On 23 January 2020, the International Accounting Standards Board (often known as the "IASB") published amendments to paragraphs 69 to 76 of the IAS 1 Presentation of Financial Statements.
The amendments clarify:
What is meant by a right to defer settlement?
That a right to defer must exist at the end of the reporting period.
That classification is unaffected by the likelihood that an entity will exercise its deferral right.
Only if an embedded derivative in a convertible liability is itself an equity instrument would the terms of liability not impact its classification.
In this context, the Malaysian Accounting Standards Board (commonly known as "MASB") has decided to implement the same amendments for MFRS 101.
Amendments to MFRS 101 on the classification of Liabilities as Current or Non-Current clarify the following:
Rights to defer settlement for at least 12 months
The amendments clarify that liability is non-current when an entity has the right to postpone settlement for at least a year after the date recorded on the balance sheet.
Existence of rights to defer at the end of the reporting period
The right to postpone exists only if the entity would have complied with the relevant covenants based on its circumstances at the balance sheet date, even though compliance is required only after that date.
The expectations or intentions of management do not have any impact on the classification
The question of whether or not an entity will make use of the right to defer settlement of a liability at the end of the reporting period is irrelevant to the application of the classification principle since what is important is whether or not the entity has the right to do so.
Suppose the entity has the right to defer the settlement at the reporting date because the liability meets the criteria in paragraph 69 for classification as non-current liabilities. Still, management intends or expects to settle the liability within 12 months, after the reporting date and before the authorisation of financial statements. In that case, the classification of the liability remains noncurrent.
However, the entity may need to disclose information about the timing of settlement to enable users of its financial statements to understand the impact of the liability on the entity’s financial position.
Classification of settlement
The amendments also make it clear that when a liability could be settled by the transfer of an entity's own equity instruments, for example, a conversion option in a convertible bond, the conversion option does not affect the current or non-current classification of the convertible bond, if the option satisfies the definition of an equity instrument in accordance with MFRS 132 "Financial Instruments: Presentation."
The amendments to the MFRS 101 standard for the presentation of financial statements will take effect for annual periods that begin on or after 1 January 2023.
How do the Amendments affect you?
Reinstatement may require
It is no longer possible for entities to categorise their financial liabilities according to the management intention.
In the past, management may have categorised its liabilities according to management intention; but this practice is no longer permissible in light of the amendments. Entities must examine their current classification to decide whether or not a reinstatement of the comparative figures is required.
A tricky question that a company needs to ask itself is whether or not the new classification will impact the loan covenants already in place.
Subject to Judgmental
There is no additional guidance and explanation of how an entity could determine whether or not such a right has substance. As a result of this, entities use their own judgment in order to decide whether the right to postpone has any basis in reality. Furthermore, if this judgement is substantial, entities are required to examine whether or not it is necessary to disclose this information in their financial statements.
Disclosure of Accounting Policies (Amendments to MFRS 101 and MFRS Practice Statement 2)
The amendments are intended to improve disclosures regarding accounting policies and to assist users of financial statements in differentiating between changes in accounting estimates and changes in accounting policies.
As a result of the amendments made to MFRS 101, entities are required to disclose accounting policies that are "material rather than significant."
The amendments make it even more clear that insignificant accounting policies do not have to be disclosed.
Accounting estimates are monetary values in financial statements that are subject to uncertainty over their measurement, according to the amendments that were made to MFRS 108.
Accounting policies are defined in paragraph 5 of MFRS 108 Accounting Policies, Changes in Accounting Estimates and Errors, and the term is used in this Standard with the same meaning.
A change in accounting estimate does not have any impact on previous periods and does not constitute the correction of an error. Rather, a change in accounting estimate takes place as a result of new information, discoveries, or more experience.
Changes in accounting estimates are applied prospectively to future transactions and other upcoming events, whereas errors are corrected retrospectively after they have already occurred.
MFRS 132 Financial Instrument: Presentation defines a financial liability as any liability that is either:
A contractual obligation to deliver cash or another financial asset to another entity; or
to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity.
A contract that will or may be settled in the entity’s equity instruments and is a derivative or non-derivative with certain conditions.
When certain conditions are met, as outlined in paragraph 69 of MFRS 101 Presentation of Financial Statements, a company is required to classify its liabilities as current. An entity shall classify a liability as current when:
it expects to settle the liability in its normal operating cycle;
it holds the liability primarily for trading;
the liability is due to be settled within twelve months after the reporting period, or
it does not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period.