Non-current Liabilities with Covenants – ASGC comments on IASB Exposure Draft

On 21 March 2022, the ASCG has submitted its comment letter on the IASB ED/2021/9 Non-current Liabilities with Covenants to the IASB.

In this Exposure Draft, the IASB proposed amendments to IAS 1 to clarify the requirements on the classification of liabilities as current or non-current (we reported). The proposed amendments would clarify the classification of non-current liabilities that are subject to the entity complying with conditions (such as covenants), that are not tested until a future date after the end of the reporting period (e.g., at a future interim reporting date).

In our comment letter, we generally agree with the IASB’s proposal to require that conditions with which an entity must comply within twelve months after the reporting period have no effect on whether an entity has, at the end of the reporting period, a right to defer settlement of a liability for at least twelve months. However, we question whether in some situations a classification as non-current warrants a fair presentation of an entity’s financial position, for example, if an entity breaches a condition shortly after the reporting date.

We also agree in principle with the proposal that additional disclosures in the notes are useful to inform users of financial statements about the risk that a liability classified as non-current may become repayable within twelve months after the reporting date. We therefore welcome that the IASB proposes additional disclosures abouts covenants. However, as it is likely that many of an entity’s liabilities are subject to compliance with covenants, we recommend the IASB limit the scope of the disclosures to situations in which there is a substantial risk that the entity cannot comply with the conditions.

Further, we do not agree with the proposal to require entities to present separately, in their statement of financial position, liabilities that are subject to the entity complying with covenants, as it is likely that almost all of an entity’s non-current liabilities would be presented within that proposed new line item, thus limiting the informational value of this separate line item.

Details are outlined in the ASCG comment letter, which is available on the ASCG’s website.