Current/noncurrent debt classification: IFRS® Accounting Standards vs US GAAP

2. Breached conditions at the reporting date remedied after the reporting date

Under IFRS Accounting Standards, a loan with breached conditions at the reporting date is classified as current if the breach renders the loan repayable immediately. This is true even if the lender agrees, after the reporting date but before the financial statements are issued², not to demand repayment as a result of the breach.

Under US GAAP, unlike IFRS Accounting Standards, a debt repayable on demand as a result of a covenant violation is not classified as current if, after the reporting date but before the financial statements are issued²:

• the lender waived or lost its right to demand repayment for more than 12 months from the reporting date and it is not probable that the debtor will violate any provision of the debt instrument within 12 months from the reporting date; or
• for a long term-obligation with grace periods for which breaches may be remedied, it is probable that the violation will be cured within that grace period and it is not probable that the debtor will violate any provision of the debt instrument within 12 months from the reporting date.

3. Subjective acceleration clauses³

If a debt contains a subjective acceleration clause, such as a material adverse change (MAC) clause, the clause needs to be evaluated to determine if there has been a breach at the reporting date. No specific guidance exists under IFRS Accounting Standards on how to evaluate such clauses. Therefore, significant judgment may be required to determine whether the terms of the agreement have been breached at the reporting date. If a breach has occurred, the debt is classified as current, regardless of the likelihood that the holder will accelerate repayment of the debt.

Unlike IFRS Accounting Standards, US GAAP provides specific guidance on current/noncurrent classification when an otherwise noncurrent debt agreement includes a subjective acceleration clause. Classification is based on the likelihood (remote, reasonably possible or probable) that the holder will accelerate repayment of the debt, as follows:

• remote: the debtor is neither required to classify the debt as current nor required to disclose the existence of the subjective acceleration clause;
• reasonably possible: the debtor evaluates the facts and circumstances to determine the proper classification and appropriate disclosures;
• probable: the debt is classified as current and the debtor discloses the nature and terms of the subjective acceleration clause, the amount that may be due within 12 months from the reporting date, and the debt’s due date assuming acceleration.

4. Intent to repay early

Under IFRS Accounting Standards, when debt meets the criteria for classification as noncurrent, it is classified as such, even if management intends or expects to settle early or even if the company actually settles within 12 months of the reporting date.

Unlike IFRS Accounting Standards, under US GAAP intent is relevant. Therefore, it may be appropriate to classify as current debt that would otherwise be noncurrent when management has the right and intends to repay it within one year of the reporting date.

5. Convertible debt

Under IFRS Accounting Standards, when a debt (e.g. bonds) includes a holder conversion option that involves a potential transfer of the company’s own equity instruments, the conversion option is classified as either equity or liability (embedded derivative) separately from the host debt under IAS 32⁴. The IAS 1 amendments clarify that when a company classifies the host debt as current or noncurrent, it can ignore only those conversion options that are classified as equity under IAS 32. This means that when the conversion option is classified as:

• equity, the possibility that the holder may exercise its conversion right before maturity does not affect the classification of the host debt as current or noncurrent;
• liability, the host debt is classified as current if the holder may exercise its conversion right within 12 months of the reporting date.

Unlike IFRS Accounting Standards, under US GAAP the classification as current or noncurrent is not based on whether the conversion option is separated as an embedded derivative from the host debt. Instead, classification depends solely on the instrument’s features. For example, a currently convertible debt in which the issuer is required to settle the debt’s principal amount in cash on conversion but is allowed to settle the conversion spread⁵ in either cash or shares would be classified as current because the holder can immediately convert and require the issuer to pay cash for the principal amount.

In contrast to the example above, the terms of some convertible debt instruments permit the issuer to settle the convertible debt in a combination of cash and shares when converted. In that situation, under US GAAP, the issuer is permitted to consider its intended settlement method when determining the appropriate current/noncurrent classification. However, because the issuer cannot be required to deliver cash or other assets on conversion of those instruments – i.e. the issuer is contractually entitled to satisfy conversions through the delivery of its own equity shares – the holder's ability to convert the instruments currently or within 12 months of the reporting date does not require the instruments to be classified as current.

6. Disclosure requirements

IAS 1 now requires disclosure of the facts and circumstances, if any, that indicate the company may have difficulty complying with covenants within 12 months of the reporting date – e.g. actions taken by the company during or after the reporting period to avoid or mitigate a potential breach, or the fact that the company would not have complied with the covenants if they were to be assessed for compliance based on the company’s circumstances at the reporting date (i.e. based on a hypothetical test at the reporting date). Additionally, IFRS 7⁶ requires disclosure of default and breaches on loans payable at the reporting date, and qualitative and quantitative information about risks arising from financial instruments such as liquidity risk – e.g. a maturity analysis of debt.

Unlike IFRS Accounting Standards, US GAAP does not require non-SEC registrants to disclose specific qualitative or quantitative information about liquidity risk, including the risk that debt could become repayable within 12 months of the reporting date. Nevertheless, companies should consider disclosing existing covenant violations and the waiver period. Disclosures under the going concern guidance may also apply to situations where a debt covenant is breached or expected to be breached after the reporting date.

For detailed guidance on disclosures refer section 3.8 of KPMG Handbook, Debt and equity financing.

Takeaway

Long standing differences continue to exist between IAS 1 and ASC 470 in classifying debt as current or noncurrent, especially in the way subsequent events are considered in the assessment. The IAS 1 amendments, effective in 2024, create new areas of possible differences in relation to convertible debt, the effect of management’s intent, or disclosures. The classification of debt on the balance sheet plays an important part in depicting a company’s liquidity situation. Preparers with large amounts of debt, or debt with complex terms, should ensure the appropriateness of their classification conclusions and the proper presentation of their balance sheet.

To learn more about the differences between IFRS Accounting Standards and US GAAP, take a look at KPMG publication, IFRS® compared to US GAAP. For more insights on the IAS 1 amendments effective in 2024 read KPMG article, Current/noncurrent classification of liabilities: IAS 1 amendments.