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Blog Article

...Let’s Start at the Very Beginning... (Part III)

Tuesday 23 November 2021

...“Previously in International Reporting Rescue”...

At the start of the previous episode, our hypothetical IASB Technical Team, tired from months, nay years, of deliberating, had been recalled to their stations, tasked with looking at the proposed amendments to IAS 1 just one more time, one last check – in practice, do their changes really work?

Followers of this series – all episodes are available on demand – will remember how the driver for amending IAS 1 was a desire to bring greater clarity to the determination of liabilities as either Current or Non-current.

So, to summarise the story so far:

According to the originally revised paragraph 69 (d), an entity classifies a liability as current when “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”.

This all looks very clear. The classification is based, quite simply, on the existence or not of a ‘right to defer settlement’. So, what’s the problem? Or, to use the words of the IASB, “What problem is the Board trying to solve?” It is this; what if 69 (d)’s right to defer rests on the entity meeting certain lending conditions (‘covenants’) within 12 months of the reporting date? Well, if that’s the fact pattern then the entity would, as per the original amendment, refer to supporting paragraph 72 (A) to assess the existence of the right;

“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”.

And the problem? As we alluded to last time, according to a strict reading of 72 (A), if deferral rests upon the meeting of conditions at the reporting date, and those conditions are not tested until after the reporting date, then it’s impossible to determine whether the conditions are being met at the reporting date, and hence the liability would always fail the “right to defer” test and the liability would be presented as current. Phew!

This was not necessarily the intention of the Board.

The apparent impossibility to pass the “test” was evidenced in three Cases used by the Committee in the light of concerns raised by stakeholders. We assessed the fact patterns of these in the previous article. In each, the Committee concluded that the right to defer did not exist at the reporting date, and as such each should be presented as a current liability. Click here to see how each conclusion was reached. You may also want to refer back to each case in the light of the Board’s new proposals.

And the stakeholder concerns? Comments such as these, received by the board, highlight for many the issue ‘hiding’ within 72 (A) as originally drafted:

“The 2020 amendments require a company to classify a liability as current even when, at the reporting date, it has no contractual obligation to repay the liability within 12 months”.

“The requirements take no account of the design of conditions negotiated to reflect a company’s specific circumstances”

So, what has the Technical Team been up to? How have they addressed stakeholder concerns and what was the result of their ‘one last check’? Well, from what’s been produced it looks like the team really did pull an ‘all-nighter’, the pizza’s ordered in, a regular run for coffee throughout the night as the early hours turned to dawn. On 19th November the Board issued an Exposure Draft, with proposals to (re) amend IAS 1 (aka “the amendment to the amendment”)

And here’s the essence of the team’s latest endeavours:

Paragraph 69 (d) remains unaltered.

72 (A) has been re-worked:

“An 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 72B – 75, must exist at the end of the reporting period.”

72 (A) is now supported by new 72 (B);

“An entity’s right to defer settlement of a liability for at least twelve months after the reporting period may be subject to the entity complying with specified conditions (the covenants). For the purposes of applying paragraph 69(d), such conditions:

  1. affect whether that right exists at the end of the reporting period if an entity is required to comply with the condition on or before the end of the reporting period. This is the case even if compliance with the condition is assessed only after the reporting period (for example, a condition based on the entity’s financial position as of 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 condition only within twelve months after the reporting period (for example, a condition based on the entity’s financial position six months after the end of the reporting period).”

…and if 72 (B) (b) applies, then so does new 76ZA;

“When an entity classifies liabilities subject to the conditions described in paragraph 72B(b) as non-current, the entity shall:

  1. present such liabilities separately in its statement of financial position. The entity shall use a description that indicates that the non-current classification is subject to compliance with conditions within twelve months after the reporting period.
  2. disclose information in the notes that enables users of financial statements to assess the risk that the liability could become repayable within twelve months, including:
    1. the conditions with which the entity is required to comply (including, for example, their nature and the date on which the entity must comply with them);
    2. whether the entity would have complied with the conditions based on its circumstances at the end of the reporting period; and
    3. whether and how the entity expects to comply with the conditions after the end of the reporting period.”

And the net effect of these revisions?

New 72 (B) (b) means that conditions with which an entity must comply within twelve months after the reporting period do not affect classification of a liability as current or non-current. For the concerned stakeholders this is the ‘big bit’. Instead, entities would present separately, and disclose information about, non-current liabilities subject to such conditions, as per that new paragraph 76ZA above.

The Board concluded that the proposed amendments would “improve the information an entity provides when its right to defer settlement of a liability is subject to compliance with conditions”, and as such address those stakeholder concerns.

So, here’s a question. How does the Technical Team’s “amendment to the amendment” affect the presentation of those three cases used by the Committee introduced last time? Would the presentation change in the light of the new proposals? Why not have another look at that article and see what you think.

And here’s a thought. What do you think? Do you believe these new proposals constitute a significant change? Is this amendment an improvement on the original proposal? Or does more disclosure and further subdivision on the balance sheet create greater confusion rather than greater clarity?

The Exposure Draft is now open to comments and the Board will consider them in deciding whether to proceed with the proposed amendments. Why not let us know what you think about “the problem the Board is trying to solve”. We’re always happy to receive communications from readers of the blog with thoughts on current accounting issues, or maybe suggestions for areas of future training.

Join us next week for the final instalment of this epic, where we’ll consider potential comment points for the Board. Even better, come join us in London on our upcoming IFRS Update and Application Briefing. We’re back face-to-face. IAS 1’s bound to be discussed. We can’t necessarily promise pizza, but for sure they’ll be limitless coffee and loads to comment on.

See you there.

Click here to read Part 1 of this article

Click here to read Part 2 of this article

Click here to read Part 4 of this article

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