amendments to ias 1 presentation of financial statements

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• Classifying liabilities as current or non-current

IAS 1 amendments effective January 2024

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Global IFRS Institute  

Right to defer settlement must exist at reporting date and have substance

Liabilities with covenants – Classification criteria clarified and new disclosures

Convertible debt may become current

Effective date – Applies retrospectively from January 2024

Gabriela Kegalj

Partner, Department of Professional Practice, Audit

KPMG in Canada

Email [email protected]

Under the amendments to IAS 1 Presentation of Financial Statements the classification of certain liabilities as current or non-current may change (e.g. convertible debt). In addition, companies may need to provide new disclosures for liabilities subject to covenants.

The amendments will apply from 1 January 2024. However, companies need to consider whether their upcoming annual financial statements will need to include disclosures under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors  of the possible future impacts. 

We welcome the final amendments on classifying liabilities, particularly the removal of the so-called ‘hypothetical’ covenant test. Companies need to revisit their loan arrangements now to determine whether the classification of their liabilities (e.g. convertible debt) will change, and prepare to provide new disclosures about certain covenants.

Gabriela Kegalj KPMG global IFRS presentation leader

Under existing IAS 1 requirements, companies classify a liability as current when they do not have an unconditional right to defer settlement for at least 12 months after the reporting date. The International Accounting Standards Board (IASB) has removed the requirement for a right to be unconditional and instead now requires that a right to defer settlement must exist at the reporting date and have substance.

Similar to existing requirements in IAS 1, the classification of liabilities is unaffected by management’s intentions or expectations about whether the company will exercise its right to defer settlement or will choose to settle early. 

A company will classify a liability as non-current if it has a right to defer settlement for at least 12 months after the reporting date. This right may be subject to a company complying with conditions (covenants) specified in a loan arrangement. 

After reconsidering certain aspects of the 2020 amendments 1 , the IASB reconfirmed that only covenants with which a company must comply on or before the reporting date affect the classification of a liability as current or non-current. 

Covenants with which the company must comply after the reporting date (i.e. future covenants) do not affect a liability’s classification at that date. However, when non-current liabilities are subject to future covenants, companies will now need to disclose information to help users understand the risk that those liabilities could become repayable within 12 months after the reporting date. See Example 1 .

The amendments also clarify how a company classifies a liability that can be settled in its own shares – e.g. convertible debt. 

When a liability includes a counterparty conversion option that involves a transfer of the company’s own equity instruments, the conversion option is recognised as either equity or a liability separately from the host liability under IAS 32 Financial Instruments: Presentation . The IASB has now clarified that when a company classifies the host liability as current or non-current, it can ignore only those conversion options that are recognised as equity.

Companies may have interpreted the existing IAS 1 requirements differently when classifying convertible debt. Therefore, convertible debt may become current (see Example 2 ). 

The amendments apply retrospectively for annual reporting periods beginning on or after 1 January 2024, with early application permitted. They also specify the transition requirements for companies that may have early-adopted the previously issued but not yet effective 2020 amendments.

1  Classification of Liabilities as Current or Non-current (Amendments to IAS 1), published in January 2020

© 2024 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

IAASB Issues Guidance on How Amendments Made to IFRS Standard IAS 1 Impact the ISAs

The International Auditing and Assurance Standards Board (IAASB) has published new guidance to help users understand the impact on the International Standards on Auditing (ISAs) due to narrow-scope amendments made to International Accounting Standard (IAS) 1 , Presentation of Financial Statements by the International Accounting Standards Board (IASB).

While the IAASB remains framework neutral when developing the ISAs, it considers financial reporting framework developments that may affect the ISAs, such as changes to the International Financial Reporting Standards (IFRS). Amendments to IAS 1 and the Impact on the ISAs: Disclosure of Material Accounting Policy Information , among other matters, provides users with guidance on how to address the effect of the amendments on a number of illustrative auditor reports throughout the ISAs that assume, as part of the fact pattern, that the financial statements are prepared by the management of the entity in accordance with IFRSs.

The new guidance does not amend or override the ISAs, the texts of which alone are authoritative. Reading the new guidance is not a substitute for reading the ISAs.

The Disclosure Initiative – IASB amends accounting policy requirements

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The IASB issued amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements.

The IASB's amendments provide guidance and examples to help entities apply materiality judgements to accounting policy disclosures. This publication summarises the amendments.

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Keeping up with the Financial Instruments with Characteristics of Equity (FICE)

T he International Accounting Standards Board (IASB) released an Exposure Draft (ED) in November 2023 to address ambiguities in IAS 32 and to enhance comparability in financial statements.

With financial markets changing rapidly and innovation taking place, financial instruments with both debt and equity features have become more complex and prevalent. IAS 32 – Financial Instruments: Presentation classification of these instruments is not always clear cut, resulting in diversity in practice and reduced comparability of financial statements.

To tackle these challenges, the IASB published its Exposure Draft: Financial Instruments with Characteristics of Equity . This move aims to address the classification challenges posed by complex financial instruments that possess both debt and equity features. These challenges have led to inconsistencies and reduced comparability in financial statements under the current IAS 32 standard.

Let’s unpack the proposals and considerations raised by the fraternity on the exposure draft.

The effect of relevant laws and regulations

The IASB proposes that only contractual rights and obligations that are enforceable by laws or regulations, and that are in addition to those created by relevant laws or regulations, should be considered in the classification of the financial instrument. This clarification aims to streamline the classification process but could lead to inconsistencies across different jurisdictions with varying regulatory requirements.

Fixed-for-fixed condition

If a contract will be settled by an entity with a fixed number of its own equity instruments in exchange for a fixed amount of cash or another financial asset, it qualifies as an equity instrument. In practice it isn’t clear whether the condition would be violated if there is variation in the consideration or the number of the entity’s own equity instruments.

The proposal firstly clarifies that the fixed-for-fixed condition may be achieved if the currency of the consideration is denominated in the entity’s functional currency. Entities with shares in multiple currencies may have to consider whether they continue to meet the fixed-for-fixed conditions on existing complaint instruments that are denominated in a currency that is different from its functional currency.

Secondly, variability in the consideration is permitted per the proposals if it is limited to preservation and passage-of-time adjustments. The exposure draft provides new guidance and examples on these adjustments but on the face of it these adjustments could add complexity in assessing the fixed-for-fixed condition.

Obligations to purchase an entity’s own equity instruments

Contracts obligating an entity to purchase its own equity instruments, including forward purchase contracts and written put options, are classified as financial liabilities.

The proposals clarify when to derecognise equity instruments subject to these purchase obligations and mandates that it should be removed from a component of equity other than share capital or non-controlling interest. Mixed views have been expressed on whether this debit should preclude non-controlling interests.

The proposed measurement of the financial liability should ignore the probability and estimated timing of the redemption and it should be remeasured in profit or loss. Financial instrument measurement is governed by IFRS 9 – Financial Instruments and there is concern that the proposals may create disparity with the IFRS 9 general measurement principles by ignoring timing and probability.

These amendments would apply equally to obligations that will be settled using a different type of own equity instruments.

Contingent settlement provisions

For instruments with settlement contingent on uncertain future events, the proposals clarify that these should be classified as financial liabilities unless the settlement provisions are non-genuine, or settled like a financial liability only in liquidation.

The proposals provide guidance on the meaning of non-genuine and liquidation and clarifies that the measurement of the financial liability should ignore the probability and estimated timing of the contingent event.

Shareholder discretion

In distinguishing between a financial liability and equity instrument, an entity considers whether it has an unconditional right to avoid delivering cash or another financial asset. In some instances, settlement is at the discretion of the shareholders and there is ambiguity whether these shareholder decisions can be treated as entity decisions. The proposal prescribes new factors to consider when evaluating the shareholder decisions, although in essence the assessment would still require significant judgement.

Reclassification of financial liabilities and equity instruments

IAS 32 does not include any guidance on reclassification of financial liabilities and equity instruments after initial recognition. Under the proposals. a reclassification would be permitted when the substance of a contract changes because of a change in circumstance external to the contract for example, a change in an entity’s functional currency or a change in an entity’s group structure. The proposed amendments also specify how the reclassifications should be accounted for.

Investors seek for more transparency about an entity’s capital structure. To respond, the IASB proposes to improve IFRS 7 by introducing new disclosure that focuses on the nature and priority of claims on liquidation, terms and conditions of financial instruments, potential dilution of ordinary shares, financial instruments with an obligation for a company to purchase its own equity instruments, and other proposed disclosure. The amendments to IAS 1 target the distribution of profits among equity holders and requires additional information about amounts attributable to ordinary shareholders in the financial statements.

Enhancing the quality of disclosures is always welcomed, however the sheer volume of the proposed disclosure is quite onerous. The relevance of some of the proposed disclosure is doubtful for example the usefulness of the liquidation disclosure for highly regulated industries which may pose challenges for multinational entities that operate in various jurisdictions.

Transition and effective date

The IASB has proposed a fully retrospective approach to the amendments limited to one comparative period. This approach could pose practical implementation challenges with entities having to reassess numerous contracts that may prove to be difficult. There is no proposed effective date as this will be decided once the IASB has considered the feedback on the proposals.

I hope to have shed some light on the exposure draft. Generally, these much-awaited proposals are welcomed, and we look forward to further developments from the IASB.

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In May 2024, the International Accounting Standards Board (IASB) issued Amendments to the Classification and Measurement of Financial Instruments which amended IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures.

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