Wednesday 3 November 2021
Here’s a question. How often do you refer to IAS 1? Weekly, monthly, just once a year. Never, maybe? Well, correct me if I’m wrong, but I’d suggest the answer, for most of us, will be a variation-on-a-theme of, ‘not often’. If so, that’s reasonable and understandable, maybe. The way in which IAS 1 achieves its objective means, for most, there’s no day-to-day urgency to refer to its requirements. That ‘need’ doesn’t exist with Presentation of Financial Statements in the way that it might with a recognition and measurement standard, such as IFRS 9 for example, where we’re faced with the challenge of ‘new items’ that we might have to report on. During a recent presentation I described IAS 1 as “like the CPU within a computer, chugging away in the background, doing ‘its thing’ without us consciously concerned about the thing it’s doing, or how it’s doing it”. Ok, maybe not the best analogy ever given, but I’m going to stick with it. Afterall, IAS 1 is important, arguably fundamentally so, to our whole set of ‘reporting operations’, yet we don’t tend to look into more deeply, ‘below the bonnet’ if you like, unless something is not working, or is just “not quite right”. So, imagine then a financial reporting world without IAS 1. There would be no Income Statement, no Statement of Financial Position, no Other Comprehensive Income, no accounting policy notes. Or, rather there would be, but with so many variations that little value, little assurance, little relevance would be the result.
Maybe then it’s rather good news that the IASB does refer to IAS 1, and often. In fact, the subject of the standard is central to one of the Board’s key financial reporting projects, one that’s focused on what entities should disclose, and how they should do it, all to help ensure continuing relevance for the reader. The Primary Financial Statements project is a significant initiative, and we shouldn’t be too surprised to see a new variant of IAS 1 emerge within the next few years. We’ll leave a discussion of that topic to a later article. Here, we’re going to concentrate on something that’s far more current.
And that choice of words is deliberate:
Current - or to place the word within a relevant context - current or non-current.
Now, let’s give it a more specific focus and that is to do with the presentation of liabilities - current or non-current. It’s that distinction the Board’s been deliberating on, referring to it often, since 2013, or thereabouts. Now, one could argue that the decision as to whether a liability is presented as current over non-current (or vice versa) is something that could be covered off in a timeframe somewhat shorter than eight years (and counting). Yet, such is the importance of this distinction to the presentation of the balance sheet, for its impact on important KPI’s, for the meeting (or not) of debt covenants and the like, that for the Board time is not the most important issue; correct (or what they believe to be ‘correct’) presentation is. The result of this near decade-long endeavour is an amendment to IAS 1, currently slated to be effective from January 2023 (but please, ‘watch this space’).
In summary, IAS 1’s classification as current is based on whether the liability forms part of the operating cycle, or is a traded item, or is due to be settled within twelve months, or whether a right to defer settlement beyond twelve months is not in existence at the reporting date. And of course, if it’s not current, then its non-current - a statement of fact, but one that might be determined by the application of judgement (possibly). Let’s be aware of this; the terminology (as summarised above) is not changing. What’s being amended is a rewording of certain paragraphs that support the definition of ‘current’, specifically with respect to financial liabilities and more specifically with respect to a clarification as to what really is meant by the words ‘a right to defer settlement beyond twelve months’.
In the Board’s view, there’s been too much room for interpretation here, especially with respect to management’s expectation regarding possible deferral of settlement and whether a curing of debt in breach of covenants might arise in the post balance sheet period.
So, lets refer directly to the IASB’s announcement re the amendment:
“The amendments 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.
- 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
- clarify how lending conditions affect classification; and
- clarify requirements for classifying liabilities an entity will or may settle by issuing its own equity instruments.
We’re going to focus on a) which in simple terms requires an assessment of whether a right to defer exists; i.e., if the right is there, then non-current is the classification, and if it’s not there, then it’s current. That appears straightforward, with no room for ambiguity, no need for judgement, surely? That’s the theory and was the Board’s aim. Further, management’s intentions, or expectations, are no longer a consideration.
Well, let’s put it into practice.
We’ll end Part I of this article with a quiz, testing those ‘clarified’ criteria. After you’ve had a go, click on the link below to see the answers, as per the amended IAS 1. When we return for Part II we’ll assess if all is as it first appears, or instead whether there’s more of the devil and the detail that must be considered.
Could it be that through trying to improve IAS 1, it’s the Board that now urgently (and inadvertently) needs to refer again, to its very own standard? Maybe.
Remember, for an up-to-date view on any of the Board’s issued standards look at the schedule of upcoming courses, whether that’s face-to-face, or our virtual offering.
Click here to read Part 2 of this article
Click here to read Part 3 of this article
Click here to read Part 4 of this article