A. Background
As per para 73 of IAS 1 Presentation of Financial Statements, a company can classify liability arising from loan arrangement as non-current only if the company can avoid settling the debt in the 12 months after the reporting date. However, a company’s ability to do so is often subject to complying with covenants.
In January 2020, the International Accounting Standards Board (IASB) issued amendments to paragraphs 69 to 76 of IAS 1 (the 2020 amendments) to specify the requirements for classifying liabilities as current or non-current. A key requirement was that if any entity with liabilities subject to future covenants (i.e., which are to be complied with at a date subsequent to the reporting period) do not comply with the covenants at that date then the entity do not have the right to defer settlement of the liabilities at the end of the reporting period.
B. Amendment (2022)
The amendments to IAS 1 specify that covenants to be complied with after the reporting date do not affect the classification of liability arising from loan arrangement as current or non-current at the reporting date. Rather, the amendment requires a company to disclose information about these covenants in the financial statements’ notes.
Under the 2022 amendments, only covenants of a liability, which an entity must comply with on or before the reporting date affect the classification of that liability as current or non-current. The amendments are linked to the requirements on disclosure about such liabilities.
The IASB expects the amendments to improve the information a company provides about long-term debt with covenants by enabling investors to understand the risk that such debt could become repayable early.
C. Applicability
The amendments are effective for annual reporting periods beginning on or after 1 January 2024, with early adoption permitted.
