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By David R. Jones
Feb. 10 — Whether an entity's debt is classified as current or non-current would hinge in part on the entity's rights at the end of a reporting period under a proposal the International Accounting Standards Board issued Feb. 10.
The proposed measure is part an exposure draft, ED/2015/1, the board published to make several narrow-scope amendments to International Accounting Standard 1: Presentation of Financial Statements.
“The amendments aim at a more general approach to the classification of liabilities under IAS 1 based on the contractual arrangements in place at the reporting date,” the London-based IASB said in a Feb. 10 statement.
The proposal also would spell out that an entity must classify a liability as current if:
• it expects to settle the liability in its normal operating cycle;
• it holds the liability primarily for the purpose of trading;
• the liability is slated to be settled within 12 months after the reporting period concludes; or
• it lacks the right at the end of the reporting period to defer settlement of the liability for at least 12 months after 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,” according to the ED.
All other liabilities would have to be classified as non-current, the ED said.
Further, the ED would add a provision that defines a settlement, in classifying a liability as current or non-current, as the “transfer to the counterparty of cash, equity instruments” or other assets or services.
This is designed to clarify the connection between the settlement of a liability and the outflow of resources from an entity, the board said.
The ED, though not containing a proposed effective date, calls for the amendments to be applied retrospectively, with early application allowed.
The ED's publication follows a 2012 IASB proposal to amend IAS 1.
Under this proposal, if an entity expected—and had the discretion—to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan facility with the same lender, on the same or similar terms, it would have been required to classify the obligation as non-current, “even if it would otherwise be due within a shorter period,” the IASB said.
The board, however, in 2013 decided not to approve the amendment, instead choosing to pursue narrow-scope changes to IAS 1.
In addition, IASB chose to exclude from the ED a provision on the impact of events occurring after a reporting period, such as an entity's breach of covenant or early repayment, a Deloitte analysis noted.
Comments on the ED must be submitted to the IASB by June 10, 2015.
The IASB said it “is not requesting comments on matters in IAS 1 that are not addressed in this Exposure Draft.”
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The exposure draft is available at http://www.ifrs.org/Current-Projects/IASB-Projects/IAS-1-classification-liabilities/Exposure-Draft-February-2015/Documents/ED-Classification-of-Liabilities-Amdments-to-IAS-1-February-2015.pdf
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