Topic 101 - Presentation of Financial Statements

This topic includes FAQs relating to the following IFRS standards, IFRIC Interpretations and SIC Interpretations:

IAS 1 Presentation of Financial Statements
IFRIC 7 Apply the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies
IFRIC 17 Distributions of Non-Cash Assets to Owners
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

 

Other resources

  • IFRS At a Glance by standard is available here

 

Sub-topic within this main topic are set out below, with links to IFRS Interpretation Committee agenda decisions and BDO IFRS FAQs relating to that sub-topic below each sub-topic:

Sub-topic Number Sub-topic and Related FAQ
101.1 Scope and definitions
101.2 Financial statements - purpose, complete set and general features
  • 101.2.1.1
101.3 Going concern
  • 101.3.1.1
  • 101.3.1.2
101.4 Materiality and aggregation
101.5 Offsetting
101.6 Comparative information and consistency of presentation
101.7 Statement of financial position
  • 101.7.1.1
  • 101.7.1.2
101.8 Classification of liabilities as current or non-current
  • 101.8.1.1
  • 101.8.1.2
  • 101.8.2.1
  • 101.8.2.2
  • 101.8.2.3
  • 101.8.2.4
  • 101.8.2.5
  • 101.8.2.6
  • 101.8.2.7
  • 101.8.2.8
  • 101.8.2.9
  • 101.8.2.10
  • 101.8.2.11
  • 101.8.2.12
  • 101.8.2.13
  • 101.8.2.14
  • 101.8.2.15
101.9 Structure and content- Statement of profit or loss and other comprehensive income
  • 101.9.1.1
  • 101.9.1.2
  • 101.9.1.3
101.10 Statement of changes in equity
101.11 Notes
  • 101.11.1.1
101.12 Other issues

 

 

FAQ#

Title

Text of FAQ

101.2.1.1

IFRIC Agenda Decision - Issues related to the application of IAS 1

May 2014 - The Interpretations Committee received a request to clarify the application of some of the presentation requirements in IAS 1. The submitter expressed a concern that the absence of definitions in IAS 1 and the lack of implementation guidance give significant flexibility that may impair the comparability and understandability of financial statements. The submitter provided examples in the following areas:

(a)

presentation of expenses by function;

(b)

presentation of additional lines, headings and subtotals;

(c)

presentation of additional statements or columns in the primary statements; and

(d)

application of the materiality and aggregation requirements.

The Interpretations Committee observed that a complete set of financial statements is comprised of items recognised and measured in accordance with IFRS.

The Interpretations Committee noted that IAS 1 addresses the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. It also noted that while IAS 1 does permit flexibility in presentation, it also includes various principles for the presentation and content of financial statements as well as more detailed requirements. These principles and more detailed requirements are intended to limit the flexibility such that financial statements present information that is relevant, reliable, comparable and understandable.

The Interpretations Committee observed that securities regulators, as well as some members of the Interpretations Committee, were concerned about the presentation of information in the financial statements that is not determined in accordance with IFRS. They were particularly concerned when such information is presented on the face of the primary statements. The Interpretations Committee noted that it would be beneficial if the IASB’s Disclosure Initiative considered what guidance should be given for the presentation of information beyond what is required in accordance with IFRS.

Consequently, the Interpretations Committee determined that it should not propose an Interpretation nor an amendment to a Standard and consequently decided not to add this issue to its agenda.

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101.3.1.1

IFRIC Agenda Decision - Going concern disclosure

July 2010 - The Committee received a request for guidance on the disclosure requirements in IAS 1 on uncertainties related to an entity’s ability to continue as a going concern.

How an entity applies the disclosure requirements in paragraph 25 of IAS 1 requires the exercise of professional judgement. The Committee noted that paragraph 25 requires that an entity shall disclose ‘material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern’. The Committee also noted that for this disclosure to be useful it must identify that the disclosed uncertainties may cast significant doubt upon the entity’s ability to continue as a going concern.

 

The Committee noted that IAS 1 provides sufficient guidance on the disclosure requirements on uncertainties related to an entity’s ability to continue as a going concern and that it does not expect diversity in practice. Therefore, the Committee decided not to add the issue to its agenda.

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101.3.1.2

IFRIC Agenda Decision - Disclosure requirements relating to assessment of going concern

July 2014 - The Interpretations Committee received a submission requesting clarification about the disclosures required in relation to material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. 

The Interpretations Committee proposed to the IASB that it should make a narrow-scope amendment to change the disclosure requirements in IAS 1 in response to this issue. At its meeting in November 2013 the IASB discussed the issue and considered amendments proposed by the staff, but decided not to proceed with these amendments and removed this topic from its agenda. Consequently, the Interpretations Committee removed the topic from its agenda. 

The staff reported the results of the IASB’s discussion to the Interpretations Committee. When considering this feedback about the IASB’s decision, the Interpretations Committee discussed a situation in which management of an entity has considered events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. Having considered all relevant information, including the feasibility and effectiveness of any planned mitigation, management concluded that there are no material uncertainties that require disclosure in accordance with paragraph 25 of IAS 1. However, reaching the conclusion that there was no material uncertainty involved significant judgement. 

The Interpretations Committee observed that paragraph 122 of IAS 1 requires disclosure of the judgements made in applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. The Interpretations Committee also observed that in the circumstance discussed, the disclosure requirements of paragraph 122 of IAS 1 would apply to the judgements made in concluding that there remain no material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.

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101.7.1.1

 

IFRIC Agenda Decision - Presentation of Liabilities or Assets Related to Uncertain Tax Treatments

September 2019 - The Committee received a request about the presentation of liabilities or assets related to uncertain tax treatments recognised applying IFRIC 23 Uncertainty over Income Tax Treatments (uncertain tax liabilities or assets). The request asked whether, in its statement of financial position, an entity is required to present uncertain tax liabilities as current (or deferred) tax liabilities or, instead, can present such liabilities within another line item such as provisions. A similar question could arise regarding uncertain tax assets.

The definitions in IAS 12 of current tax and deferred tax liabilities or assets

When there is uncertainty over income tax treatments, paragraph 4 of IFRIC 23 requires an entity to ‘recognise and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying IFRIC 23’. Paragraph 5 of IAS 12 Income Taxes defines:

a.

current tax as the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period; and

b.

deferred tax liabilities (or assets) as the amounts of income taxes payable (recoverable) in future periods in respect of taxable (deductible) temporary differences and, in the case of deferred tax assets, the carryforward of unused tax losses and credits.

Consequently, the Committee observed that uncertain tax liabilities or assets recognised applying IFRIC 23 are liabilities (or assets) for current tax as defined in IAS 12, or deferred tax liabilities or assets as defined in IAS 12.

Presentation of uncertain tax liabilities (or assets)

Neither IAS 12 nor IFRIC 23 contain requirements on the presentation of uncertain tax liabilities or assets. Therefore, the presentation requirements in IAS 1 apply. Paragraph 54 of IAS 1 states that ‘the statement of financial position shall include line items that present: …(n) liabilities and assets for current tax, as defined in IAS 12; (o) deferred tax liabilities and deferred tax assets, as defined in IAS 12…’.

Paragraph 57 of IAS 1 states that paragraph 54 ‘lists items that are sufficiently different in nature or function to warrant separate presentation in the statement of financial position’. Paragraph 29 requires an entity to ‘present separately items of a dissimilar nature or function unless they are immaterial’.

Accordingly, the Committee concluded that, applying IAS 1, an entity is required to present uncertain tax liabilities as current tax liabilities (paragraph 54(n)) or deferred tax liabilities (paragraph 54(o)); and uncertain tax assets as current tax assets (paragraph 54(n)) or deferred tax assets (paragraph 54(o)).

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine the presentation of uncertain tax liabilities and assets. Consequently, the Committee decided not to add the matter to its standard-setting agenda.

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101.7.1.2

IFRIC Agenda Decision - Supply Chain Financing Arrangements—Reverse Factoring

December 2020 - The Committee received a request about reverse factoring arrangements. Specifically, the request asked:

a.

how an entity presents liabilities to pay for goods or services received when the related invoices are part of a reverse factoring arrangement; and

b.

what information about reverse factoring arrangements an entity is required to disclose in its financial statements.

In a reverse factoring arrangement, a financial institution agrees to pay amounts an entity owes to the entity’s suppliers and the entity agrees to pay the financial institution at the same date as, or a date later than, suppliers are paid.

Presentation in the statement of financial position

IAS 1 Presentation of Financial Statements specifies how an entity is required to present its liabilities in the statement of financial position.

 

Paragraph 54 of IAS 1 requires an entity to present ‘trade and other payables’ separately from other financial liabilities. ‘Trade and other payables’ are sufficiently different in nature or function from other financial liabilities to warrant separate presentation (paragraph 57 of IAS 1). Paragraph 55 of IAS 1 requires an entity to present additional line items (including by disaggregating the line items listed in paragraph 54) when such presentation is relevant to an understanding of the entity’s financial position. Consequently, an entity is required to determine whether to present liabilities that are part of a reverse factoring arrangement:

a.

within trade and other payables;

b.

within other financial liabilities; or

c.

as a line item separate from other items in its statement of financial position.

Paragraph 11(a) of IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that ‘trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier’. Paragraph 70 of IAS 1 explains that ‘some current liabilities, such as trade payables… are part of the working capital used in the entity’s normal operating cycle’. The Committee therefore concluded that an entity presents a financial liability as a trade payable only when it:

a.

represents a liability to pay for goods or services;

b.

is invoiced or formally agreed with the supplier; and

c.

is part of the working capital used in the entity’s normal operating cycle.

Paragraph 29 of IAS 1 requires an entity to ‘present separately items of a dissimilar nature or function unless they are immaterial’. Paragraph 57 specifies that line items are included in the statement of financial position when the size, nature or function of an item (or aggregation of similar items) is such that separate presentation is relevant to an understanding of the entity’s financial position. Accordingly, the Committee concluded that, applying IAS 1, an entity presents liabilities that are part of a reverse factoring arrangement:

a.

as part of ‘trade and other payables’ only when those liabilities have a similar nature and function to trade payables—for example, when those liabilities are part of the working capital used in the entity’s normal operating cycle.

b.

separately when the size, nature or function of those liabilities makes separate presentation relevant to an understanding of the entity’s financial position. In assessing whether it is required to present such liabilities separately (including whether to disaggregate trade and other payables), an entity considers the amounts, nature and timing of those liabilities (paragraphs 55 and 58 of IAS 1).

The Committee observed that an entity assessing whether to present liabilities that are part of a reverse factoring arrangement separately might consider factors including, for example:

a.

whether additional security is provided as part of the arrangement that would not be provided without the arrangement.

b.

the extent to which the terms of liabilities that are part of the arrangement differ from the terms of the entity’s trade payables that are not part of the arrangement.

Derecognition of a financial liability

An entity assesses whether and when to derecognise a liability that is (or becomes) part of a reverse factoring arrangement applying the derecognition requirements in IFRS 9 Financial Instruments.

An entity that derecognises a trade payable to a supplier and recognises a new financial liability to a financial institution applies IAS 1 in determining how to present that new liability in its statement of financial position (see ‘Presentation in the statement of financial position’).

...

Notes to the financial statements

...

An entity applies judgement in determining whether to provide additional disclosures in the notes about the effect of reverse factoring arrangements on its financial position, financial performance and cash flows. The Committee observed that:

a.

assessing how to present liabilities and cash flows related to reverse factoring arrangements may involve judgement. An entity discloses the judgements that management has made in this respect if they are among the judgements made that have the most significant effect on the amounts recognised in the financial statements (paragraph 122 of IAS 1).

b.

reverse factoring arrangements may have a material effect on an entity’s financial statements. An entity provides information about reverse factoring arrangements in its financial statements to the extent that such information is relevant to an understanding of any of those financial statements (paragraph 112 of IAS 1).

The Committee noted that making materiality judgements involves both quantitative and qualitative considerations.

...

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine the presentation of liabilities that are part of reverse factoring arrangements, the presentation of the related cash flows, and the information to disclose in the notes about, for example, liquidity risks that arise in such arrangements. Consequently, the Committee decided not to add a standard-setting project on these matters to the work plan.

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101.8.1.1

IFRIC Agenda Decision - Normal operating cycle

June 2005 - The IFRIC considered an issue regarding the classification of current and non⁠–⁠current assets by reference to an entity's normal operating cycle. It was asked whether the guidance in paragraph 57(a) (now paragraph 66(a)) of IAS 1 was applicable only if an entity had a predominant operating cycle. This is particularly relevant to the inventories of conglomerates which, on a narrow reading of the wording, might always have to refer to the twelve⁠–⁠month criterion in paragraph 57(c) (now paragraph 66(c)) of IAS 1, rather than the operating cycle criterion.

 

The IFRIC decided not to consider the question further because, in its view, it was clear that the wording should be read in both the singular and the plural and that it was the nature of inventories in relation to the operating cycle that was relevant to classification. Furthermore, if inventories of different cycles were held, and it was material to readers' understanding of an entity's financial position, then the general requirement in paragraph 71 (now paragraph 57) of IAS 1 already required disclosure of further information.

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101.8.1.2

IFRIC Agenda Decision - Current /non-current classification of a callable term loan

November 2010 - The Committee received a request on the classification of a liability as current or non-current when the liability is not scheduled for repayment within twelve months after the reporting period, but may be callable by the lender at any time without cause. The Committee notes that paragraph 69(d) of IAS 1 requires that a liability must be classified as a current liability if the entity does not have the unconditional right at the reporting date to defer settlement for at least twelve months after the reporting period.

 

The Committee noted that IAS 1 provides sufficient guidance on the presentation of liabilities as current or noncurrent and that it does not expect diversity in practice. Consequently, the Committee decided not to add the issue to its agenda.

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101.8.2.1

Scope of IAS 1.69

Which liabilities do the classification requirements of IAS 1.69 apply to?

 

Analysis: The requirements of IAS 1.69 apply to all types of liabilities (e.g. bank borrowings, corporate bonds, lease liabilities, contract liabilities and accounts payable) except for deferred tax liabilities, which are always presented as non-current (IAS 1.56).

 

The only exception to this requirement is when a presentation based on liquidity provides information that is more reliable and more relevant (i.e. a ‘non-classified’ statement of financial position – IAS 1.60). Such a presentation is common for financial institutions such as banks and insurance companies. In these cases, a distinction between current and non-current assets and liabilities is not made in the statement of financial position.

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101.8.2.2

Unit of account for applying IAS 1.69

Are liabilities divided into current and non-current portions?

 

Analysis: If a portion of a liability does not meet any of the criteria in IAS 1.69, then that portion of the liability is presented as non-current.

 

For example, many bank loans and lease liabilities are amortising, with regular payments of principal and interest. Those payments that are contractually due within the next 12 months result in IAS 1.69(d) being met as the entity does not have an unconditional right to defer settlement of those portions of the liability for at least 12 months. Therefore, those payments are classified as current.

 

As long as the remaining portion (or portions) do not meet any of the criteria in IAS 1.69, the payments due more than 12 months after the reporting period are classified as non-current liabilities.

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101.8.2.3

Effect of covenants – compliance with covenants

Entity Z has a 31 December 2020 year-end. Entity Z has a term loan with a bank, which requires it to repay the entire capital balance on 31 December 2024. Included in the loan agreement is a covenant requiring Entity Z to maintain a specified financial ratio as at each year-end. If Entity Z does not satisfy the covenant, then the bank has the right to demand that Entity Z repay the loan immediately.

 

Entity Z has met the specified financial ratio as at 31 December 2020. How does Entity Z classify the capital element of the bank loan in its 31 December 2020 financial statements?

Analysis: IAS 1.69(d) is not met because Entity Z has an unconditional right to defer settlement of the liability for at least 12 months because it satisfies the covenant in the loan and therefore the bank does not have the right to demand repayment of the loan in the next 12 months. None of the other criteria in IAS 1.69 are met.

 

The capital amount of the bank loan is classified as a non-current liability.

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101.8.2.4

Effect of covenants – waiver received subsequent to period end

Same fact pattern as FAQ 101.8.2.3 except Entity Z does not meet the covenant as at 31 December 2020, however, on 15 February 2021, before the financial statements are authorised for issue by the Board of Directors, Entity Z receives a waiver of the covenant violation from its bank. Therefore, the bank has stated that it will not demand repayment of the loan in 2021.

 

How does Entity Z classify the bank loan in its 31 December 2020 financial statements?

Analysis: IAS 1.69(d) is met because Entity Z does not have an unconditional right to defer settlement of the liability for at least 12 months as at its reporting date of 31 December 2020. IAS 1.74 requires that:

 

When an entity breaches a provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, after the reporting period and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have an unconditional right to defer its settlement for at least twelve months after that date.

 

The bank granting the waiver is a non-adjusting event after the reporting period. It does not affect the classification of the bank loan as at 31 December 2020. This requirement differs from certain other financial reporting frameworks (e.g. US GAAP), where receipt of a waiver of a covenant violation after period end may affect the classification of the liability as at the reporting date.

 

Entity Z may be required to disclose the waiver as a non-adjusting event after the reporting period in accordance with IAS 10.21.   

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101.8.2.5

Effect of covenants – waiver received prior to period end

Same fact pattern as FAQ 101.8.2.3 except Entity Z is concerned that it will not meet its financial covenant as at 31 December 2020, so it discusses the matter with its bank in November 2020. On 15 December 2020, the bank agrees to waive the covenant as at 31 December 2020, meaning Entity Z does not need to comply with the covenant as at 31 December 2020. Entity Z needs to comply with the covenant as at future reporting dates (in this fact pattern, the next covenant test will be on 31 December 2021).

 

How does Entity Z classify the bank loan in its 31 December 2020 financial statements?

Analysis: IAS 1.69(d) is not met because, as at its reporting date, Entity Z has an unconditional right to defer settlement of the liability for at least 12 months. The waiver was received prior to the period end, meaning that it is taken into account in assessing whether any of the criteria in IAS 1.69 were met. IAS 1.75 requires (continuing on from IAS 1.74, see FAQ 101.8.2.4):

 

However, an entity classifies the liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

 

The capital amount of the bank loan is therefore classified as a non-current liability. 

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101.8.2.6

Effect of covenants – covenants tested after period end

Same fact pattern as FAQ 101.8.2.3 except the banking agreement states that the covenants will be tested based on the audited financial statements once they are approved and released. Entity Z expects to issue its audited financial statements for the period ended 31 December 2020 by 1 March 2021. Entity Z violates its financial covenant as at 31 December 2020 based on its audited financial statements.

 

Since the audited financial statements were not available as at 31 December 2020, is the breach of covenant a non-adjusting event after the reporting period, meaning that it does not affect the classification of the loan as current or non-current?

Analysis: No. The loan is required to be classified as current regardless of the fact that the audited financial statements were not yet available, as the conditions that led to the breach already existed at the reporting date.  The audited financial statements provide evidence of that breach.

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101.8.2.7

Effect of covenants – quarterly testing

Entity Y has a 31 December 2020 year-end. Entity Y has a term loan from a bank, which requires it to repay the entire capital balance on 31 December 2024. Included in the loan agreement is a covenant requiring Entity Y to maintain a specified financial ratio as at each quarter end (e.g. March, June, September and December). If Entity Y does not satisfy the covenant at any of these dates, then the bank has the right to demand that Entity Y repay the loan immediately.

 

Entity Y has met the specified financial ratio as at 31 December 2020. How does Entity Y classify the bank loan in its 31 December 2020 financial statements?

Analysis: The criterion in IAS 1.69(d) is not met because Entity Z has an unconditional right to defer settlement of the liability for at least 12 months because it satisfies the covenant in the loan at its reporting date. Therefore, as at that date, the bank does not have the right to demand repayment of the loan in the next 12 months.

 

The fact that compliance with the covenant will be tested again in less than 12 months (e.g. 31 March 2021) does not change the fact that, as at its reporting date, Entity Y complies with the covenant. The subsequent covenant tests are based on the financial ratios at those future dates, which do not affect conditions as at 31 December 2020.

 

The bank loan is classified as a non-current liability.

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101.8.2.8

Effect of covenants – quarterly testing with violation after period end

Same fact pattern as FAQ 101.8.2.7, except it is currently 5 April 2021 and the 31 December 2020 financial statements have not been completed. Entity Y met its loan covenant as at 31 December 2020, but Entity Y has violated its covenant as at 31 March 2021.

 

How does Entity Y classify the bank loan in its 31 December 2020 financial statements?

Analysis: The criterion in IAS 1.69(d) is not met because Entity Z has an unconditional right to defer settlement of the liability for at least 12 months because it satisfies the covenant in the loan at its reporting date. Therefore the bank does not have the right to demand repayment of the loan in the next 12 months.

 

The fact that compliance with the covenant will be tested again in less than 12 months (e.g. 31 March 2021) does not change the fact that, as at its reporting date, Entity Y complies with the covenant. The subsequent breach of covenant as at 31 March 2021 does not affect conditions as at 31 December 2020.

 

The bank loan is classified as a non-current liability. Failure to comply with the covenant as at 31 March 2021 should be disclosed as a non-adjusting subsequent event in the 31 December 2020 financial statements (IAS 10.21).

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101.8.2.9

Conditional rollover rights

Entity M has a loan that is due for repayment within 12 months of the reporting period end. The terms of the loan grant Entity M the option to roll over the loan for another 12 months, with the rollover being conditional on Entity M passing a financial test.

 

How is the loan classified as at Entity M’s period end if the rollover has not taken place?

Analysis: The classification depends on the precise facts and circumstances. IAS 1.73 states that if an entity expects, and has the discretion, to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan facility, then it is classified as non-current. An entity must assess whether it has the ‘discretion’ to do so.  For example, discretion in respect of a financial ratio test would include consideration of whether the entity expects to pass that test.  This would include circumstances in which an entity would not currently pass the test, but could take action to enable it to do so by the time the test is required to be carried out.

 

Consequently, the loan is classified as non-current if the rollover conditions are perfunctory and/or are within Entity M’s control (e.g. not to sell a subsidiary or to enter into other loan agreements) and management expects to exercise the option to roll over the loan.

 

The loan is classified as current if management does not intend to roll over the loan. The loan will also be classified as current if the rollover condition(s) have been breached and management can do nothing to rectify the position (e.g. a covenant which requires that a particular subsidiary is not sold, and the subsidiary has already been sold by the financial period end).

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101.8.2.10

Rollover agreed to prior to period end with a different lender

Entity N will be required to repay a bank loan within 12 months of period end. Before period end, Entity N enters into an agreement with a new bank where the new bank will ‘roll’ the old loan into a new loan, which will not be repayable for another 5 years.  

 

How is the loan classified as at period end?

Analysis: The loan is classified as a current liability. Entity N has an obligation to settle the amount due under its existing loan with the original bank within the next 12 months, regardless of the fact that it entered into an agreement with another bank which ensures that it will have the necessary funds to repay the original loan.

 

If Entity N had entered into an agreement before period end to roll the loan into a new loan with the original bank, then FAQ 101.8.2.9 would apply, and the loan would be classified as current or non-current depending on whether Entity N has the intention and discretion to roll over the existing loan.

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101.8.2.11

Classification of contract liabilities

Entity X sells clothing and, with each purchase, customers may earn loyalty points which can be accumulated and redeemed in future for free or discounted merchandise. Each point entitles the customer to a CU 0.10 discount on a future purchase, which may be redeemed at any time by the customer. When a sale is made, Entity X allocates a portion of the transaction price to each of the points, and recognises them as a contract liability as required by IFRS 15.

 

Entity X has historical data which provides strong support that only 50-55% of the points earned in a given calendar year will be redeemed during the following calendar year. This is because many customers prefer to accumulate their points for a larger purchase.

 

How does Entity X classify its contract liability relating to the points?

Analysis: All points are classified as current liabilities because Entity X does not have an unconditional right to defer settlement of the related contract liability for at least 12 months.

 

Technically, every customer could decide to redeem all of their points within the next 12 months. It is not relevant that Entity X has strong historical evidence that this will not take place, as IAS 1.69(d) is based on the contractual rights and obligations of Entity X and its customers.

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101.8.2.12

Classification of trade payables

Is a trade payable due to be paid more than 12 months after the reporting period classified as a current or non-current liability?

Analysis: IAS 1.70 states that some liabilities, including trade payables and some accruals for employee and other operating costs, are part of the working capital used in the entity’s normal operating cycle. Therefore, such liabilities are classified as current even if they are due to be settled more than 12 months after the reporting period. This is because the criterion in IAS 1.69(a) is met as the entity ‘expects to settle the liability in its normal operating cycle’. If an entity’s normal operating cycle is not clearly identifiable, IAS 1.70 requires an entity to assume that is 12 months.

101.8.2.13

Classification of convertible note – compound financial instrument with a European conversion option

Entity A issues a CU1,000 convertible note in return for the same amount of cash consideration. The note has a maturity of three years from its date of issue. The note pays a 10% annual coupon in arrears, and, on maturity, the holder has an option either to receive a cash repayment of CU1,000 or 10,000 of the issuer’s shares (i.e. the conversion feature is a European-style option exercisable only upon maturity). The market interest rate for a note without a conversion feature would have been 12% at the date of issue.

 

Entity A accounts for the convertible note in accordance with IAS 32 as a compound financial instrument. Entity A recognises a financial liability at the present value of the cash flows using a 12% discount rate, with conversion feature being classified as an equity instrument as it is a derivative that satisfies IAS 32’s ‘fixed for fixed’ test.

 

How is the liability component classified at the date on which the convertible note is issued?

Analysis: The liability component is classified as non-current as Entity A has the unconditional right to defer settlement of the liability for three years.

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101.8.2.14

Classification of convertible note – compound financial instrument with an American conversion option

Same fact pattern as FAQ 101.8.2.13, except the conversion feature may be exercised at any time by the holder (i.e. the conversion feature is an American-style option exercisable at any time). Any accrued interest prior to the conversion feature being exercised must be paid by Entity A.

 

Entity A accounts for the convertible note in the same way as in FAQ 101.8.2.13. This is because the conversion feature still satisfies the ‘fixed for fixed’ test as it results in a fixed amount of cash (the outstanding principal amount of the loan) being converted into a fixed number of shares.

 

How is the liability component classified?

Analysis: The liability component is classified as non-current. The holder of the convertible note has the option to settle the liability at any time by exercising the conversion feature, however, IAS 1.69(d) states ‘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.’

 

Therefore, while the conversion feature may result in the liability being settled at any time in the next three years, it does not result in current classification because it will only result in the liability being settled by the issue of equity instruments. The effect of the conversion feature on the classification of the liability is ignored.

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101.8.2.15

Classification of convertible note – hybrid financial liability

Same fact pattern as FAQ 101.8.2.13, except that the coupon ‘rolls up’ and is added to the amount repayable on maturity of the loan.  However, at any point, the carrying amount of the liability (i.e. unpaid principal and interest) will convert into 10,000 of Entity A’s shares. 

 

Entity A classifies the convertible note as a hybrid financial instrument. The convertible note contains both a financial liability relating to the obligation to pay cash (i.e. principal and interest) and a derivative financial instrument relating to the conversion feature. The conversion feature is not classified as equity because it fails the ‘fixed for fixed’ test. This is because exercising the conversion feature will result in a variable amount of cash (unpaid principal plus accrued interest, which will vary over the term of the note) being converted into a fixed number of shares. The conversion feature introduces the possibility that the loan may be settled by the exchange of a variable amount of an obligation to pay cash for a fixed number of shares, which is not an equity instrument.

 

How are the liabilities classified?

Analysis: Under the current requirements of IAS 1, practice has differed in how the conversion feature affects the classification of the two financial liability components of this hybrid financial instrument.

 

One approach is to classify both portions as non-current liabilities. This is because IAS 1.69(d) states (emphasis added) ‘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.’ Some have interpreted this to mean that, because the shares that would be issued upon the holder exercising the conversion feature are equity instruments, this settlement feature does not affect the classification of the convertible note. Therefore, both financial liabilities are classified as non-current.

 

Another approach is to consider that because the conversion feature is classified as a financial liability as a result of failing the ‘fixed for fixed’ test in IAS 32, both components of the convertible note should be classified as current liabilities.

 

Diversity exists in practice under current IAS 1 requirements. It should be noted that the amendments to IAS 1, which are effective for annual reporting periods beginning on or after 1 January 2023 clarify this requirement. Please see IFRB 2020/01 (available here) for further information.

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101.9.1.1

IFRIC Agenda Decision - Presentation of payments on non-income taxes

July 2012 - The IFRS Interpretations Committee received a request seeking clarification of whether production-based royalty payments payable to one taxation authority that are claimed as an allowance against taxable profit for the computation of income tax payable to another taxation authority should be presented as an operating expense or a tax expense in the statement of comprehensive income.

As the basis for this request, the submitter assumed that the production-based royalty payments are, in themselves, outside the scope of IAS 12 Income Taxes while the income tax payable to the other taxation authority is within the scope of IAS 12. On the basis of this assumption, the submitter asks the Committee to clarify whether the production-based royalty payments can be viewed as prepayment of the income tax payable. The Committee used the same assumption when discussing the issue.

 

The Committee observed that the line item of ‘tax expense’ that is required by paragraph 82(d) of  IAS 1 Presentation of Financial Statements is intended to require an entity to present taxes that meet the definition of income taxes under IAS 12. The Committee also noted that it is the basis of calculation determined by the relevant tax rules that determines whether a tax meets the definition of an income tax. Neither the manner of settlement of a tax liability nor the factors relating to recipients of the tax is a determinant of whether an item meets that definition.

 

The Committee further noted that the production-based royalty payments should not be treated differently from other expenses that are outside the scope of IAS 12, all of which may reduce income tax payable. Accordingly, the Committee observed that it is inappropriate to consider the royalty payments to be prepayment of the income tax payables. Because the production-based royalties are not income taxes, the royalty payments should not be presented as an income tax expense in the statement of comprehensive income.

The Committee considered that, in the light of its analysis of the existing requirements of IAS 1 and IAS 12, an interpretation was not necessary and consequently decided not to add this issue to its agenda.

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101.9.1.2

IFRIC Agenda Decision - Income and expenses arising on financial instruments with a negative yield - presentation in the statement of comprehensive income

January 2015 - The Interpretations Committee discussed the ramifications of the economic phenomenon of negative effective interest rates for the presentation of income and expenses in the statement of comprehensive income.

The Interpretations Committee noted that interest resulting from a negative effective interest rate on a financial asset does not meet the definition of interest revenue in IAS 18 Revenue [IAS 18 has been withdrawn. Paragraph 4.2 of the Conceptual Framework for Financial Reporting contains a definition of income], because it reflects a gross outflow, instead of a gross inflow, of economic benefits. Consequently, the expense arising on a financial asset because of a negative effective interest rate should not be presented as interest revenue, but in an appropriate expense classification. The Interpretations Committee noted that in accordance with paragraphs 85 and 112(c) of IAS 1 Presentation of Financial Statements, the entity is required to present additional information about such an amount if that is relevant to an understanding of the entity’s financial performance or to an understanding of this item.

 

The Interpretations Committee considered that in the light of the existing IFRS requirements an interpretation was not necessary and consequently decided not to add the issue to its agenda.

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101.9.1.3

IFRIC Agenda Decision - Presentation of interest revenue for particular financial instruments

March 2018 - The Committee received a request about the effect of the consequential amendment that IFRS 9 made to paragraph 82(a) of IAS 1. That consequential amendment requires an entity to present separately, in the profit or loss section of the statement of comprehensive income or in the statement of profit or loss, interest revenue calculated using the effective interest method. The request asked whether that requirement affects the presentation of fair value gains and losses on derivative instruments that are not part of a designated and effective hedging relationship (applying the hedge accounting requirements in IFRS 9 or IAS 39 Financial Instruments: Recognition and Measurement).

 

Appendix A to IFRS 9 defines the term ‘effective interest method’ and other related terms. Those interrelated terms pertain to the requirements in IFRS 9 for amortised cost measurement and the expected credit loss impairment model. In relation to financial assets, the Committee observed that the effective interest method is a measurement technique whose purpose is to calculate amortised cost and allocate interest revenue over the relevant time period. The Committee also observed that the expected credit loss impairment model in IFRS 9 is part of, and interlinked with, amortised cost accounting. 

The Committee noted that amortised cost accounting, including interest revenue calculated using the effective interest method and credit losses calculated using the expected credit loss impairment model, is applied only to financial assets that are subsequently measured at amortised cost or fair value through other comprehensive income. In contrast, amortised cost accounting is not applied to financial assets that are subsequently measured at fair value through profit or loss.

Consequently, the Committee concluded that the requirement in paragraph 82(a) of IAS 1 to present separately an interest revenue line item calculated using the effective interest method applies only to those assets that are subsequently measured at amortised cost or fair value through other comprehensive income (subject to any effect of a qualifying hedging relationship applying the hedge accounting requirements in IFRS 9 or IAS 39).

The Committee did not consider any other presentation requirements in IAS 1 or broader matters related to the presentation of other ‘interest’ amounts in the statement of comprehensive income. This is because the consequential amendment that IFRS 9 made to paragraph 82(a) of IAS 1 did not affect those matters. More specifically, the Committee did not consider whether an entity could present other interest amounts in the statement of comprehensive income, in addition to presenting the interest revenue line item required by paragraph 82(a) of IAS 1.

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to apply paragraph 82(a) of IAS 1 and present separately, in the profit or loss section of the statement of comprehensive income or in the statement of profit or loss, interest revenue calculated using the effective interest method. Consequently, the Committee decided not to add this matter to its standard-setting agenda.

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101.11.1.1

IFRIC Agenda Decision - Actuarial assumptions: discount rate

November 2013 - The Interpretations Committee discussed a request for guidance on the determination of the rate used to discount post-employment benefit obligations. The submitter stated that:

a.

according to paragraph 83 of IAS 19 Employee Benefits (2011) the discount rate should be determined by reference to market yields at the end of the reporting period on “high quality corporate bonds” (HQCB);

b.

IAS 19 does not specify which corporate bonds qualify to be HQCB;

c.

according to prevailing past practice, listed corporate bonds have usually been considered to be HQCB if they receive one of the two highest ratings given by a recognised rating agency (eg ‘AAA’ and ‘AA’); and

d.

because of the financial crisis, the number of corporate bonds rated ‘AAA’ or ‘AA’ has decreased in proportions that the submitter considers significant.

In the light of the points above, the submitter asked the Interpretations Committee whether corporate bonds with a rating lower than ‘AA’ can be considered to be HQCB.

The Interpretations Committee observed that IAS 19 does not specify how to determine the market yields on HQCB, and in particular what grade of bonds should be designated as high quality. The Interpretations Committee considers that an entity should take into account the guidance in paragraphs 84 and 85 of IAS 19 (2011) in determining what corporate bonds can be considered to be HQCB. Paragraphs 84 and 85 of IAS 19 (2011) state that the discount rate:

a.

reflects the time value of money but not the actuarial or investment risk;

b.

does not reflect the entity-specific credit risk;

c.

does not reflect the risk that future experience may differ from actuarial assumptions; and

d.

reflects the currency and the estimated timing of benefit payments.

The Interpretations Committee further noted that ‘high quality’ as used in paragraph 83 of IAS 19 reflects an absolute concept of credit quality and not a concept of credit quality that is relative to a given population of corporate bonds, which would be the case, for example, if the paragraph used the term ‘the highest quality’. Consequently, the Interpretations Committee observed that the concept of high quality should not change over time. Accordingly, a reduction in the number of HQCB should not result in a change to the concept of high quality. The Interpretations Committee does not expect that an entity’s methods and techniques used for determining the discount rate so as to reflect the yields on HQCB will change significantly from period to period. Paragraphs 83 and 86 of IAS 19, respectively, contain requirements if the market in HQCB is no longer deep or if the market remains deep overall, but there is an insufficient number of HQCB beyond a certain maturity.

The Interpretations Committee also noted that:

a.

paragraphs 144 and 145 of IAS 19 (2011) require an entity to disclose the significant actuarial assumptions used to determine the present value of the defined benefit obligation and a sensitivity analysis for each significant actuarial assumption;

b.

the discount rate is typically a significant actuarial assumption; and

c.

an entity shall disclose the judgements that management has made in the process of applying the entity's accounting policies and that have the most significant effect on the amounts recognised in the financial statements in accordance with paragraph 122 of IAS 1 Presentation of Financial Statements; typically the identification of the HQCB population used as a basis to determine the discount rate requires the use of judgement, which may often have a significant effect on the entity’s financial statements.

 

The Interpretations Committee discussed this issue in several meetings and noted that issuing additional guidance on, or changing the requirements for, the determination of the discount rate would be too broad for it to address in an efficient manner. The Interpretations Committee therefore recommends that this issue should be addressed in the IASB’s research project on discount rates. Consequently, the Interpretations Committee decided not to add this issue to its agenda.

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