Companies would be required to report information designed to help investors assess whether noncurrent liabilities with covenants could become repayable within 12 months under a proposal issued Friday by the International Accounting Standards Board (IASB).
The proposal would amend IAS 1, Presentation of Financial Statements, which currently requires a company to classify a liability as noncurrent only if the company has a right to defer settlement of the liability for at least 12 months after the reporting date. But such a right often is subject to the company complying with covenants after the reporting date.
If the company fails to comply with covenants after the reporting date, the company might have long-term debt that becomes repayable within 12 months.
The proposed amendments would specify that in such a situation, covenants would not affect the classification of a liability as current or noncurrent at the reporting date.
Instead, a company would:
- Present noncurrent liabilities that are subject to covenants on the statement of financial position separately from other noncurrent liabilities.
- Disclose information about the covenants in the notes to its financial statements, including their nature and whether the company would have complied with them based on its circumstances at the reporting date.
These proposals also address feedback from stakeholders about the classification of debt as current or noncurrent when applying requirements introduced in 2020 that have not yet taken effect. Those requirements would be deferred under Friday's proposal to align with the proposed amendment.
Comments can be submitted through 21 March 2022.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.