Non-Current

vs
Current

www.ufs.ac.za
Source for this PowerPoint:
https://www.cpdbox.com/current-non-current-ias-1/
Most statements of financial position present individual items
in distinction to current and non-current (except for banks
and similar institutions).

This seems so basic and obvious that most of us do not really

think about classifying individual assets and liabilities as
current and non-current.

We do it automatically. But not always correctly.

For example, one of the biggest mistakes I have seen in this

area is presenting the long-term loans.

Many companies present them automatically as non-current

liabilities – while they are not!

Why?

Just go on reading!
What do the rules say?
The standard IAS 1 Presentation of Financial Statements specifies when to
present certain asset or liability as current.

Many people believe that “12 months” is the magic formula or the rule of
thumb that precisely determines what is current or non-current.
Not always true.

More specifically, an asset is presented as current when:

It is expected to be realised (sold, consumed) in its normal operating cycle.

Here, the standard does not specify what the normal operating cycle is, as it
varies from business to business. Sometimes it’s not so clear – in these cases,
it is assumed to be 12 months.

An asset is held for trading.

It does not matter that the company will probably not sell an asset within 12
months; as soon as its purpose is trading, then it’s current.

It is expected to be realised within 12 months after the reporting period, or

It is a cash or cash equivalent (not restricted in any way).
The same applies for liabilities, too, but the standard IAS 1 adds that when there is no unconditional right to defer
settlement of the liability for at least 12 months after the reporting period, then it is current.

Everything else is non-current.

Typical examples of current items are inventories, trade receivables, prepayments, cash, bank accounts, etc.

Typical examples of non-current items are long-term loans or provisions, property, plant and equipment, intangibles,
investments in subsidiaries, etc.

These are just examples, but there are a few items that are not that outright and need to be assessed carefully.
Property, plant and equipment
In most cases, property, plant and equipment (PPE) is classified as non-current,
because the companies use these assets for a period longer than 12 months, or longer
than just one operating cycle.

This also applies for most intangible assets and investment properties.

However, there is a few exceptions or situations, when you should present your PPE as
current:
Non-current assets classified as held for sale under IFRS 5. (IFRS 5 is excluded for
EACC3708/EFIN2708)

When some non-current assets meets the criteria of IFRS 5 to be classified as held for
sale, it shall no longer be presented within non-current assets.
Inventories
Inventories are a typical current asset, as
inventory production usually determines the
length of company’s operating cycle.

It does not matter whether the asset produced

has the economic life shorter than 12 months or
not – if you produce machinery or cars, from your
point of view it’s still a piece of inventory (unless
you’d like to use some items for your own
business, for example for test drives, advertising
purposes or so).

Inventories whose production period is longer

than 12 months and are expected to be realised
(sold) beyond 12 months after the end of the
reporting period, are classified as current assets.

For example, cheese, wine or whiskey that need to

mature for a few years, are still classified as
current assets.
Deferred tax assets and liabilities
Deferred tax assets and liabilities are always
classified as non-current.

Loans with covenants

This is the trickiest one. Here, the companies
make big mistakes in presenting their loans.

The standard IAS 1 specifically says that when an

entity breaches some provisions of a long-term
loan arrangement before the period end and the
effect is that the loan become repayable on
demand, the loan must be presented as current.

The standard is very strict here – it applies also in

the case when the lender (bank) agreed not to
demand the payment as the consequence of
breach after the end of the reporting period, but
before the financial statements are authorised for
issue.
Question:
ABC took a loan from StrictBank repayable in 5 years. The loan agreement requires ABC
to maintain debt service cover ratio at minimum level of 1,2 throughout the life of the
loan, otherwise the loan may become repayable on demand.

ABC found out that the debt service cover ratio was 1.05 at the end of November 20X1
and reported the breach to StrickBank. How should ABC present the loan in its financial
statements for the year ended 31 December 20X1?
Solution:
The answer depends on the reaction of the StrictBank.
If StrictBank agrees NOT to demand immediate repayment of the loan due to the breach of the covenant at or
before the period end (31 December 20X1) and this agreement is valid:
For more than 12 months after the end of the reporting period => the loan is classified as non-current.
For less than 12 months after the end of the reporting period => the loan is classified as current.
If StrictBank agrees NOT to demand immediate repayment of the loan due to the breach of the covenant after the
period end (31 December 20X1), but before the financial statements are authorised for issue, the loan is classified
as current, because ABC does not have an unconditional right to defer the loan settlement for at least 12 months
after that date.
The impact of presenting the loan as current instead of non-current can be tremendous, as all liquidity rations
worsen immediately.

Source for this PowerPoint: https://www.cpdbox.com/current-non-current-ias-1/