be found in the sections that follow.
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Meaning of settlement
The amendment to IAS 1 clarified the meaning of settlement for the purpose of classifying a liability as current or non-current. Settlement is the transfer of economic resources or own equity instruments to the counterparty that results in the extinguishment of the liability (IAS 1.76A).
An unconditional right to defer settlement of the liability
Paragraph IAS 1.69(d) states that a liability is classified as current if an entity ‘does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period’.
Therefore, when it comes to liabilities, the classification as current or non-current is not a matter of expectations of the entity (as is the case with assets). Lack of unconditional right to defer settlement for at least a year makes a liability current. Provisions for claims and litigation are a typical example of a liability when entities usually do not have such a right and therefore these provisions should be classified as current, even if the court case is expected to last for many years.
On the other hand, when an entity intends to settle an obligation within a year from the reporting date, but (1) this is before the contractual due date and (2) the entity has an unconditional right to defer the settlement – such a liability is classified as non-current.
The latest amendment to IAS 1 further clarified this approach (IAS 1.75A, BC48C(b)). Additionally, the amendment changed ‘unconditional’ right to ‘substantive’ right to reflect the fact that loans are often not 100% unconditional (e.g. there are covenants to be complied with).
Example – Revolving credit facility
On 1 June 20X1, Entity A arranges a revolving credit facility (‘RCF’) with a bank. RCF allows Entity A to draw down up to $2 million any time, with repayments possible at any time as well. Interest is charged only on the withdrawal amount and not on the entire RCF limit. RCF is valid for 5 years provided that Entity A maintains debt to EBITDA ratio lower than 3.
On 10 November 20X1, Entity A draws down $1.5 million to cover higher marketing expenses anticipated in December 20X1. This amount remains outstanding at 31 December 20X1 (annual reporting date) and Entity A expects to repay it during the first quarter of the following year (20X2). Debt to EBITDA ratio remains below 3 at 31 December 20X1.
Despite the intention to repay the outstanding amount in three months, Entity A classifies $1.5 million as a non-current liability at 31 December 20X1. This is because it has an unconditional right to defer settlement for at least twelve months after the reporting period.
Rollover is the renewal of loan, when instead of paying back debt at maturity, an entity ‘rolls it over’ into a new loan. When an entity expects to roll over an obligation under an existing loan facility, this can be taken into account for the purpose of current/non-current distinction only if the operation is fully at the discretion of the entity (IAS 1.73).
Impact of the amendment
The amendment to IAS 1 changed paragraph IAS 1.73 so that a ‘substantive’ right to roll over an obligation for at least twelve months after the reporting period under an existing loan facility will make such a liability a non-current irrespective of management’s intent.
Many financing agreements include covenants and the existence of covenants does not warrant a classification of a liability as current. Only when the covenants are breached at the reporting date with the effect that the liability becomes payable in the next 12 months, such a liability is classified as current. This is because the entity does not have an unconditional right to defer the settlement for at least twelve months after the reporting date (IAS 1.74).
Under the amended IAS 1 (para.72A), if the right to defer settlement is subject to complying with any covenants (or other conditions), this right exists at the end of the reporting period when the entity complies with those conditions at the end of the reporting period. In other words, IAS 1 (as amended) anticipates breaches of covenants. See also this IFRIC agenda decision on covenants to be complied with in the future (plus a more detailed staff paper).
However, due to criticism of the new approach to covenants to be complied with in the future, IASB decided to issue a new amendment to IAS 1. Under the new amendment, as currently drafted, a company would be required to:
- present non-current liabilities with covenants separately in its balance sheet; and
- disclose information in the notes about the covenants with which it must comply within 12 months after the reporting date.
In addition, the IASB proposes to defer the effective date of the 2020 amendments to no earlier than 1 January 2024. Companies would therefore not be required to change their assessment of the classification of liabilities before the proposed amendments are in effect.
See this snapshot prepared by the IASB staff.
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Conversion of a liability to equity
The fact that a liability can be converted to equity at the option of the counterparty is not in itself a reason to classify this liability as current provided that the option is recognised in equity separately from the liability component (IAS 1.69(d) – before amendments or IAS 76B – after amendments).
Impact of events after the end of the reporting period
Any events relating to a liability that take place after the balance sheet date do not impact current/non-current classification at the balance sheet date. See more discussion in paragraphs IAS 1.74-76.
Current / non-current classification of assets
General criteria for assets
An entity classifies an asset as current when (IAS 1.66):
- it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
- it holds the asset primarily for the purpose of trading;
- it expects to realise the asset within twelve months after the reporting period; or
- the asset is cash or a cash equivalent unless the asset is restricted for at least twelve months after the reporting period.
If none of the above criteria is met, an asset is classified as non-current.
Assets acquired with a view to resale
Assets that are normally classified as non-current cannot be reclassified as current unless they meet the criteria to be classified as held for sale in accordance with IFRS 5. Similar restriction concerns assets of a class that an entity would normally regard as non-current that are acquired exclusively with a view to resale (IFRS 5.3,11).
Deferred tax assets/liabilities
Deferred tax assets or liabilities should never be classified as current (IAS 1.56). Instead, entities should disclose in the notes how much of the deferred tax balance is expected to be recovered within/beyond 12 months (IAS 1.61).
Operating cycle of an entity is the time between the acquisition of assets for processing and their realisation in cash. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be twelve months (IAS 1.68). All assets used/sold, or liabilities settled, within an operating cycle are classified as current, even if this takes more than 12 months. Typical assets used or sold in one operating cycle are inventories and trade receivables. Examples of liabilities settled as part of the normal operating cycle are trade payables and short-term employee benefits. All kinds of borrowings and bank overdrafts are not liabilities that settled as part of the normal operating cycle (IAS 1.71) and therefore are classified as non-current unless they meet one of the criteria set out in IAS 1.69(b)-(d).
The same operating cycle applies to the classification of an entity’s assets and liabilities (IAS 1.70).
Current and non-current portion of a single asset or liability
Financial assets and financial liabilities of a long-term nature are split into current/non-current portion based on the maturity of cash flows (IAS 1.68, 72).
For other assets and liabilities, when a balance sheet line combines amounts to be recovered within and beyond 12 months (e.g. trade receivables/payables, deferred tax assets/liabilities, inventories), an entity is required to separately disclose amounts expected to be recovered or settled within or beyond 12 months (IAS 1.61). This disclosure is thought to facilitate assessing liquidity and solvency of an entity.
Presentation based on liquidity
As an exception to the current/ non-current classification, IAS 1.60 allows presentation based on liquidity if it is more relevant to understanding of the financial position of an entity. Presentation based on liquidity is used mostly by financial institutions. When an entity has diverse operations, a mixed approach is allowed (IAS 1.64).