The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. AASB 101 Presentation of Financial Statements, sets out overall requirements for the presentation of financial statements and guidelines for their structure.
The Australian Accounting Standards Board has issued AASB 2020-1 to make amendments to AASB 101. The purpose of this amendment is to assist entities to determine whether debt and other liabilities with an uncertain settlement date should be classified as current or non-current. It also provides clarity over the classification requirements for when a company might settle debt by converting it into equity. This amendment does not bring anything new to the Standard, it merely clarifies certain areas relating to classification of liabilities and the classification requirements for debt conversion.
To determine if a liability is to be classified as current or non-current, an entity should consider:
- when the trade liability is normally expected to settle; or
- whether it will be settled within the next 12 months after the reporting date; or more specifically
- whether the entity has the right to defer settlement at year end, for at least 12 months.
The amendment specifies that the right to defer settlement must have substance and if certain conditions exists, these conditions must be met by the end of the reporting period. It would not be necessary for the entity to determine if the lender has tested compliance of the specified conditions at reporting date.
Below is a practical example to illustrate the impact of the amendment:
- Company A has a loan with Lender X. The loan has specified conditions including financial covenants. During the reporting period, Company A breaches those covenants, which triggers the loan to become due and payable at that date.
- Lender X provides Company A with a period of grace for at least 12 months after the reporting period for Company A to rectify the breach, during which the lender cannot demand immediate repayment.
This authority is given by Lender X after the end of the reporting period, before the authorisation of financial statements for issue.
|This will require Company A to classify the loan as current, as Company A had no right to defer its settlement for at least 12 months at the end of the reporting period.|
This authority is given by Lender X before the end of the reporting period.
|This will require Company A to classify the loan as non-current, as Company A had the right to defer its settlement for at least 12 months at the end of the reporting period.|
Lender X provides this authority with a 12-month grace period from date of authority given, which is two months prior to the end of the reporting period.
|This will require Company A to classify the loan as current, as Company A did not have the right to defer its settlement for at least 12 months at the end of the reporting period.|
This Standard applies to annual reporting periods beginning on or after 1 January 2022, with early application being permitted.
To read more on this new Standard, please click here.