As the year draws to a close, entities preparing their financial statements for the year ending 31 December 2024 should consider several important updates to the International Financial Reporting Standards (IFRS). These amendments, issued by the International Accounting Standards Board (IASB), aim to enhance the transparency, consistency, and relevance of financial reporting. Below are the key changes that may impact financial statements for this reporting period.
- IAS 1 Presentation of Financial Statements – Classification of liabilities as current or non-current
The amendment to IAS 1, issued in January 2020 and effective for annual reporting periods beginning on or after 1 January 2024, clarifies the criteria for classifying liabilities as current or non-current.
A key change is the emphasis on an entity’s “right” to defer the settlement of a liability for at least 12 months after the reporting period. According to the revised standard, a liability should be classified a non-current if the entity has a substantive right to defer settlement beyond 12 months.
This change shifts the emphasis from management’s intentions or expectations to the actual rights that exist at the reporting date. The amendment ensures that liabilities are classified based on the contractual terms in place at the end of the reporting period, preventing potential misclassification based on future plans. For example, if an entity has a loan that is contractually due in more than 12 months but could be repaid earlier at the entity’s discretion, the loan should still be classified as non-current. This approach provides stakeholders with a clearer and more consistent understanding of the entity’s liquidity and financial flexibility.
- IAS 1 Presentation of Financial Statements – Non-current liabilities with covenants
The amendments to IAS 1, issued in October 2022 and effective for annual reporting periods beginning on or after 1 January 2024, further clarify the requirements related to the classification of liabilities subject to covenants.
As explained above, for an entity to classify a liability as non-current, it should have a right to defer the settlement for at least 12 months after the reporting period. However, this right may be contingent on the entity complying with specific conditions, or covenants, outlined in a loan arrangement. The amendments clarify the only covenants an entity must comply with on or before the reporting period impact the classification of the liabilities as current or non-current, even if compliance is assessed afterwards. Covenants that only require compliance after the reporting period do not impact the classification of the liability at the reporting period’s end.
When an entity classifies liabilities as non-current based on its right to defer settlement, contingent upon complying with covenants within 12 months after the reporting period, it should disclose additional information in the notes to the financial statements. The entity should provide details about the covenants, including their nature, timing, and related liabilities, as well as any facts or circumstances indicating potential difficulties in compliance.
If an entity breaches a covenant of a long-term loan agreement on or before the end of the reporting period, resulting in the liability becoming payable on demand, it must classify the liability as current. This classification applies even if the lender agrees, after the reporting period, not to demand payment due to the breach. The liability is considered current because, at the reporting period’s end, the entity does not have an unconditional right to defer settlement for at least 12 months. However, the entity may classify the liability as non-current if, by the end of the reporting period, the lender agrees to a grace period of at least 12 months during which the breach can be rectified and the lender cannot demand immediate repayment.
In cases where loans are classified as current liabilities, certain events occurring after the reporting period require additional disclosures in terms of IAS 10 Events after the Reporting Period. Such events include the refinancing of a current liability on a long-term basis, rectification of a breach of a long-term loan arrangement that was classified as current, the lender granting a grace period to rectify such a breach, and the settlement of a liability that was classified as non-current.
- IFRS 16 Leases – Sale and leaseback transactions
In September 2022, the IASB issued amendments to IFRS 16 to provide clarity on the accounting treatment for sale and leaseback transactions. The amendments are effective for annual reporting periods beginning on or after 1 January 2024.
A sale and leaseback transaction occurs when an entity sells an asset and then leases it back from the buyer. These amendments are very narrow in scope, affecting only those transactions that qualify as a sale in terms of IFRS 15 Revenue from Contracts with Customers, and not those transactions that are, in substance, considered borrowing arrangements. Additionally, the amendments specifically apply to the seller-lessee and affect only transactions that include variable lease payments.
The amendments require a seller-lessee to subsequently measure lease liabilities from a leaseback transaction in such a way that no gain or loss related to the retained right of use is recognised in profit or loss. However, gain or loss related to the partial or full termination of the lease can be recognised. These amendments aim to ensure that financial statements accurately reflect the economic substance of these leases and are expected to impact only a very limited number of entities.
- IAS 7 Statement of Cash Flow and IFRS 7 Financial Instruments: Disclosures – Supplier finance arrangements
In May 2023, the IASB issued amendments to IAS 7 and IFRS 7 to address supplier finance arrangements. The amendments are effective for annual reporting periods beginning on or after 1 January 2024.
Supplier finance arrangements, often involving the use of third-party finance providers, allow suppliers to receive payment earlier than the original due date, while the buyer typically extends its payment terms. The amendments to IAS 7 aim to enhance transparency by introducing new disclosure requirements. Entities must provide detailed information on the terms and conditions of supplier finance arrangements. They are required to disclose, as of the beginning and end of the reporting period, the carrying amounts and related line items of financial liabilities associated with these arrangements. This includes disclosing the carrying amounts of these liabilities for which suppliers have already received payment from finance providers, as well as the range of payment due dates for both these liabilities and comparable trade payables not part of a supplier finance arrangement. Additionally, entities must describe the nature and impact of any non-cash changes in the carrying amounts of the financial liabilities disclosed.
The amendments to IFRS 7 add supplier finance arrangements as another factor to consider in providing liquidity risk disclosures in the financial statements.
The 2024 reporting season introduces important IFRS updates that will impact the preparation and presentation of financial statements. Entities must ensure that they fully understand and apply these changes to provide stakeholders with financial information that reflects the latest developments in accounting standards.
This article provides a brief overview of the amendments to the IFRS standards effective for annual reporting periods beginning on or after 1 January 2024. For detailed guidance and interpretation, please refer directly to the IFRS or consult a professional. If you require further assistance or have specific questions, our team is available to offer additional support.