Revised rules governing the classification of liabilities as current or non-current come into force for financial reporting periods ending on or after 1 January 2024 (i.e. years ending on or after December 2024). The changes particularly focus on how to classify liabilities that have “rights to defer settlement” and may require additional disclosures when these rights are used to justify a non-current classification.

Comparative information is required to be prepared under the new rules, so now is the time to start investigating the impact.

What are the new requirements?

The changes revise paragraph 69(d) of / AASB 101 / NZ IAS 1 Presentation of Financial Statements to require that a liability must be classified as “current” if the entity “does not have the right at the end of the reporting period to defer settlement of the liability for at least 12 months after the reporting date.”

Further guidance on assessing the “right to defer settlement for at least 12 months” is contained in revised paragraphs 72-76. The changes mean that rights no longer need to be unconditional, are unaffected by management’s intentions and are only impacted by conditions of a covenant that an entity must comply with before or at year end. Where covenants have been breached, waivers or grace periods granted by the lender must have been agreed to before the end of the period, and last for at least twelve months, if a non-current classification is to be considered.

The amendments include extra disclosures to provide users with more information about the rights used to justify a non-current decision and the risks involved if circumstances change. Where covenants are to be tested after the balance date, the entity must provide details on the nature and amount of the covenant, when the entity has to comply with it, and any known information impacting that future compliance.

Who is impacted?

Since AASB 101 / NZ IAS 1 is the principal standard driving disclosure in financial statements, the change could impact most entities whose financial statements apply accounting standards. In Australia this will include Tier 1 and 2 entities (as the AASB also made equivalent changes to AASB 1060), and special purpose financial statements if they apply AASB 101 (as many lodging entities do). In New Zealand the changes impact Tier 1 and Tier 2 for-profit entities.

Therefore, all entities, especially those with loan arrangements subject to covenants should be investigating the terms and conditions of their liabilities to see whether the new rules affect the classification that has been applied. If so, the effects will need to be adjusted to the first financial report prepared for a year beginning on or after 1 January 2024. The changes apply retrospectively, and so adjusted comparatives will be required as well. In addition, the disclosures from paragraph 30 of AASB 108 / NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors about the impact of “issued but not operative standards may be relevant” ahead of June 2024 year ends.

Where can I find more details?

The IASB’s changes to IAS 1 were made in 2 stages, in 2020 and 2022 which required both Australia and New Zealand to issue separate amending standards in both those years. However, both are operative from 1 January 2024 and so compiled versions of AASB 101 and NZ IAS 1 incorporating all the amendments are now available.

Additional information can be found on the IASB website in its project pages on Classification of liabilities as current or non-current and Non-current liabilities with covenants and in recent publications of the major firms including:

• BDO – Entities may have to reclassify their borrowings 
• EY – IAS 1 amendments effective from 1 January 2024
• KPMG – Classifying liabilities as current or non-current 
• PwC – December 2023 reporting essentials