Classification of liabilities with covenants: clarification of the scope of the amendment to IAS 1 proposed in November 2021

In November 2021, the International Accounting Standards Board (IASB) published an exposure draft of proposed limited-scope amendments to IAS 1, supplementing the initial exposure draft published in January 2020. The November 2021 amendments focused specifically on how covenants affect the classification of a liability as current or non-current, and the disclosures required on this topic.

Keywords: Mazars, Thailand, IFRS, IAS 1, IASB

15 August 2022

In June 2022, after analysing the comment letters received, the IASB tentatively decided:

to confirm that the classification of a liability as current or non-current is not affected if the right to defer settlement of the liability for at least 12 months is subject to compliance with covenants after the reporting period, while limiting the scope of this paragraph to loan arrangements;
not to require separate presentation of non-current liabilities with covenants in the balance sheet, in contrast to what was proposed in the exposure draft;
to confirm that entities must disclose in the notes the nature of covenants and the date on which the entity must comply with them, together with any objective evidence that the entity may have difficulty complying with the covenants at the specified date, when this is relevant. Such evidence could include steps taken by the entity to avoid breaching the covenants before or after the reporting date, or evidence that the entity would not have been able to comply with the covenants at the reporting date.

The amendments to IAS 1, which should be taken together with the January 2020 amendments, shall be applied retrospectively and may be early adopted. The effective date of the amendments will be determined at a future meeting, but the IASB has already decided that it will be no earlier than reporting periods commencing on or after 1 January 2024.