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Indian Accounting Standards (Ind AS) are developed to be in harmony with the International Financial Reporting Standards (IFRS) established by the International Accounting Standards Board (IASB). Before implementing new standards or amendments, the IASB releases consultative documents, such as Discussion Papers (DP) and Exposure Drafts (ED), to gather feedback from the global community. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) assists Indian stakeholders in voicing their opinions during this formative stage of international standard-setting. This ensures stakeholders are primed for the implementation of Ind AS in alignment with global timelines.
Recently, the IASB published an Exposure Draft titled "Non-current Liabilities with Covenants – Proposed Amendments to IAS 1" for public commentary.
According to IAS 1, Presentation of Financial Statements, a liability can only be classified as non-current if the entity possesses the right to defer its settlement for at least 12 months following the reporting period, commonly known as the right to defer settlement.
In October 2022, the IASB finalized amendments titled Non-current Liabilities with Covenants, which will become effective on 1 January 2024. These amendments specifically clarify the assessment of an entity’s right to defer settlement when that right is conditional on adhering to specific terms—termed 'covenants'—within the 12-month duration after the reporting period.
Feedback received from the IASB’s tentative agenda decision raised concerns about the application of the 2022 amendments across various scenarios. In response, the IASB proposed narrow-scope amendments to IAS 1.
Under the proposed changes, the classification of convertible debt containing equity conversion options (classified as equity under IAS 32) will no longer impact liability classification. Therefore, host debt liabilities can now be categorized as current, regardless of the equity conversion options.
For example, if a company secures a 10-year term loan from a bank with a clause allowing immediate repayment after 9 months, the loan's classification can be assessed without considering the equity conversion aspect.
The proposed amendments aim to introduce the following key provisions:
Additionally, the effective date for the 2020 amendments will be postponed, ensuring that entities will not be obliged to reassess their liability classifications until the new amendments become effective.
Through these amendments, the IASB seeks to enhance the clarity surrounding liability classification and increase transparency in financial reporting. Stakeholders are encouraged to examine the proposed amendments and provide their feedback during the consultation period.