DECA - IAS 1 Narrow-scope Amendments 2020 and 2022

UKEB UK Endorsement Board March 2023

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Introduction

Purpose

1The purpose of this Draft Endorsement Criteria Assessment (DECA) is to determine whether the following amendments to international accounting standards meet the UK's statutory requirements for adoption:

1. Classification of Liabilities as Current or Non-current (Amendments to IAS 1) (the 2020 Amendments), issued by the International Accounting Standards Board (IASB) in January 2020; and
2. Non-current Liabilities with Covenants (Amendments to IAS 1) (the 2022 Amendments), issued by the IASB in October 2022.

2The draft UK-adopted International Accounting Standard text for each Amendment is reproduced in Appendices A and B of this document respectively. For ease of reference the combined effect of the two Amendments is reproduced in Appendix C.

3The 2020 and 2022 Amendments (the Amendments) have an effective date of 1 January 2024 with earlier application permitted.

4The 2020 Amendments were published by the IASB in January 2020, but had not been adopted by the EU by the end of the UK's EU Exit Transition Period on 31 December 2020. Accordingly, they were not incorporated into domestic UK law as UK-adopted international accounting standards. The EU had not adopted the amendments due to stakeholder concerns about one of the requirements introduced by the 2020 Amendments. These concerns led to the IASB undertaking additional work to understand those concerns, ultimately leading to the 2022 Amendments.

5The UKEB actively influenced the development of the 2022 Amendments. This included submitting a Final Comment Letter on 21 March 2022 in response to the IASB's Exposure Draft ED/2021/9 Non-current Liabilities with Covenants.

Joint assessment and adoption

6This DECA considers the 2020 and 2022 Amendments and proposes they are adopted on a joint basis.

7The Board considered the pros and cons of a number of approaches to adopting the 2020 and 2022 Amendments but proposes adoption on a joint basis. Alternative approaches considered included simply adopting each amendment separately or making modifications to the Amendments to effectively combine them. Of the approaches considered, the joint approach appeared to be most consistent with the apparent intent of the Amendments and provided the most appropriate approach to assessing the Amendments.

8In our view the joint approach is consistent with the intention of the IASB because the 2022 Amendments are intended to improve the application of the 2020 Amendments. They also include amendments that supersede elements of the 2020 Amendments.

9The IASB's effective date requirements reinforce this view. Those entities that have already applied the 2020 Amendments must apply the 2022 Amendments immediately upon issuance of the 2022 Amendments. Those entities that have not applied the 2020 Amendments can now only apply them for an earlier period in conjunction with the 2022 Amendments.

10The IASB has also provided a combined text of the two sets of Amendments (to make the joint effect of the two amendments clearer) as an appendix to the 2022 Amendments. While this does not form part of the mandatory text, its inclusion further suggests that the intention is for the Amendments to be jointly applied. This text is included in Appendix C.

11In the UK legal context, Section 6(c) of the Interpretation Act 1978 states that words in the singular include the plural and words in the plural include the singular unless the contrary intention appears. On this basis, joint adoption is consistent with the International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019 No. 685 (SI 2019/685), Regulation 7 of which outlines the basis upon which an International Accounting Standard can be adopted.

12Given the nature of the Amendments, and the apparent intention of the IASB, this DECA determines that joint assessment of the Amendments is appropriate; and provides the most relevant approach to assessing the endorsement criteria in Regulation 7 of SI 2019/685.

13This DECA therefore considers whether the 2020 and 2022 Amendments taken as a package meet the UK's statutory requirements for adoption as set out in Regulation 7 of SI 2019/685.

Background to the Amendments

14The Amendments clarify the requirements for classification of liabilities and add disclosure requirements for non-current liabilities with covenants to IAS 1 Presentation of Financial Statements. These Amendments are part of the IASB's continuous effort to maintain and improve international accounting standards.

15Section 2 in this DECA provides a brief description of the Amendments.

Exclusions from the adoption assessment

16Both the 2020 and 2022 Amendments include amendments to the Basis for Conclusions to IAS 1. The 2022 Amendments also include amendments to IFRS Practice Statement 2 Making Materiality Judgements. The IFRS Practice Statement 2 amendments add a reference to the new disclosure requirements to an existing example (Example P) that addresses assessing whether information about covenants is material.

17UK-adopted international accounting standards comprises only the mandatory¹ sections of standards, therefore amendments to the Basis for Conclusions and IFRS Practice Statement 2 are not adopted by the Board and are excluded from the DECA.

Structure of the assessment

18We have presented our analysis in the following sections:

1. Section 1: describes UK statutory requirements for adoption of new or amended international accounting standards; and
2. Section 2: discusses how the Amendments meet the criteria in Section 1.

Do the Amendments lead to a significant change in accounting practice?

19A standard adopted by the UKEB under Regulation 6 of SI 2019/685 that it considers is likely to lead to a 'significant change in accounting practice', is subject to the requirements in paragraph 3 of Regulation 11 of SI 2019/685 that the UKEB:

1. "carry out a review of the impact of the adoption of the standard; and
2. publish a report setting out the conclusions of the review no later than 5 years after the date on which the standard takes effect (being the first day of the first financial year in respect of which it must be used)".

20Section 2 of the DECA discusses whether the Amendments lead to a significant change in accounting practice and [tentatively] concludes that they do not.

I. Section 1: UK statutory requirements for adoption

UK statutory requirements

1.1Paragraph 1 of Regulation 7 of SI 2019/685 requires that an international accounting standard only be adopted if:

1. "the standard² is not contrary to either of the following principles-
   1. an undertaking's accounts must give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss;
   2. consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking;
2. the use of the standard is likely to be conducive to the long term public good in the United Kingdom; and
3. the standard meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management."

1.2This DECA assesses the criteria above in the following order:

1. Whether the Amendments meet the criteria of relevance, reliability, understandability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management (Regulation 7(1)(c)).
2. Whether the Amendments are not contrary to the principle that an entity's accounts must give a true and fair view (Regulation 7(1)(a)).
3. Whether use of the Amendments is likely to be conducive to the long term public good in the UK (Regulation 7(1)(b)). Regulation 7(2) of SI 2019/685 includes specific areas to consider for this assessment. They are:
   1. whether the Amendments are likely to improve the quality of financial reporting;
   2. the costs and benefits that are likely to result from the use of the Amendments; and
   3. whether the Amendments are likely to have an adverse effect on the economy of the UK, including on economic growth.

Relevance, Reliability, Understandability and Comparability

1.3Information is relevant if it is capable of making a difference in the decision-making of users⁴ or in their assessment of the stewardship of management. The information may aid predictions of the future, confirm or change evaluations of the past, or both.

1.4Financial information is reliable if, within the bounds of materiality, it:

1. can be depended on by users to represent faithfully what it either purports to represent or could reasonably be expected to represent;
2. is complete; and
3. is free from material error and bias.

1.5Financial information should be readily understandable by users with a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence.

1.6Information is comparable if it enables users to identify and understand similarities in, and differences among, items. Information about an entity should be comparable with similar information about other entities and with similar information about the same entity for another period.

1.7In conducting our overall assessment against the technical accounting criteria we are required to adopt an absolute, rather than a relative, approach. This means that this assessment is an absolute one against the criteria (do the Amendments provide information that is understandable, relevant, reliable and comparable?) rather than a relative one (do the Amendments provide information that is more understandable, relevant, reliable and comparable than current, or any other, accounting?). When an assessment of any individual aspect or requirement of the Amendments uses comparative language (e.g. ‘enhances comparability'), this does not mean that our objective is to reflect a real comparison in relative terms. Instead, our objective is to explain that any individual aspect or requirement of the Amendments has the potential to “enhance” one or more of the qualitative characteristics. Consideration of whether the Amendments are likely to improve the quality of financial reporting is separate from this assessment and is included within the UK long term public good assessment in Section 2.

True and fair view assessment

1.8As noted above, the first adoption criterion set out in Regulation 7(1) of SI 2019/685 requires that an international accounting standard can be adopted only if:

"the standard is not contrary to either of the following principles-

1. an undertaking's accounts must give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss;
2. consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking; [....]”

1.9For the sake of brevity, we refer to our assessment against this endorsement criterion as 'the true and fair view assessment' and to the principles set out in Regulation 7(1)(a) as the ‘true and fair principle'. However, these abbreviated expressions do not imply that our assessment has considered anything other than the full terms of the endorsement criterion set out above.

1.10The duty of the UKEB under Regulation 7(1)(a) is to determine generically, before a standard is applied to a set of accounts, whether that standard is 'not contrary' to the true and fair principle. In other words, it is an ex-ante assessment. We have therefore considered whether the Amendments contain any requirement that would prevent accounts prepared using the Amendments from giving a true and fair view.

1.11Our approach is to determine whether the Amendments are not contrary to the true and fair principle in respect of any of the specific items identified in Regulation 7(1)(a) (namely, the assets, liabilities, financial position and profit or loss) in the context of the preparation of the accounts as a whole. A holistic approach has been taken to this assessment, considering the impact of the Amendments taken as a whole, including its interaction with other UK-adopted international accounting standards.

1.12For the purposes of our assessment, we consider the requirement in IAS 1 for financial statements to 'present fairly the financial position, financial performance and cash flows of an entity'⁵ to be equivalent to the Companies Act 2006 requirement for accounts to give a true and fair view.

1.13Our assessment is separate from the duty of directors under section 393(1) of the Companies Act 2006, which requires directors to be satisfied that a specific set of accounts gives a true and fair view of an undertaking's or group's assets, liabilities, financial position and profit or loss.

[Draft Adoption decision]

1.14[Section 2 of this DECA discusses how the Amendments meet the statutory endorsement criteria set out in this Section 1.

1.15On the basis of these assessments, and subject to any stakeholder feedback, the UKEB [tentatively] concludes that the Amendments meet the statutory endorsement criteria. The UKEB is therefore of the view that it will adopt the Amendments for use in the UK.]

2. Section 2: Description and assessment of the Amendments

UK long term public good

Do the Amendments lead to a significant change in accounting practice?

2.1The UKEB is required to assess whether or not the Amendments are likely to lead to a 'significant change in accounting practice' and therefore meet the criteria for a post-implementation review.

2.2The Amendments to IAS 1 do not fundamentally change the basic requirements in IAS 1 or introduce new principles. They clarify the classification of liabilities and add limited disclosure requirements about non-current liabilities with covenants.

2.3Whilst the above changes will in principle be applicable to most companies that use UK-adopted international accounting standards to produce their accounts, the Amendments are largely a clarification of existing guidance. As a result, the UKEB [tentatively] concludes that the Amendments are not likely to lead to a significant change in accounting practice and do not meet the criteria for a post-implementation review under Regulation 11 in SI 2019/685.

Appendix A: Draft Classification of Liabilities as Current or Non-current Amendments to IAS 1 [2020 Amendments]

Copyright

UK-adopted international accounting standards contain copyright material of the IFRS® Foundation (Foundation) in respect of which all rights are reserved.

Reproduced and distributed by the UK Endorsement Board (“UKEB"), pursuant to the delegation by the Secretary of State in the International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021 No. 609, with the permission of the Foundation within the United Kingdom only. No rights granted to third parties other than as permitted by the Terms of Use (see below) without the prior written permission of the UKEB, and the Foundation.

'UK-adopted international accounting standards' are issued by the UKEB in respect of their application in the United Kingdom and have not been prepared or endorsed by the International Accounting Standards Board.

Terms of Use for Users

1The IFRS Foundation and the UK Endorsement Board (“UKEB”) (pursuant to the delegation by the Secretary of State in the International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021 No. 609), grant users of the UK-adopted international accounting standards' (Users) the permission to reproduce the 'UK-adopted international accounting standards' for

1. the User's Professional Use, or
2. private study and education

Professional Use: means use of 'UK-adopted international accounting standards' in the User's professional capacity in connection with the business of providing accounting services for the purpose of application of IFRS as adopted by the UK for preparation of financial statements and/or financial statement analysis to the User's clients or to the business in which the User is engaged as an accountant.

For the avoidance of doubt, the abovementioned usage does not include any kind of activities that make (commercial) use of the ‘UK-adopted international accounting standards' other than direct or indirect application of the ‘UK-adopted international accounting standards' such as but not limited to commercial seminars, conferences, commercial training or similar events.

2For any application that falls outside Professional Use, Users shall be obliged to contact the UKEB and the IFRS Foundation for a separate individual licence under terms and conditions to be mutually agreed.

3Except as otherwise expressly permitted in this notice, Users shall not, without prior written permission of the UKEB and the Foundation, have the right to license, sublicense, transmit, transfer, sell, rent, or otherwise distribute any portion of the 'UK-adopted international accounting standards' to third parties in any form or by any means, whether electronic, mechanical or otherwise either currently known or yet to be invented.

4Users are not permitted to modify or make alterations, additions or amendments to or create any derivative works from the ‘UK-adopted international accounting standards' save as otherwise expressly permitted in this notice.

5For further details about licensing the IFRS Foundation's intellectual property please contact [email protected]

Amendments to IAS 1 Presentation of Financial Statements - Classification of Liabilities as Current or Non-current

Paragraphs 69, 73, 74 and 76 are amended. Paragraphs 72A, 75A, 76A, 76B and 139U are added. Paragraph 139D is deleted. Headings are added before paragraphs 70, 71, 72A and 76A. Paragraphs 70, 71, 72 and 75 are not amended, but are included for ease of reading. New text is underlined and deleted text is struck through.

Structure and content

Statement of financial position

Current liabilities

69An entity shall classify a liability as current when:

1. it expects to settle the liability in its normal operating cycle;
2. it holds the liability primarily for the purpose of trading;
3. the liability is due to be settled within twelve months after the reporting period; or
4. it does not have an unconditional the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73). Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

An entity shall classify all other liabilities as non-current.

Normal operating cycle (paragraph 69(a))

70Some current liabilities, such as trade payables and some accruals for employee and other operating costs, are part of the working capital used in the entity's normal operating cycle. An entity classifies such operating items as current liabilities even if they are due to be settled more than twelve months after the reporting period. The same normal operating cycle applies to the classification of an entity's assets and liabilities. When the entity's normal operating cycle is not clearly identifiable, it is assumed to be twelve months.

Held primarily for the purpose of trading (paragraph 69(b)) or due to be settled within twelve months (paragraph 69(c))

71Other current liabilities are not settled as part of the normal operating cycle, but are due for settlement within twelve months after the reporting period or held primarily for the purpose of trading. Examples are some financial liabilities that meet the definition of held for trading in IFRS 9, bank overdrafts, and the current portion of non-current financial liabilities, dividends payable, income taxes and other non-trade payables. Financial liabilities that provide financing on a long-term basis (ie are not part of the working capital used in the entity's normal operating cycle) and are not due for settlement within twelve months after the reporting period are non-current liabilities, subject to paragraphs 74 and 75.

72An entity classifies its financial liabilities as current when they are due to be settled within twelve months after the reporting period, even if:

1. the original term was for a period longer than twelve months; and
2. an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are authorised for issue.

Right to defer settlement for at least twelve months (paragraph 69(d))

72AAn entity's right to defer settlement of a liability for at least twelve months after the reporting period must have substance and, as illustrated in paragraphs 73–75, must exist at the end of the reporting period. If the right to defer settlement is subject to the entity complying with specified conditions, the right exists at the end of the reporting period only if the entity complies with those conditions at the end of the reporting period. The entity must comply with the conditions at the end of the reporting period even if the lender does not test compliance until a later date.

73If an entityexpects, and has the discretion, right, at the end of the reporting period, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. However, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing) If the entity has no such right, the entity does not consider the potential to refinance the obligation and classifies the obligation as current.

74When an entity breaches a provision condition of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, after the reporting period and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have an unconditional the right to defer its settlement for at least twelve months after that date.

75However, an entity classifies the liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

75AClassification 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)).

76In respect of loans classified as current liabilities, if If the following events occur between the end of the reporting period and the date the financial statements are authorised for issue, those events are disclosed as non-adjusting events in accordance with IAS 10 Events after the Reporting Period.

1. refinancing on a long-term basis of a liability classified as current (see paragraph 72);
2. rectification of a breach of a long-term loan arrangement classified as current (see paragraph 74); and
3. the granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement ending at least twelve months after the reporting period. classified as current (see paragraph 75); and
4. settlement of a liability classified as non-current (see paragraph 75A).

Settlement (paragraphs 69(a), 69(c) and 69(d))

76AFor the purpose of classifying a liability as current or non-current, settlement refers to a transfer to the counterparty that results in the extinguishment of the liability. The transfer could be of:

1. cash or other economic resources—for example, goods or services; or
2. the entity's own equity instruments, unless paragraph 76B applies.

76BTerms of a liability that could, at the option of the counterparty, result in its settlement by the transfer of the entity's own equity instruments do not affect its classification as current or non-current if, applying IAS 32 Financial Instruments: Presentation, the entity classifies the option as an equity instrument, recognising it separately from the liability as an equity component of a compound financial instrument.

Transition and effective date

139D[Deleted]

139UClassification of Liabilities as Current or Non-current, issued in January 2020 amended paragraphs 69, 73, 74 and 76 and added paragraphs 72A, 75A, 76A and 76B. An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2022 retrospectively in accordance with IAS 8. Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact.

Appendix B: Draft Non-current Liabilities with Covenants Amendments to IAS 1 [2022 Amendments]

Copyright

UK-adopted international accounting standards contain copyright material of the IFRS® Foundation (Foundation) in respect of which all rights are reserved.

Reproduced and distributed by the UK Endorsement Board (“UKEB”), pursuant to the delegation by the Secretary of State in the International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021 No. 609, with the permission of the Foundation within the United Kingdom only. No rights granted to third parties other than as permitted by the Terms of Use (see below) without the prior written permission of the UKEB, and the Foundation.

'UK-adopted international accounting standards' are issued by the UKEB in respect of their application in the United Kingdom and have not been prepared or endorsed by the International Accounting Standards Board.

Terms of Use for Users

1The IFRS Foundation and the UK Endorsement Board (“UKEB”) (pursuant to the delegation by the Secretary of State in the International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021 No. 609), grant users of the UK-adopted international accounting standards' (Users) the permission to reproduce the 'UK-adopted international accounting standards' for

1. the User's Professional Use, or
2. private study and education

Professional Use: means use of 'UK-adopted international accounting standards' in the User's professional capacity in connection with the business of providing accounting services for the purpose of application of IFRS as adopted by the UK for preparation of financial statements and/or financial statement analysis to the User's clients or to the business in which the User is engaged as an accountant.

For the avoidance of doubt, the abovementioned usage does not include any kind of activities that make (commercial) use of the ‘UK-adopted international accounting standards' other than direct or indirect application of the ‘UK-adopted international accounting standards' such as but not limited to commercial seminars, conferences, commercial training or similar events.

2For any application that falls outside Professional Use, Users shall be obliged to contact the UKEB and the IFRS Foundation for a separate individual licence under terms and conditions to be mutually agreed.

3Except as otherwise expressly permitted in this notice, Users shall not, without prior written permission of the UKEB and the Foundation, have the right to license, sublicense, transmit, transfer, sell, rent, or otherwise distribute any portion of the 'UK-adopted international accounting standards' to third parties in any form or by any means, whether electronic, mechanical or otherwise either currently known or yet to be invented.

4Users are not permitted to modify or make alterations, additions or amendments to or create any derivative works from the ‘UK-adopted international accounting standards' save as otherwise expressly permitted in this notice.

5For further details about licensing the IFRS Foundation's intellectual property please contact [email protected]

Amendments to IAS 1 Presentation of Financial Statements - Non-current Liabilities with Covenants

Paragraphs 60, 71, 72A, 74 and 139U are amended. Paragraphs 72B and 139W are added. Paragraph 76ZA is added immediately after paragraph 76. New text is underlined and deleted text is struck through. Paragraphs 69 and 75 are not amended but have been included for ease of reference.

Structure and content

Statement of financial position

Current/non-current distinction

60An entity shall present current and non-current assets, and current and non-current liabilities, as separate classifications in its statement of financial position in accordance with paragraphs 66–76B except when a presentation based on liquidity provides information that is reliable and more relevant. When that exception applies, an entity shall present all assets and liabilities in order of liquidity.

Current liabilities

69An entity shall classify a liability as current when:

1. it expects to settle the liability in its normal operating cycle;
2. it holds the liability primarily for the purpose of trading;
3. the liability is due to be settled within twelve months after the reporting period; or
4. it does not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period.

An entity shall classify all other liabilities as non-current.

Held primarily for the purpose of trading (paragraph 69(b)) or due to be settled within twelve months (paragraph 69(c))

71Other current liabilities are not settled as part of the normal operating cycle, but are due for settlement within twelve months after the reporting period or held primarily for the purpose of trading. Examples are some financial liabilities that meet the definition of held for trading in IFRS 9, bank overdrafts, and the current portion of non-current financial liabilities, dividends payable, income taxes and other non-trade payables. Financial liabilities that provide financing on a long-term basis (ie are not part of the working capital used in the entity's normal operating cycle) and are not due for settlement within twelve months after the reporting period are non-current liabilities, subject to paragraphs 72A 75–74 and 75.

Right to defer settlement for at least twelve months (paragraph 69(d))

72AAn entity's right to defer settlement of a liability for at least twelve months after the reporting period must have substance and, as illustrated in paragraphs 72B75–73–75, must exist at the end of the reporting period. If the right to defer settlement is subject to the entity complying with specified conditions, the right exists at the end of the reporting period only if the entity complies with those conditions at the end of the reporting period. The entity must comply with the conditions at the end of the reporting period even if the lender does not test compliance until a later date.

72BAn entity's right to defer settlement of a liability arising from a loan arrangement for at least twelve months after the reporting period may be subject to the entity complying with conditions specified in that loan arrangement (hereafter referred to as ‘covenants'). For the purposes of applying paragraph 69(d), such covenants:

1. affect whether that right exists at the end of the reporting periodas illustrated in paragraphs 74-75if an entity is required to comply with the covenant on or before the end of the reporting period. Such a covenant affects whether the right exists at the end of the reporting period even if compliance with the covenant is assessed only after the reporting period (for example, a covenant based on the entity's financial position at the end of the reporting period but assessed for compliance only after the reporting period).
2. do not affect whether that right exists at the end of the reporting period if an entity is required to comply with the covenant only after the reporting period (for example, a covenant based on the entity's financial position six months after the end of the reporting period).

74When an entity breaches a covenant condition of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, after the reporting period and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have the right to defer its settlement for at least twelve months after that date.

75However, an entity classifies the liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

76ZAIn applying paragraphs 69–75, an entity might classify liabilities arising from loan arrangements as non-current when the entity's right to defer settlement of those liabilities is subject to the entity complying with covenants within twelve months after the reporting period (see paragraph 72B(b)). In such situations, the entity shall disclose information in the notes that enables users of financial statements to understand the risk that the liabilities could become repayable within twelve months after the reporting period, including:

1. information about the covenants (including the nature of the covenants and when the entity is required to comply with them) and the carrying amount of related liabilities.
2. facts and circumstances, if any, that indicate the entity may have difficulty complying with the covenants—for example, the entity having acted during or after the reporting period to avoid or mitigate a potential breach. Such facts and circumstances could also include the fact that the entity would not have complied with the covenants if they were to be assessed for compliance based on the entity's circumstances at the end of the reporting period.

Transition and effective date

139UClassification of Liabilities as Current or Non-current, issued in January 2020 amended paragraphs 69, 73, 74 and 76 and added paragraphs 72A, 75A, 76A and 76B. An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2024 1 January 2023 retrospectively in accordance with IAS 8. Earlier application is permitted. If an entity applies those amendments for an earlier period after the issue of Non-current Liabilities with Covenants (see paragraph 139W), it shall also apply Non-current Liabilities with Covenants for that period. If an entity applies Classification of Liabilities as Current or Non-current those amendments for an earlier period, it shall disclose that fact.

139WNon-current Liabilities with Covenants, issued in October 2022, amended paragraphs 60, 71, 72A, 74 and 139U and added paragraphs 72B and 76ZA. An entity shall apply:

1. the amendment to paragraph 139U immediately on issue of Non-current Liabilities with Covenants.
2. all other amendments for annual reporting periods beginning on or after 1 January 2024 retrospectively in accordance with IAS 8. Earlier application is permitted. If an entity applies these amendments for an earlier period, it shall also apply Classification of Liabilities as Current or Non-current for that period. If an entity applies Non-current Liabilities with Covenants for an earlier period, it shall disclose that fact

Appendix C: Consolidated Text of 2020 and 2022 Amendments

Copyright

UK-adopted international accounting standards contain copyright material of the IFRS® Foundation (Foundation) in respect of which all rights are reserved.

Reproduced and distributed by the UK Endorsement Board (“UKEB”), pursuant to the delegation by the Secretary of State in the International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021 No. 609, with the permission of the Foundation within the United Kingdom only. No rights granted to third parties other than as permitted by the Terms of Use (see below) without the prior written permission of the UKEB, and the Foundation.

'UK-adopted international accounting standards' are issued by the UKEB in respect of their application in the United Kingdom and have not been prepared or endorsed by the International Accounting Standards Board.

Terms of Use for Users

1The IFRS Foundation and the UK Endorsement Board (“UKEB”) (pursuant to the delegation by the Secretary of State in the International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021 No. 609), grant users of the UK-adopted international accounting standards' (Users) the permission to reproduce the 'UK-adopted international accounting standards' for

1. the User's Professional Use, or
2. private study and education

Professional Use: means use of ‘UK-adopted international accounting standards' in the User's professional capacity in connection with the business of providing accounting services for the purpose of application of IFRS as adopted by the UK for preparation of financial statements and/or financial statement analysis to the User's clients or to the business in which the User is engaged as an accountant.

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AMENDMENTS TO IAS 1 ISSUED IN 2020 AND 2022

This appendix combines the amendments to IAS 1 Presentation of Financial Statements included in Classification of Liabilities as Current or Non-current, issued in January 2020, and Non-current Liabilities with Covenants, issued in October 2022.

Paragraphs 60, 69, 71, 73, 74 and 76 are amended. Paragraphs 72A, 72B, 75A, 76ZA, 76A, 76B, 139U and 139W are added. Paragraph 139D is deleted. Headings are added before paragraphs 70, 71, 72A and 76A. Paragraphs 70, 72 and 75 are not amended but have been included for ease of reading. New text is underlined and deleted text is struck through.

Structure and content

Statement of financial position

Current/non-current distinction

60An entity shall present current and non-current assets, and current and non-current liabilities, as separate classifications in its statement of financial position in accordance with paragraphs 66–76B except when a presentation based on liquidity provides information that is reliable and more relevant. When that exception applies, an entity shall present all assets and liabilities in order of liquidity.

Current liabilities

69An entity shall classify a liability as current when:

1. it expects to settle the liability in its normal operating cycle;
2. it holds the liability primarily for the purpose of trading;
3. the liability is due to be settled within twelve months after the reporting period; or
4. it does not have the an unconditional right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73). Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

An entity shall classify all other liabilities as non-current.

Normal operating cycle (paragraph 69(a))

70Some current liabilities, such as trade payables and some accruals for employee and other operating costs, are part of the working capital used in the entity's normal operating cycle. An entity classifies such operating items as current liabilities even if they are due to be settled more than twelve months after the reporting period. The same normal operating cycle applies to the classification of an entity's assets and liabilities. When the entity's normal operating cycle is not clearly identifiable, it is assumed to be twelve months.

Held primarily for the purpose of trading (paragraph 69(b)) or due to be settled within twelve months (paragraph 69(c))

71Other current liabilities are not settled as part of the normal operating cycle, but are due for settlement within twelve months after the reporting period or held primarily for the purpose of trading. Examples are some financial liabilities that meet the definition of held for trading in IFRS 9, bank overdrafts, and the current portion of non-current financial liabilities, dividends payable, income taxes and other non-trade payables. Financial liabilities that provide financing on a long-term basis (ie are not part of the working capital used in the entity's normal operating cycle) and are not due for settlement within twelve months after the reporting period are non-current liabilities, subject to paragraphs 72A75–74 and 75.

72An entity classifies its financial liabilities as current when they are due to be settled within twelve months after the reporting period, even if:

1. the original term was for a period longer than twelve months, and
2. an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are authorised for issue.

Right to defer settlement for at least twelve months (paragraph 69(d))

72AAn entity's right to defer settlement of a liability for at least twelve months after the reporting period must have substance and, as illustrated in paragraphs 72B75–73–75, must exist at the end of the reporting period.

72BAn entity's right to defer settlement of a liability arising from a loan arrangement for at least twelve months after the reporting period may be subject to the entity complying with conditions specified in that loan arrangement (hereafter referred to as ‘covenants'). For the purposes of applying paragraph 69(d), such covenants:

1. affect whether that right exists at the end of the reporting periodas illustrated in paragraphs 74-75if an entity is required to comply with the covenant on or before the end of the reporting period. Such a covenant affects whether the right exists at the end of the reporting period even if compliance with the covenant is assessed only after the reporting period (for example, a covenant based on the entity's financial position at the end of the reporting period but assessed for compliance only after the reporting period).
2. do not affect whether that right exists at the end of the reporting period if an entity is required to comply with the covenant only after the reporting period (for example, a covenant based on the entity's financial position six months after the end of the reporting period).

73If an entity expects, and has the discretion, right, at the end of the reporting period, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. If the entity has no such right However, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as current.

74When an entity breaches a covenant provision condition of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, after the reporting period and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have the an unconditional right to defer its settlement for at least twelve months after that date.

75However, an entity classifies the liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

75AClassification 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)).

76In respect of loans classified as current liabilities, if If the following events occur between the end of the reporting period and the date the financial statements are authorised for issue, those events are disclosed as non-adjusting events in accordance with IAS 10 Events after the Reporting Period.

1. refinancing on a long-term basis of a liability classified as current (see paragraph 72);
2. rectification of a breach of a long-term loan arrangement classified as current (see paragraph 74); and
3. the granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement classified as current (see paragraph 75); and ending at least twelve months after the reporting period.
4. settlement of a liability classified as non-current (see paragraph 75A).

76ZAIn applying paragraphs 69–75, an entity might classify liabilities arising from loan arrangements as non-current when the entity's right to defer settlement of those liabilities is subject to the entity complying with covenants within twelve months after the reporting period (see paragraph 72B(b)). In such situations, the entity shall disclose information in the notes that enables users of financial statements to understand the risk that the liabilities could become repayable within twelve months after the reporting period, including:

1. information about the covenants (including the nature of the covenants and when the entity is required to comply with them) and the carrying amount of related liabilities.
2. facts and circumstances, if any, that indicate the entity may have difficulty complying with the covenants—for example, the entity having acted during or after the reporting period to avoid or mitigate a potential breach. Such facts and circumstances could also include the fact that the entity would not have complied with the covenants if they were to be assessed for compliance based on the entity's circumstances at the end of the reporting period.

Settlement (paragraphs 69(a), 69(c) and 69(d))

76AFor the purpose of classifying a liability as current or non-current, settlement refers to a transfer to the counterparty that results in the extinguishment of the liability. The transfer could be of:

1. cash or other economic resources—for example, goods or services; or
2. the entity's own equity instruments, unless paragraph 76B applies.

76BTerms of a liability that could, at the option of the counterparty, result in its settlement by the transfer of the entity's own equity instruments do not affect its classification as current or non-current if, applying IAS 32 Financial Instruments: Presentation, the entity classifies the option as an equity instrument, recognising it separately from the liability as an equity component of a compound financial instrument.

Transition and effective date

139D[Deleted]

139UClassification of Liabilities as Current or Non-current, issued in January 2020 amended paragraphs 69, 73, 74 and 76 and added paragraphs 72A, 75A, 76A and 76B. An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2024 1 January 2023 retrospectively in accordance with IAS 8. Earlier application is permitted. If an entity applies those amendments for an earlier period after the issue of Non-current Liabilities with Covenants (see paragraph 139W), it shall also apply Non-current Liabilities with Covenants for that period. If an entity applies Classification of Liabilities as Current or Non-current those amendments for an earlier period, it shall disclose that fact.

139WNon-current Liabilities with Covenants, issued in October 2022, amended paragraphs 60, 71, 72A, 74 and 139U and added paragraphs 72B and 76ZA. An entity shall apply:

1. the amendment to paragraph 139U immediately on issue of Non-current Liabilities with Covenants.
2. all other amendments for annual reporting periods beginning on or after 1 January 2024 retrospectively in accordance with IAS 8. Earlier application is permitted. If an entity applies these amendments for an earlier period, it shall also apply Classification of Liabilities as Current or Non-current for that period. If an entity applies Non-current Liabilities with Covenants for an earlier period, it shall disclose that fact

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