On 31 October, the International Accounting Standards Board (IASB) published 'Non-current Liabilities with Covenants (Amendments to IAS 1)' to clarify how the conditions with which an entity must comply within twelve months after the reporting period affect the classification of a liability. The amendments are effective for reporting periods beginning on or after 1 January 2024.
In 2020, the IASB issued amendments to IAS 1 titled Classification of Liabilities as Current or Non-current (see our article IASB Issued Amendments to IAS 1 to Clarify the Classification of Liabilities). In the 2020 amendments, among other changes, the IASB clarified that the classification of liabilities as current or non-current is based on rights that exist at the end of the reporting period.
The 2020 amendments specified how an entity assesses whether it has the right to defer settlement of a liability when that right is subject to compliance with specified conditions (in the amendments referred to as ‘covenants’) within twelve months after the reporting period. Because there were concerns about the outcome of applying the 2020 amendments to such covenants, the IASB decided to address these concerns and amend IAS 1 again.
The amendments to IAS 1 Non-current Liabilities with Covenants (the 2022 amendments) specify that only covenants that an entity is required to comply with on or before the end of the reporting period affect the entity’s right to defer settlement of a liability for at least twelve months after the reporting date (and therefore must be considered in assessing the classification of the liability as current or non-current). Such covenants affect whether the right exists at the end of the reporting period, even if compliance with the covenant is assessed only after the reporting date (e.g. a covenant based on the entity’s financial position at the reporting date that is assessed for compliance only after the reporting date).
The IASB also specifies that the right to defer settlement is not affected if an entity only has to comply with a covenant after the reporting period. However, if the entity’s right to defer settlement of a liability is subject to the entity complying with covenants within twelve months after the reporting period, an entity discloses information that enables users of financial statements to understand the risk of the liabilities becoming repayable within twelve months after the reporting period. This would include information about the covenants (including the nature of the covenants and when the entity is required to comply with them), the carrying amount of related liabilities and facts and circumstances, if any, that indicate that the entity may have difficulties complying with the covenants.
Transition and effective date
The 2022 amendments are applied retrospectively in accordance with IAS 8 for annual reporting periods beginning on or after 1 January 2024. Earlier application of the 2022 amendments is permitted. If an entity applies the 2022 amendments for an earlier period, it is also required to apply the 2020 amendments early.
At the same time, the IASB aligns the effective date of the 2020 amendments to 1 January 2024 (they were originally effective from 1 January 2023). An entity that applies the 2020 amendments after the publication of the 2022 amendments is required to also apply the 2022 amendments for that period.