Written by Carmen Ridley
The AASB issued AASB 2022 – 6 Amendments to Australian Accounting Standards – Non-current Liabilities with Covenants in December 2022.
Depending on the terms and conditions of long-term liabilities in place, this standard may allow certain loans to be classified as non-current.
The effective date of the amending standard is annual reporting periods beginning on or after 1 January 2024, however there are some significant changes to the classification principles. This could mean that some entities want to early adopt this standard for their next reporting period.
There are two elements to the changes which are included in AASB 2020-1 Amendments to Australian Accounting Standards; – Classification of Liabilities as Current or Non-current with a further amendment in AASB 2022-6. Therefore, these two standards (AASB 2020-1 & AASB2022-6) should be considered together as:
a. Change in the definition of current liability, the extract below shows the changes to the definition, principally the word ‘unconditional’ has been removed from paragraph d since the IASB confirmed that it was unlikely that any long-term loan would be unconditional, for example if an entity breached the terms of the arrangement then the loan would be able to be called is a condition. This change was not considered to be a significant change.
b. Covenants to be tested after the reporting period.
One of the changes made in the 2020 standard related to covenants which were tested after the reporting period. This requires entities to consider whether these covenants were met at the reporting date. AASB 2022-6 includes further guidance relating to these covenants and effectively reverses the changes from the 2020 amendment.
AASB 2022-6 requires an entity to consider only covenants which are to be tested on or before the reporting period to be considered when classifying liabilities.
As can be seen in the decision tree below if an entity has complied with the requirements of the relevant covenant at the reporting date, then they are considered to have a right to defer the settlement for at least 12 months.
AASB 2022 – 6 requires additional disclosures to provide clarity and guidance about covenants which are to be tested after the reporting period, however these covenants do not affect the classification of the liability.
An entity has a 5 year loan which expires in June 2027 which contains liquidity covenants based on the entities balance sheet at 30 June each year although the bank ensures compliance when they receive the financial statements in September. The bank agreement allows the bank to perform an annual review of the loan to determine whether the loan continues to be appropriate and in their risk profile.
Assuming that the entity has complied with the covenants at 30 June then the loan can be classified as non-current in the 30 June financial statements regardless of the existence of any annual review clauses relating to future adverse occurrences at the entity which may be in the agreement but which do not exist at 30 June.
This means that some loans that have previously been classified as current, are now re-classified as non-current for the current year and comparatives.
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