(b) it is held primarily for the purpose of trading;
(c) it is expected to be realised within twelve months after the end of the reporting
period; or
(d) it is cash or a cash equivalent (as defined in IAS 7, see Chapter 36 at 1.1) unless it is
restricted from being exchanged or used to settle a liability for at least twelve
months after the end of the reporting period. [IAS 1.66].
As an exception to this, deferred tax assets are never allowed to be classified as current.
[IAS 1.56].
Current assets include assets (such as inventories and trade receivables) that are sold,
consumed or realised as part of the normal operating cycle even when they are not
expected to be realised within twelve months after the reporting period. Current assets
also include assets held primarily for the purpose of being traded, for example, some
financial assets that meet the definition of held for trading in IFRS 9 – Financial
Instruments – and the current portion of non-current financial assets. [IAS 1.68].
3.1.4 Current
liabilities
IAS 1 requires a liability to be classified as current when it satisfies any of the following
criteria, with all other liabilities classified as non-current. The criteria for classifying a
liability as current are:
(a) it is expected to be settled in the entity’s normal operating cycle (discussed
at 3.1.1 above);
(b) it is held primarily for the purpose of trading;
(c) it is due to be settled within twelve months after the end of the reporting period; or
(d) the entity does not have an unconditional right to defer settlement of the liability
for at least twelve months after the end of the reporting period. Terms of a liability
that could, at the option of the counterparty, result in its settlement by the issue of
equity instruments do not affect its classification. [IAS 1.69].
Presentation of financial statements and accounting policies 123
The requirements at (d) above are discussed by the IASB in its Basis for Conclusions
which can be summarised as follows. According to the Conceptual Framework,
conversion of a liability into equity is a form of settlement. The Board concluded,
as part of its improvements project in 2007, that classifying a liability on the basis
of the requirements to transfer cash or other assets rather than on settlement better
reflects the liquidity and solvency position of an entity. In response to comments
received, the Board decided to clarify that the exception to the unconditional right
to defer settlement of a liability for at least twelve months criterion in (d) above
only applies to the classification of a liability that can, at the option of the
counterparty, be settled by the issuance of the entity’s equity instruments. Thus the
exception does not apply to all liabilities that may be settled by the issuance of
equity. [IAS 1.BC 38L-P].
Notwithstanding the foregoing, deferred tax liabilities are never allowed to be classified
as current. [IAS 1.56].
In an agenda decision of November 2010 the Interpretations Committee reconfirmed
(d) above by stating that a debt scheduled for repayment after more than a year which
is, however, payable on demand of the lender is a current liability.
The standard notes that some current liabilities, such as trade payables and some
accruals for employee and other operating costs, are part of the working capital used in
the entity’s normal operating cycle. Such operating items are classified as current
liabilities even if they are due to be settled more than twelve months after the end of
the reporting period. [IAS 1.70].
However, neither IAS 19 – Employee Benefits – nor IAS 1 specifies where in the
statement of financial position an asset or liability in respect of a defined benefit plan
should be presented, nor whether such balances should be shown separately on the
face of the statement or only in the notes – this is left to the judgement of the
reporting entity (see 3.1.5 below). When the format of the statement of financial
position distinguishes current assets and liabilities from non-current ones, the
question arises as to whether this split needs also to be made for defined benefit plan
balances. IAS 19 does not specify whether such a split should be made, on the grounds
that it may sometimes be arbitrary. [IAS 19.133, BC200]. In practice few, if any, entities
make this split.
Some current liabilities are not settled as part of the normal operating cycle, but are due
for settlement within twelve months after the end of the reporting period or held
primarily for the purpose of being traded. Examples given by the standard are some (but
not necessarily all) financial liabilities that meet the definition of held for trading in
accordance with IFRS 9, bank overdrafts, and the current portion of non-current
financial liabilities, dividends payable, income taxes and other non-trade payables.
Financial liabilities that provide financing on a long-term basis (and are not, therefore,
part of the working capital used in the entity’s normal operating cycle) and are not due
for settlement within twelve months after the end of the reporting period are non-
current liabilities. [IAS 1.71].
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The assessment of a liability as current or non-current is applied very strictly in IAS 1.
In particular, a liability should be classified as current:
(a) when it is due to be settled within twelve months after the end of the reporting
period, even if:
(i) the original term was for a period longer than twelve months; and
(ii) an agreement to refinance, or to reschedule payments, on a long-term basis is
completed after the period end and before the financial statements are
authorised for issue (although disclosure of the post period end refinancing
would be required); [IAS 1.72, 76] or
(b) when an entity breaches a provision of a long-term loan arrangement on or
before the period end with the effect that the liability becomes payable on
demand. This is the case even if the lender agreed, after the period end and
before the authorisation of the financial statements for issue, not to demand
payment as a consequence of the breach (although the post period end
agreement would be disclosed). The meaning of the term ‘authorised for issue’ is
discussed in Chapter 34 at 2.1.1. The standard explains that the liability should be
classified as current because, at the period end, the entity does not have an
unconditional right to defer its settlement for at least twelve months after that
date. [IAS 1.74, 76]. However, the liability would be classified as non-current if the
lender agreed by the period end to provide a period of grace ending at least
twelve months after the reporting period, within which the entity can rectify the
breach and during which the lender cannot demand immediate repayment.
[IAS 1.75].
The key point here is that for a liability to be classified as non-current requires that the
entity has at the end of the reporting period an unconditional right to defer its settlement
for at least twelve months thereafter. Accordingly, the standard explains that liabilities
would be non-current if an entity ex
pects, and has the discretion, to refinance or roll
over an obligation for at least twelve months after the period end under an existing loan
facility, even if it would otherwise be due within a shorter period. However, when
refinancing or rolling over the obligation is not at the discretion of the entity the
obligation is classified as current. [IAS 1.73].
Some common scenarios involving debt covenants are illustrated in the following example.
Example 3.1:
Determining whether liabilities should be presented as current or
non-current
Scenario 1
An entity has a long-term loan arrangement containing a debt covenant. The specific requirements in the debt
covenant have to be met as at 31 December every year. The loan is due in more than 12 months. The entity
breaches the debt covenant at or before the period end. As a result, the loan becomes payable on demand.
Scenario 2
Same as scenario 1, but the loan arrangement stipulates that the entity has a grace period of 3 months to rectify
the breach and during which the lender cannot demand immediate repayment.
Presentation of financial statements and accounting policies 125
Scenario 3
Same as scenario 1, but the lender agreed not to demand repayment as a consequence of the breach. The entity
obtains this waiver:
(a) at or before the period end and the waiver is for a period of more than 12 months after the period end;
(b) at or before the period end and the waiver is for a period of less than 12 months after the period end;
(c) after the period end but before the financial statements are authorised for issue.
Scenario 4
An entity has a long-term loan arrangement containing a debt covenant. The loan is due in more than 12 months.
At the period end, the debt covenants are met. However, circumstances change unexpectedly and the entity
breaches the debt covenant after the period end but before the financial statements are authorised for issue.
As discussed in Chapter 50 at 4.4.9, IFRS 7 requires the following disclosures for any loans payable
recognised at the reporting date:
• details of any defaults during the period of principal, interest, sinking fund, or redemption terms;
• the carrying amount of the loans payable in default at the reporting date; and
• whether the default was remedied, or the terms of the loans payable were renegotiated, before the
financial statements were authorised for issue.
If, during the period, there were breaches of loan agreement terms other than those described above, the same
information should be disclosed if those breaches permitted the lender to demand accelerated repayment (unless
the breaches were remedied, or the terms of the loan were renegotiated, on or before the reporting date).
As noted at 5.5 below, IAS 1 requires certain disclosures of refinancing and rectification of loan agreement
breaches which happen after the end of the reporting period and before the accounts are authorised for issue.
The table below sets out whether debt is to be presented as current or non-current and whether the above
disclosures are required.
Scenario
Scenario
Scenario
Scenario
Scenario Scenario
1
2
3(a)
3(b)
3(c) 4
At the period end, does the
no
no
yes
no
no yes
entity have an unconditional
right to defer the settlement of
the liability for at least
12 months?
current
current
non-
current
current non-
Classification of the liability
current
current
Are the above IFRS 7
yes
yes
no
yes
yes no
disclosures required?
Are the disclosures in IAS 1
no
no
no
no
yes no
required?
3.1.5
Information required on the face of the statement of financial
position
IAS 1 does not contain a prescriptive format or order for the statement of financial position.
[IAS 1.57]. Rather, it contains two mechanisms which require certain information to be
shown on the face of the statement. First, it contains a list of specific items for which this
is required, on the basis that they are sufficiently different in nature or function to warrant
separate presentation. [IAS 1.54, 57]. Second, it stipulates that: additional line items (including
the disaggregation of those items specifically required), headings and subtotals should be
presented on the face of the statement of financial position when such presentation is
relevant to an understanding of the entity’s financial position. [IAS 1.55]. Clearly this is a
126 Chapter
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highly judgemental decision for entities to make when preparing a statement of financial
position, and allows a wide variety of possible presentations. The judgement as to whether
additional items should be presented separately is based on an assessment of:
(a) the nature and liquidity of assets;
(b) the function of assets within the entity; and
(c) the amounts, nature and timing of liabilities. [IAS 1.58].
IAS 1 indicates that the use of different measurement bases for different classes of assets
suggests that their nature or function differs and, therefore, that they should be
presented as separate line items. For example, different classes of property, plant and
equipment can be carried at cost or revalued amounts in accordance with IAS 16 –
Property, Plant and Equipment. [IAS 1.59].
The face of the statement of financial position should include line items that present the
following amounts: [IAS 1.54]
(a) property, plant and equipment;
(b) investment
property;
(c) intangible
assets;
(d) financial assets (excluding amounts shown under (f), (i) and (j));
(e) groups of contracts within the scope of IFRS 17 – Insurance Contracts – that are
assets arising from each of:
(i) insurance contracts; and
(ii) reinsurance
contracts;
(f) investments accounted for using the equity method;
(g) biological
assets;
(h) inventories;
(i) trade and other receivables;
(j) cash and cash equivalents;
(k) the total of assets classified as held for sale and assets included in disposal groups
classified as held for sale in accordance with IFRS 5;
(l) trade and other payables;
(m) provisions;
(n) groups of contracts within the scope of IFRS 17 that are liabilities arising from each of:
(i) insurance contracts; and
(ii) reinsurance
contracts;
(o) financial liabilities (excluding amounts shown under (l) and (m));
(p) liabilities and assets for current tax, as defined in IAS 12;
(q) deferred
tax
liabilities and deferred tax assets, as defined in IAS 12;
(r) liabilities included in disposal groups classified as held for sale
in accordance with
IFRS 5;
(s) non-controlling
interests,
presented within equity; and
(t) issued capital and reserves attributable to owners of the parent.
Presentation of financial statements and accounting policies 127
The standard notes that items above represent a list of items that are sufficiently
different in nature or function to warrant separate presentation on the face of the
statement of financial position. In addition:
(a) line items should be included when the size, nature or function of an item or
aggregation of similar items is such that separate presentation is relevant to an
understanding of the entity’s financial position; and
(b) the descriptions used and the ordering of items or aggregation of similar items
may be amended according to the nature of the entity and its transactions, to
provide information that is relevant to an understanding of the entity’s financial
position. For example, a financial institution may amend the above descriptions
to provide information that is relevant to the operations of a financial institution.
[IAS 1.57].
As noted above, when relevant to an understanding of financial position, additional line items
and subtotals should be presented. Regarding subtotals, IAS 1 requires that they should:
(a) be comprised of line items made up of amounts recognised and measured in
accordance with IFRS;
(b) be presented and labelled in a manner that makes the line items that constitute the
subtotal clear and understandable;
(c) be consistent from period to period (see 4.1.4 below); and
(d) not be displayed with more prominence than the subtotals and totals required in
IFRS for the statement of financial position. [IAS 1.55A, BC38.G].
The distinction between trade and financial liabilities in certain supplier finance
arrangements is discussed in Chapter 48 at 6.5.
3.1.6
Information required either on the face of the statement of financial
position or in the notes
IAS 1 requires further sub-classifications of the line items shown on the face of the
statement of financial position to be presented either on the face of the statement or in
the notes. The requirements for these further sub-classifications are approached by the
standard in a similar manner to those for line items on the face of the statement of
financial position. There is a prescriptive list of items required (see below) and also a
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