The International Accounting Standards Board (IASB) has issued amendments to IAS 1 ‘Presentation of Financial Statements’ to improve disclosures about long-term debt with covenants for periods beginning on or after 1 January 2024 (with early adoption being permissible).
IAS 1 requires entities to classify debt as current if the entity is unable to avoid settling the debt within 12 months after the reporting date. However, the entity may need to comply with covenants during that same period, which may question whether the debt should be classified as non-current. For example, a long-term debt may become current if the entity fails to comply with the covenants during the 12-month period after the reporting date.
The amendments set out in ‘Non-current Liabilities with Covenants (Amendments to IAS 1)’ state that at the reporting date, the entity doesn't need to consider covenants to be complied with in the future, when considering the classification of the debt as current or non-current. Instead, the entity should disclose information about these covenants in the notes to the financial statements.
With these changes, the IASB aims to help investors understand the risk that such debt could become repayable early and therefore, has improved the information being provided on the long-term debt.
The amendments are applicable for annual reporting periods beginning on or after 1 January 2024, with early application permitted. If the amendments are applied to an earlier period, this should be disclosed. The effective date coincides with that of the amendments to IAS 1 previously issued in 2020 ‘Classification of Liabilities as Current or Non-current.’