11 January 2021 (updated on 8 July 2021)

Note: The International Accounting Standards Board announced in June 2021 that it is revisiting these amendments and may defer their effective date. The future revisions are expected to modify the requirements for the classification of debt with future conditions. In view of this, companies should carefully consider if early adoption of the 2020 amendments is appropriate.


Companies could see significant changes when classifying loans as current or non-current. 

Under the International Accounting Standards Board’s (the Board) amendments to IAS 11 which become effective in 2023, companies will need to consider the impacts of these amendments and revisit their loan agreements, as more debt could be classified as current. 

In its recent tentative agenda decision (TAD)2, the IFRS Interpretations Committee (the Committee) clarified that classifying debt with future conditions as current or non-current would be based on a hypothetical test at the reporting date – a test that the lender does not require until a later date. The TAD illustrates how a company would apply the amendments using three different term loan examples. (PDF 29 KB) 

The Board’s amendments provide a very simple test to reduce diversity in practice. But is it at the expense of relevant information? Not only does it ignore the contractual terms and conditions, it ignores the intended design of covenants and the seasonality of business. So you need to ask yourself whether it makes sense. Will your balance sheet signal fire when in fact there is no smoke?

Gabriela Kegalj
KPMG global IFRS presentation leader

Classifying loans with future conditions using a hypothetical test

The TAD clarifies that when the right to defer settlement of a liability for at least 12 months after the reporting date is subject to future conditions related to financial position, a company (borrower) would need to perform a hypothetical test for compliance at the reporting date:

  • if the loan agreement requires the test for compliance at a later date; and
  • using its financial information as at the reporting date. 

This means that a company would classify its debt as non-current only when it complies at the reporting date with all conditions – i.e. those conditions that exist at the reporting date and those that are due to be tested within 12 months after that date.

Potential mismatch between the accounting and the loan’s terms and conditions

The use of a hypothetical test means that how debt is classified for accounting purposes at the reporting date may not reflect the contractual rights and obligations of the contracted parties. For example, a loan that is not due for settlement within 12 months after the reporting date could be classified as current even though: 

  • the lender does not have the contractual right to demand repayment; and 
  • the borrower does not have the contractual obligation to settle it at the reporting date.  

Therefore, to classify a loan as non-current for accounting purposes, a company would need to comply with the conditions specified in the loan agreement at all times, even if the loan agreement was negotiated to cater for a company’s specific circumstances. For example, a specific loan agreement may consider seasonality of the business or different stages of a company’s operations and thus require compliance with different conditions on different dates. 

In practice, this would also mean that a loan’s classification may change from one reporting date to another, including from one interim reporting date to another, without any actual breach of its contractual conditions. 


No remedies might be available for a breach of a hypothetical test

A company that ‘breaches’ a hypothetical test would need to classify the loan as current – i.e. it has no remedy. This is because a lender typically provides a waiver only for an actual breach of the loan conditions that occurs prior to or at the reporting date. 


Classification of loans with financial performance or qualitative covenants remains unclear

The TAD illustrates only loans with covenants that test financial position and is limited to the three fact patterns described. The TAD does not clarify if/how classification of a loan with a financial performance condition (e.g. annual revenue target to be tested after the reporting date) or with qualitative covenants (e.g. submission of audited financial statements of the borrower by a certain date) would be affected by the forthcoming amendments. 


Have your say – Comment deadline is 15 February 2021*

The amendments would cause a significant change in practice. More debt would be classified as current even when a company does not have the contractual obligation to repay a liability within 12 months after the reporting date. 

We urge you to take this opportunity to give your feedback to the Committee on the TAD via the following link

1 Classification of Liabilities as Current or Non-current (Amendments to IAS 1 Presentation of Financial Statements)

2 Classification of Debt with Covenants as Current or Non-current (IAS 1 Presentation of Financial Statements)

* Read our comment letter (PDF 113 KB) to learn more about KPMG’s position.

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