Current vs. non-current liabilities

IAS 1 requires a liability to be classified as current if any one of the following four criteria are met:

  • It expects to settle the liability in its normal operating cycle (e.g. trade payables etc.);
  • It holds the liability primarily for the purpose of trading;
  • The liability is due to be settled within twelve months after the reporting period; or
  • It does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.

If any of these criteria are met, the liability must be classified as current.

The requirements of IAS 1 apply to all types of liabilities (e.g. bank borrowings, corporate bonds, lease liabilities, contract liabilities and accounts payable) except for deferred tax liabilities, which are always presented as non-current.


Example 1

Entity X has a 31 December 2020 year-end. Entity X has a term loan with a bank, which requires it to repay the entire capital balance on 31 December 2025.

Included in the loan agreement is a covenant requiring Entity X to maintain a specified financial ratio as at each year-end. If Entity X does not satisfy the covenant, then the bank has the right to demand that Entity X repay the loan immediately.

Entity X has met the specified financial ratio as at 31 December 2020. How does Entity X classify the capital element of the bank loan in its 31 December 2020 financial statements?

Solution 1

The capital amount of the bank loan is classified as a non-current liability.

Entity X has an unconditional right to defer settlement of the liability for at least 12 months because it satisfies the covenant in the loan and therefore the bank does not have the right to demand repayment of the loan in the next 12 months.


Example 2

Same fact pattern as Example 1, except Entity X does not meet the covenant as at 31 December 2020, however, on 24 February 2021, before the financial statements are authorized for issue by the Board of Directors, Entity X receives a waiver of the covenant violation from its bank.

Therefore, the bank has stated that it will not demand repayment of the loan in 2021. How does Entity X classify the bank loan in its 31 December 2020 financial statements?

Solution 2

The capital amount of the bank loan is classified as a current liability.

Entity X does not have an unconditional right to defer settlement of the liability for at least 12 months as at its reporting date of 31 December 2020.

The bank granting the waiver is a non-adjusting event after the reporting period. It does not affect the classification of the bank loan as at 31 December 2020.

Entity X may be required to disclose the waiver as a non-adjusting event after the reporting period in accordance with IAS 10.


Example 3

Same fact pattern as Example 1 except Entity X is concerned that it will not meet its financial covenant as at 31 December 2020, so it discusses the matter with its bank in October 2020.

On 12 December 2020, the bank agrees to waive the covenant as at 31 December 2020, meaning Entity X does not need to comply with the covenant as at 31 December 2020.

Entity X needs to comply with the covenant as at future reporting dates (in this fact pattern, the next covenant test will be on 31 December 2021). How does Entity X classify the bank loan in its 31 December 2020 financial statements?

Solution 3

The capital amount of the bank loan is classified as a non-current liability.

Entity X has an unconditional right to defer settlement of the liability for at least 12 months. The waiver was received prior to the period end, meaning that it is taken into account in assessing whether any of the criteria in IAS 1 were met.