Changes to current/non-current classification of loans and other liabilities

Currently, under AASB 101.69(d), an entity needs an 'unconditional right' to defer settlement of the liability for at least twelve months after the reporting period before it can be classified as non-current.  This is an extremely high test to pass and has resulted in many loans being classified as current (most loan arrangements are rarely unconditional).  
 
The IASB has amended IAS 1 (the international equivalent of AASB 101) and has deleted the term 'unconditional'.  The requirement is now:
"69 An entity shall classify a liability as current when:
(d) 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" 
 
Additional guidance has been provided such that:
72A 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 73–75, must exist at the end of the reporting period. 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. 
 
73 If an entity has the right, at the end of the reporting period, to roll over an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. If the entity has no such right, the entity does not consider the potential to refinance the obligation and classifies the obligation as current.
 
Please note, this doesn't change the situation where a loan covenant is breached prior to the end of the reporting period and the breach is waived after year-end but prior to signing the audit report.  This will continue to result in a current classification of the loan.
 
Application date: This amendment was approved by the AASB at its March meeting.  The amendments are effective for annual reporting periods beginning on or after 1 January 2022. Earlier application is permitted.
 
For more information visit the IFRS website or contact us to discuss.