Classifying liabilities as current or non-current

The current/non-current split tells users how much has to be paid soon — the basis of liquidity ratios and of most loan covenants. Under IAS 1.69 a liability is current if any of these is true: - it is expected to be settled in the entity's normal operating cycle (trade payables and employee accruals are current even if some are paid more than 12 months later); - it is held primarily for trading; - it is due within 12 months after the reporting period; or - the entity does not have the right at the end of the reporting period to defer settlement for at least 12 months.

Everything else is non-current. A long-term loan repaid in instalments is split: the principal falling due in the next 12 months is the current portion; interest accrued to date is current too.

The 2020 and 2022 amendments (effective for annual periods beginning on or after 1 January 2024) tightened this: - The right to defer must exist at the end of the reporting period and have substance. Management's intentions or expectations don't matter: a loan due in four years is non-current even if the company plans to repay it next month. - If the right to defer depends on covenants, only covenants the entity must comply with on or before the reporting date affect classification — even if the lender only tests them later. Covenants to be met after the reporting date don't change classification, but the entity must disclose information that lets users assess the risk the debt becomes repayable within 12 months (IAS 1.76ZA). - "Settlement" includes transferring the entity's own shares, unless a conversion option is itself classified as equity.

Two classic traps survive the amendments: - Breach at the reporting date. If a covenant is breached on or before the reporting date and the loan becomes repayable on demand, it is current — even if the lender agrees after the year end not to demand repayment (IAS 1.74). It stays non-current only if, by the reporting date, the lender has granted a grace period ending at least 12 months after it. - Refinancing after the year end. A loan due within 12 months is current even if it's refinanced long-term before the statements are authorised (IAS 1.72). But if the entity has, at the reporting date, the right under an existing facility to roll it over for at least 12 months, it is non-current (IAS 1.73).

IFRS 18, which replaces IAS 1 for annual periods beginning on or after 1 January 2027, carries these classification requirements forward.

US GAAP looks later in time. ASC 470-10 lets events after the balance sheet date, up to the date the statements are issued, change the answer in both traps. A loan callable because of a breach at the balance sheet date can stay non-current if, before issuance, the lender waives its right to demand repayment for more than a year from the balance sheet date (and a further breach within that year isn't probable). A short-term loan can be classified as non-current if, before issuance, the entity actually refinances it long-term or signs a qualifying financing agreement. Group accountants preparing both IFRS and US GAAP numbers for the same loan can therefore get different classifications.