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Long-term debt with covenants: amendments to IAS 1

Author: ICAEW Insights

Published: 14 Nov 2022

Amendments to IAS 1 Presentation of Financial Statements have been issued to clarify that the classification of liabilities as current or non-current should be based on rights that exist at the end of the reporting period.

IAS 1 Presentation of Financial Statements currently states that liabilities can only be classified as non-current if, at the reporting date, the entity has the right to defer settlement of that liability for at least 12 months. 

In some cases, covenants attached to long-term debt will impact an entity’s right to defer settlement. The amendments issued by the International Accounting Standards Board (IASB) clarify how an entity should assess the right to defer settlement where such covenants exist. 

Where an entity is required to comply with the covenant on or before the end of the reporting period, the covenant affects whether the right to defer exists at the reporting date and therefore affects the classification of current or non-current. This is the case even if the assessment of compliance with the covenant occurs after the reporting period. An example being a covenant based on the entity’s financial position as at the end of the reporting period but assessed for compliance only after the reporting period.

A covenant that an entity is required to comply with only after the reporting date does not affect whether the right to defer exists at the end of the reporting period. Therefore it does not impact the classification of the liability at the reporting date as current or non-current. For example, a covenant that is based on the entity’s financial position six months after the end of the reporting period. 

As a result, an entity might classify a liability as non-current even though it may become repayable within 12 months after the reporting date, if the company fails to comply with a covenant in that 12-month period. 

Where liabilities are classified as non-current but the right to defer is subject to complying with covenants within 12 months of the reporting date, the amendments require additional disclosure. The disclosures are aimed at helping users to assess the risk of non-current liabilities becoming repayable within 12 months and include:

  • the nature of the covenants and when the entity is required to comply with them; 
  • the carrying amount of the related liabilities; and 
  • the facts and circumstances that indicate the entity may have difficulty complying with the covenants.

The amendments are effective for annual periods beginning on or after 1 January 2024, with earlier application permitted. 

More guidance on the requirements of IAS 1 and resources relating to the Standard can be found on our IAS 1 Standards Tracker page.

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