Audit Lowe Down – Current / non-current liability classification

Lowe Lippmann Chartered Accountants

In the previous blog, we discussed the new standards in place for 31 December 2024, however the current / non-current classification changes deserve a bit more attention.

The revised AASB 101 Presentation of Financial Statements introduces a slightly amended definition of current liabilities and additional guidance around matters such as breaches of covenants, waivers and periods of grace.

Entities should consider the timing of testing of bank covenants since if they are tested:

On or before the reporting date – compliance with the covenants is considered in presenting the liability as current or non-current
After the reporting date – they are not considered as part of the current / non-current classification.

For example, an entity has a covenant which is tested annually at 31 January 2025, but they do not consider the existence of any potential breach of this covenant when classifying the liability for their 31 December 2024 financials since the testing date is after the reporting period.

However, additional disclosures are now required where an entity is required to give information about the existence of covenants, including facts and circumstances that indicate the entity may have difficulty complying with the covenant.

In the example above, if the entity considered that they may breach the January covenants due to current trading results, then this information would be disclosed in the 31 December 2024 financial statements.

Further disclosures in this example would depend on whether an actual breach occurred:

If breach occurred but going concern basis was still appropriate, then this would be disclosed as a non-adjusting event after the reporting date
If breach occurred and going concern was no longer appropriate, then the financial statements for 31 December 2024 would be prepared on a non-going concern basis
If no breach occurred, then a disclosure would be useful to clarify if facts and circumstances about a potential breach were included.

If an entity receives a waiver or period of grace in relation to a breached covenant, then this should be received by the borrower prior to the reporting period for it to be useful for the financial statements.

Entities should carefully review their loan agreements and covenants, to ensure accurate classification of liabilities under the new guidance since action may need to be taken prior to the end of the reporting period.

Please do not hesitate to contact your Lowe Lippmann Relationship Partner if you wish to discuss any of these matters further.

Liability limited by a scheme approved under Professional Standards Legislation

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