IAS 1 Narrow-scope Amendments 2020 and 2022

On 31 October 2022 the IASB published amendments to IAS 1 Non-current Liabilities with Covenants (the 2022 Amendments). These amendments address stakeholders’ concerns about the classification of liabilities as current or non-current when applying requirements introduced in January 2020, namely the amendments to IAS 1 Classification of Liabilities as Current or Non-current (the 2020 Amendments) that are not yet in effect.

The 2020 and 2022 Amendments taken together are focused on clarifying the classification of liabilities as current or non-current. So, while quite narrow and limited in scope, they have the potential to impact virtually every company preparing financial statements in accordance with international accounting standards. The classification of liabilities communicates important information to users about the likely pressures on the working capital of companies and can impact important metrics relating to solvency and liquidity.

Both sets of Amendments now have an effective date of 1 January 2024 and neither has been adopted for use in the UK. The Board had not been established when the 2020 Amendments were developed but it influenced the development of the 2022 Amendments.

Given the nature of the amendments the UKEB believes that joint assessment of both amendments together and, if appropriate, joint adoption of the 2020 and 2022 Amendments as a package, reflects the operation of the revised IAS 1 after amendment, provides the most relevant approach to assessing the endorsement criteria in Section 7 of Statutory Instrument (SI) 2019/685 International Accounting Standards and European Public Limited-Liability Company  (Amendment etc.) (EU Exit) Regulations 2019.

Background

2022 Amendments: Non-current Liabilities with Covenants

These amendments were published on 31 October 2022 and aim to improve the information companies provide about long-term debt with covenants. The amendments responded to stakeholders’ feedback on the classification of debt as current or non-current when applying requirements introduced in 2020 that are not yet in effect.

These amendments are effective annual reporting periods beginning on or after 1 January 2024, with early adoption only permitted if the 2020 Amendments are early adopted at the same time.

IAS 1 requires a company to classify debt 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.

The amendments to IAS 1 specify that covenants to be complied with after the reporting date do not affect the classification of debt as current or non-current at the reporting date. Instead, the amendments require a company to disclose information about these covenants in the notes to the financial statements.

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.

The UKEB responded to the IASB’s Exposure Draft ED/2021/9 Non-current Liabilities with Covenants (Proposed Amendments to IAS 1) . The UKEB project page can be found here.

2020 Amendments: Classification of Liabilities as Current or Non-Current

These amendments related to this project Classification of Liabilities as Current or Non-Current (Amendments to IAS 1) were published by the IASB in January 2020. These amendments were originally effective for annual reporting periods beginning on or after 1 January 2022, with early application permitted.

In July 2020, the IASB deferred the effective date of the Amendments to IAS 1 to annual reporting periods beginning on or after 1 January 2023 with early application permitted.

Subsequently, the publication of the 2022 Amendments deferred the effective date of the Amendments to IAS 1 to annual reporting periods beginning on or after 1 January 2024, with early adoption only permitted if the 2022 Amendments are early adopted at the same time.

The Amendments to IAS 1 Presentation of Financial Statements, clarify a criterion in IAS 1 for classifying a liability as non-current: the requirement for an entity to have the right to defer settlement of the liability for at least 12 months after the reporting period.

These amendments:

  • specify that an entity’s right to defer settlement must exist at the end of the reporting period;
  • clarify that classification is unaffected by management’s intentions or expectations about whether the entity will exercise its right to defer settlement of a liability;
  • clarify how lending conditions affect classification; and
  • clarify requirements for classifying liabilities an entity will or may settle by issuing its own equity instruments.
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