This article deals with current vs. non-current classification where a loan is refinanced or the loan repayment is rescheduled subsequent to the reporting date but before the financial statements are approved for issue.
QUERY
Entity Ze has a five-year bank loan that was outstanding at 31st March, 20X1, the reporting date. At the reporting date, the loan had already completed a term of four years and six months. Therefore, at 31st March, 20X1, the loan was repayable before 30th September, 20X1. On 30th June, 20X1, Entity Ze approved the financial statements for issue. However, after 31st March, 20X1 but before 30th June, 20X1, it signed an agreement with the bank to refinance the loan for another five years. The entity did not have discretion to refinance the loan at the reporting date. It was agreed between the bank and the entity post-31st March, 20X1 but before the financial statements were approved for issue. Entity Ze wants to classify this as a non-current liability. Is that an acceptable position?
RESPONSE
No. This is not an acceptable position. At 31st March, 20X1, Entity Ze should present the loan as current liability instead of as non-current liability.
References of the Standard
The following paragraphs of Ind AS 1 Presentation of Financial Statements are relevant:
69 An entity shall classify a liability as current when:
(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the reporting period; or
(d) it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73). Terms of a liability that could, at the option of the counter-party, result in its settlement by the issue of equity instruments do not affect its classification.
An entity shall classify all other liabilities as non-current.
72 An entity classifies its financial liabilities as current when they are due to be settled within twelve months after the reporting period, even if:
a. the original term was for a period longer than twelve months, and
b. an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are approved for issue.
73 If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. However, when refinancing or rolling over the obligation is not at the discretion of the entity (for example, there is no arrangement for refinancing), the entity does not consider the potential to refinance the obligation and classifies the obligation as current.
74 Where there is a breach of a material 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 on the reporting date, the entity does not classify the liability as current, if the lender agreed, after the reporting period and before the approval of the financial statements for issue, not to demand payment as a consequence of the breach.
75 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.
ANALYSIS
Paragraph 69 contains provisions relating to when a financial liability is presented as current. Paragraph 74 contains more of an exception to paragraph 69.
Paragraphs 74 and 75 of Ind AS 1 contain provisions relating to curing of a breach of a material provision of a loan. As per paragraph 74, a loan is presented as non-current if a breach of a material provision relating to a loan is cured after the end of the reporting period, but before the financial statements are approved for issue, such that the loan is no longer current.
As per paragraph 75, if the lender provides a grace period ending at least twelve months after the reporting period, within which a breach can be rectified, the loan is treated as non-current.
The fact pattern that is being dealt with is not relating to the curing of a breach. It is related to extension of the loan term that is otherwise current at the reporting date. With regard to this fact pattern, it is paragraphs 72 and 73 that apply rather than paragraphs 74 and 75. As per paragraph 72, the entity classifies its financial liabilities as current when they are due to be settled within twelve months after the reporting period, even if the original term was for a period longer than twelve months, and an agreement to refinance the loan on a long-term basis is completed after the reporting period and before the financial statements are approved for issue. Paragraph 73 confirms that if an entity did not have the refinancing or rescheduling rights prior to the reporting date, any refinancing or rescheduling agreement on a long-term basis post the reporting date but before the financial statements are approved for issue, the loan would not qualify as a non-current liability at the reporting date.
CONCLUSION
On the basis of the above, at 31st March, 20X1, Entity Ze should present the loan as current liability instead of as non-current liability. Post the reporting period, and after the loan is rescheduled or refinanced on a long-term basis, Entity Ze would present them as non-current.
