Non-current Liabilities with Covenants

Overview

The International Accounting Standards Board (IASB) has recently issued an exposure draft: Non-current Liabilities with Covenants (the ED) which amends IAS 1 Presentation of Financial Statements (IAS 1).

Reporting entities are required to apply additional judgement when determining whether loans or other long-term debt arrangements with conditions (often described as covenants), should be treated as current or non-current liabilities in the statement of financial position. Loan covenants, if breached by the borrower, permit the lender to demand repayment before the loan’s due date.

IAS 1 requires an entity to classify a liability as non-current only if the entity has a right to defer settlement of the liability for at least 12 months after the reporting date. However, this right may be subject to an entity complying with covenants after the reporting date. If the entity fails to comply with these future covenants, the debt may become repayable within 12 months.

In 2020, the IASB issued amendments to clarify aspects of how an entity classifies a liability as current or non-current — Classification of Liabilities as Current or Non-current (2020 amendments). The 2020 amendments were intended to clarify how an entity assesses whether it has the right to defer settlement of a liability when that right is subject to specified conditions within twelve months after the reporting period.

The ED proposes narrow scope amendments to help address constituent concerns relating to the application of the 2020 amendments.

Proposed amendments 

The proposed amendments:

• specify that conditions with which an entity must comply within twelve months after the reporting period do not affect the classification of a liability as current or non-current;
• provide for additional presentation and disclosure requirements for non-current liabilities subject to covenants; and
• defer the effective date of the 2020 amendments from 1 January 2023 to no earlier than 1 January 2024.

Additional guidance

The ED provides that an entity would treat a loan or other long-term debt arrangement as non-current, if the liability could become repayable within twelve months after the reporting period:

1. at the discretion lender or a third party —for example, when a loan is callable at any time without cause; or
2. if an uncertain future event or outcome occurs (or does not occur) and its occurrence (or non-occurrence) is unaffected by the entity’s future actions—for example, when the liability is a financial guarantee or insurance contract liability.

Additional disclosures

The ED proposes additional disclosures when an entity classifies liabilities subject to covenants as non‑current. In these circumstances, the entity is required to:

• present such liabilities separately from other non-current liabilities in its statement of financial position; and
• disclose information about the covenants in the notes to the financial statements, including their nature, whether the entity would have complied with them based on its circumstances at the reporting date, and how the entity expects to comply with the covenants after the end of the reporting period.

The proposals are expected to help investors assess whether non-current liabilities with covenants could become repayable within 12 months.

 

Your feedback is important

We encourage you to read the ED and to share your comments with us.

The XRB is committed to adopting international accounting standards in the for-profit sector. Generally, once a standard has been issued by the IASB, the XRB then issues the New Zealand equivalent standard without further public consultation.

It is important that we receive comments from preparers, readers of for-profit financial statements and other stakeholders at this time. This will help the XRB when representing New Zealand’s views to the IASB during the development of this international standard.

The XRB will consider separately any proposed disclosure concessions for Tier 2 for-profit entities.

Your comments will help us ensure that the standard provides for appropriate reporting outcomes for reporting entities in Aotearoa New Zealand.

 

Accessing the Consultation Document

IASB ED/2021/9:

Commenting on the Proposals

This is your opportunity to comment on the proposals.

Please send your comments—both formal and informal—to the XRB by 2 February 2022, using the secure upload form below.

All comments received will be considered by the New Zealand Accounting Standards Board (NZASB) of the XRB and will form part of the feedback we share with the IASB.

You could also choose to send your comments directly to the IASB (due by 21 March 2022), by clicking on the following link https://www.ifrs.org/projects/open-for-comment/.  When submitting directly, we encourage you to also send a copy of your submission to the XRB (through the upload form below).

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Submissions closed on 2 February 2022