SSOURCEStandardsetting APLUS Areliabilitiessubjecttoconditionsclassifiedascurrentornon-current?
AsummaryoftheInstitute’sresponsetotheIASBExposureDraftED/2021/9Non-currentLiabilitieswithCovenants–ProposedamendmentstoIAS1 InternationalountingStandard(IAS)1PresentationofFinancialStatementsspecifiestherequirementsofhowentitiesclassifyliabilitiesascurrentornon-current. InNovember2021,theInternationalountingStandardsBoard(IASB)publishedanexposuredraft(ED)toproposeamendmentstoIAS1inresponsetotheconcernsraisedbyitsstakeholdersabouttheesandpotentialconsequencesofClassificationofLiabilitiesasCurrentorNon-current(2020amendments)andtherelatedIFRSInterpretationsCommitteeTentativeAgendaDecision. Theproposalsspecifythatconditionswithwhichanentityplywithin12monthsafterthereportingperioddonotaffecttheclassificationofaliabilityascurrentornon-current.Instead,entitieswouldseparatelypresentanddiscloseinformationrelatedtothesenon-currentliabilitiessubjecttoconditions.Inaddition,theproposalswouldalsodefertheeffectivedateofthe2020amendments. TheInstitute’sStandardSettingDepartmentrespondedtothisEDthismonth.ThisarticlesummarizesourmentsontheED.TheInstitute’ssubmissionisavailableonourwebsite. Overall,wesupporttheIASB’sefforttoaddresstheconcernsraisedbystakeholders.Havingsaidthat,weconsiderthattheprincipleintroducedintheEDfortheclassificationofliabilitiesthataresubjecttospecifiedconditionswithin12monthsafterthereportingperiodisnotclearandhasinadvertentlycreatedissueswiththeintroductionofparagraphs72Band72CoftheED. Thenotionof“unaffectedbytheentity’sfutureactions” Wehavesignificantconcernsoverthenotionof“unaffectedbytheentity’sfutureactions”ascurrentlydraftedinparagraph72C(b).WeconsiderthattheEDisnotyetclearastohowanentityassessesthenatureandextentofits“abilitytoaffect.”GiventhatthisisanewconceptandtheEDprovideslimitedapplicationguidance,thismayleadtoariskofwideinterpretation. Inaddition,questionswereraisedastomoncovenants,e.g.changeofcontrolandessfulinitialpublicofferingsareconsideredtobe“conditions”orevents“unaffectedbytheentity’sfutureactions,”andwhetherparagraph72Bor72C(b)shouldbeappliedinthosecases.Wealsonotethatparagraphs72Band72Carenotnecessarilymutuallyexclusiveandthisisproblematicastheywouldleadtodifferentclassificationesonthesamefactsandcircumstances. Inlightoftheabove,westronglymendthattheIASB:•testtheproposalswithreal-life examplesandassesswhethertheresultingesareinlinewiththeIASB’sintentionandachievetheED’sobjectives;•clarifytheinteractionbetweenparagraphs72Band72C;and•clarifythenotionof“unaffectedbytheentity’sfutureactions”andtheterm“conditions”usingillustrativeexamples. Classificationoffinancialguaranteecontractsandinsurancecontractliabilities Wedisagreewiththeexamplesoffinancialguaranteecontractsandinsurancecontractliabilitiesstatedinparagraph72C(b)asthiswouldimplythatalltheseinstrumentsmustbeclassifiedascurrentliabilitiesapplyingtheproposal.Weconsiderthatclassifyingtheentireinsurancecontractliabilitiesascurrentliabilitiesdoesnotreflectthebusinesssubstanceoftheinsurancecontracts,isinconsistentwiththerequirementsinInternationalFinancialReportingStandard(IFRS)17InsuranceContracts,anddoesnotproviderelevantinformationtousersoffinancialstatements.Wealsodonotconsiderthatallfinancialguaranteecontractsshouldbeclassifiedascurrentliabilitiesinallcircumstances. ordingly,wemendtheIASBconsiderseekingfeedbackfromtheinsuranceindustryregardingtheclassificationofinsurancecontractliabilitiesandtheinteractionbetween theproposalandIFRS17,andreconsiderwhetherclassifyingallfinancialguaranteecontractsandinsurancecontractliabilitiesascurrentliabilitiesisappropriate. Separatepresentationrequirement WesuggesttheIASBremovetheproposedseparatepresentationrequirementinparagraph76ZA(a)becausesucharequirementseemstocontradicttheprinciple-basednatureofIFRSs.Weconsiderthedisaggregationrequirementsinparagraph55ofIAS1alreadysetouttheprinciplesforpresentingadditionallineitemsinthestatementoffinancialpositionwhenitisrelevanttoanunderstandingofanentity’sfinancialposition.Webelievethatidentifyingnon-currentliabilitiessubjecttospecifiedconditionsthroughdisclosuresinthenotestothefinancialstatementswouldbesufficientforuserstoidentifyandassesstheriskofthoseliabilities. Disclosurerequirements Wedonotsupporttheproposeddisclosureregardingpliancewithcovenants.Weconsiderthatthecostsofpreparingsuchdisclosuremayoutweighitsbenefitstotheusersoffinancialstatements,thatitrequiresdisclosureofanentity’sfuturebehaviour,whichisarguablybeyondtheremitofastandardsetterandthatitmaypotentiallytriggerlegalobligationifthefinaleisdifferentfromthatdisclosedinthefinancialstatements. Hence,wemendtheIASBreplacesuchdisclosurewithkeyfactorsthatmayaffecttheabilityofanentityplyingwiththeconditionsafterthereportingdate.Weconsiderthatthesuggesteddisclosureswouldbeobjectiveandprovidemoreusefulinformationforusersoffinancialstatementstomaketheirowndecisions. ThisarticlewascontributedbyJoniKanCPAandKatherineLeungCPA,AssociateDirectorsoftheInstitute’sStandardSettingDepartment.Visitour“What’snew”webpageforourlatestpublications,andfollowusonLinkedInforingactivities. March202235