On The Future of the Classification of Liabilities

The amendments to IAS 11 are meant to advance consistency in execution and explain the prerequisites on deciding whether a liability is current or non-current.

Under current IAS 1 prerequisites, organizations classify liability as current when they do not have an unconditional right to defer settlement of the liability for at least twelve months after the end of the reporting period. The IASB lifted the prerequisite for a right to be unconditional. Rather, rights to defer settlement need substance and are found toward the finish of the reporting period.

There is not much direction on the best way to decide if a right has substance. Management might need use their own discretion in the above.

However, the current prerequisite to disregard management when settling and classifying a liability remains the same.

If the liability has the right defer settlement for a minimum of twelve months after the reporting period then it may be grouped under non-currents. The IASB established that right to defer can only be done if the organization conforms to conditions indicated in the loan agreement at the close of the reporting period, regardless of whether the lender complies later. 

This is likely to affect how organizations characterize rollover facilities as some will now be classified as non-current. Therefore, the grouping of term loans, rollover facilities, etc might be aligned.

Convertible debt may be current as the settlement of liabilities encompasses moving the organisation’s equity instrument to the counterparty.

Considering this, the corrections explain how an organization groups a liability that incorporates a counterparty conversion choice, which could be determined as either equity or a liability separately from the liability component under IAS 322. For the most part, if liability has any conversion alternatives that include an exchange of the organization’s own equity instruments, it would influence its characterization as current or non-current. The IASB has now explained that an organization can disregard just those conversion options that are perceived as equity.

Accordingly, organisations may need to reconsider the arrangement of liabilities that can be settled by the transfer of the organisation’s convertible debt, etc.

The alterations apply reflectively for annual reporting periods starting on or after January the 1^st 2022.

Organisations should incorporate IAS 83 disclosures in the next yearly financial statements.

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