Our letter is in response to the IASB's Exposure Draft 2015/1 'Classification of Liabilities – Proposed amendments to IAS 1'
The proposals seek to clarify that only rights in existence at the reporting date should affect the classification of a liability, and to make clear the link between the settlement of a liability and the outflow of resources from the entity.
In our letter, we voice our support for the Board's objectives and the guiding principle that only rights in place at the reporting date should affect the classification of a liability. While we believe that the proposed amendments will provide additional clarity, we also believe they could benefit from further refinement in a number of areas and that additional illustrative examples should be provided to address some of the challenges that have arisen in practice, including:
- that covenant breaches occurring between the end of the reporting period and the date the financial statements are authorised for issue are non-adjusting events with no impact on classification at the end of the reporting period;
- whether non-current classification is appropriate if a lender agrees before the end of the reporting period to waive a covenant breach on the condition that the borrower agrees to insert an additional covenant test (or some other related requirement) within twelve months after the end of the reporting period; and
- whether, in situations similar to that described in the preceding bullet point, an entity should consider the likelihood that it will be able to rectify the breach and/or meet the additional covenant test.
- we note that the proposed removal of the word 'unconditional' from IAS 1.69(d) could weaken the existing requirement and lead to increased diversity in practice as entities seek to avoid classifying liabilities as current; and
- we believe that the proposed amendments could be improved by providing guidance with respect to the definition of a 'rollover' and encourage the Board to provide a formal link to the extinguishment guidance in IFRS 9 and IAS 39.
Ultimately, we feel that classification of liabilities is a topic which would benefit from a more comprehensive review in due course.