Current Liabilities

A liability shall be classified as current, when it satisfies any of the following criteria:
(i) it is expected to be settled in normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within twelve months after the end of the reporting period; or
(iv) the undertaking does not have an unconditional right to defer settlement of the liability, for at least twelve months after the end of the reporting period.

All other liabilities shall be classified as non-current.

Some current liabilities, such as trade payables and some accruals for staff and other operating costs, are part of the working capital used in the normal operating cycle.


TRADE AND OTHER PAYABLES summary

What are trade and other payables?

Trade and other payables are current liabilities for which the amount to be settled is usually known rather than uncertain (as for provisions). Undertakings, almost without exception, carry some type of trade and other payables on their statement of financial position.

Items generally included in trade and other payables are: trade payables; amounts payable under statutory obligations such as social security obligations and payroll taxes.

These items are presented within the "Trade and other payables" line item on the face of the statement of financial position.

Current liabilities are those expected to be settled in the normal course of the undertaking’s operating cycle; due to be settled within twelve months of the date of the end of the reporting period; held primarily for the purpose of being traded; or those for which the undertaking does not have an unconditional right to defer settlement for at least twelve months after the date of the end of the reporting period.

Most trade and other payables fall within the definition of financial liabilities and are subject to the recognition and measurement rules that apply to those liabilities.

Initial recognition

An undertaking should recognise trade and other payables when it becomes a party to the contractual provisions of the instrument.

An undertaking’s obligations concerning trade and other payables are usually easily identified and the point of recognition is clear.

Most obligations are legally enforceable and arise under contractual arrangements. These include amounts owed for assets purchased or services obtained (trade creditors), and obligations to provide goods and services where an external party has paid in advance.

Obligations are often imposed by statute. An undertaking should recognise these obligations on the basis of notices and requests for payment from the relevant authority. Constructive obligations should be recognised on the basis of amounts promised to third parties.

An undertaking often incurs obligations in the form of financial and performance guarantees. For example, an undertaking may sell its receivables yet retain a portion of the credit risk in these receivables through guarantees.

The recognition of guarantees depends on their nature. Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should be recognised as part of provisions or, when the recognition criteria are not met, disclosed as contingent liabilities.

Financial guarantees that provide for payments to be made in response to changes in a specified index such as a credit rating should be recognised as financial instruments.

Accrued expenses are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier.

The recognition of accrued expenses results directly from the recognition of expenses for items of goods and services consumed during the period. Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.

Initial measurement

Initial measurement of trade and other payables is usually at fair value. The initial measurement of financial liabilities not at fair value through profit or loss includes transaction costs directly attributable to the acquisition or issue of the financial liability.

Initial fair value is established by reference to amounts agreed between the undertaking and the supplier and amounts invoiced from statutory authorities. Accrued expenses are measured at management’s estimate of the fair value of the goods and services received but not yet invoiced.

Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should initially be recognised at fair value.

Subsequent measurement

Items classified within trade and other payables are not usually re-measured, as the obligation is usually known with a high degree of certainty and its settlement is short-term.

Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should be re-measured at the higher of (i) the amount recognised under IAS 37 and (ii) the amount initially recognised (that is, fair value) less, where appropriate, cumulative amortisation recognised in accordance with IAS 18.

Derecognition

Derecognition occurs when the contractual obligation is cancelled, expired or discharged, for example through payment of the amount due, or through the counterparty forgiving the debt.


Presentation and disclosure

Trade and other payables should be presented as a separate line item on the face of the statement of financial position.

Such items are classified as current liabilities, even if they are due to be settled more than twelve months after the end of the reporting period.

The same normal operating cycle applies to the classification of assets and liabilities. When the undertaking’s normal operating cycle is not identifiable, it is assumed to be twelve months.

Examples of current liabilities are financial liabilities, classified as ‘held for trading’, bank overdrafts, and the current portion of non-current financial liabilities, dividends payable, income taxes and other non-trade payables.





EXAMPLE- Presentation of loan from parent
Issue
An undertaking shall present further sub-classifications of the line items presented in the statement of financial position. Those sub-classifications may be presented either on the face of the statement of financial position or in the notes, classified in a manner appropriate to the undertaking’s operations.

Should a parent, in its single-undertaking financial statements, present amounts due from a subsidiary on the face of its statement of financial position as an asset, and if so how should it be classified?

Background
A parent provides a loan to a subsidiary. Interest of 8% is paid annually. There is no specified repayment date; however, the loan is payable on demand.

Solution
Disclosure on the face of the statement of financial position is not mandatory, but it is best practice. IFRS require separate disclosure of amounts due from subsidiaries, but allow this to be presented in the notes rather than on the face of the statement of financial position.

The liability is current because the subsidiary does not have unconditional right to defer settlement of the liability. The parent, in its separate financial statements, should also classify the amount due from the subsidiary as a current asset.

Financial liabilities that provide financing on a long-term basis (not part of the working capital) and are not due for settlement within twelve months after the end of the reporting period, are non-current liabilities.


EXAMPLE- Classification and presentation of current liabilities
Issue
The following current liabilities should be disclosed on the face of the statement of financial position:

a) trade and other payables;
b) provisions;
c) financial liabilities (excluding trade and other payables and provisions); and
d) current income tax liabilities.

The following example highlights specific classes of current liabilities to be disclosed on the face of the statement of financial position, together with examples of items to be included under the headings.
Solution
a) Trade and other payables, including:
trade creditors;
accruals (for example, accruals for audit fees payable); and
social security taxes and other amounts, such as payroll taxes payable in respect of wages and salaries.
b) Provisions
Provisions for litigation, claims and assessments; and
Current portion of provisions for long term employee benefits such as jubilee payments.
c) Financial liabilities
Current portion of fixed term interest-bearing loans; and
Loans repayable on demand.
d) Current income tax liabilities, including:
corporate income taxes; and income taxes payable on dividends.

Presentation of provisions and other liabilities with current and non-current portion
Issue
How should management present the current and non-current portions of different types of provisions and liabilities in the undertaking’s statement of financial position?

Background
An undertaking has recognised the following liabilities in its statement of financial position:

a) warranty provisions;
b) provisions for environmental liabilities;
c) pension liabilities; and
d) deferred tax liabilities.
Solution
a) Warranty provisions - current or non-current liabilities

The classification will depend on the terms of the warranty. Warranties that guarantee product performance for a twelve-month period are classified as current liabilities. Conversely, warranties that guarantee product performance for an extended period are classified as non-current liabilities.

b) Provisions for environmental liabilities - non-current liabilities

This type of provision is unlikely to be part of an undertaking’s working capital. Management should therefore classify environmental provisions as non-current liabilities.

c) Pension liabilities - non-current liabilities

Considering the nature of these liabilities, management is often not able to reasonably determine the current and non-current portion reliably. It should therefore classify these liabilities as non-current liabilities.

d) Deferred tax liabilities - non-current liabilities

Management should present any deferred tax liabilities as non-current liabilities, even if the temporary differences giving rise to the liabilities are expected to reverse within 12 months.


The treatment of financial liabilities, such as bank loans is strict. The end of the reporting period is the key day by which everything must be in place. If refinancing is to take place, the end of the reporting period is the benchmark.

Failure to refinance by this date may require the undertaking to record a finance liability as current, even if it is being renegotiated to be repaid over a longer period.

This may have severe consequences, even prohibiting the financial statements to be prepared on a going-concern basis.

An undertaking classifies its financial liabilities as current, when they are due to be settled within twelve months after the end of the reporting period, even if:
(i) the original term was for a period longer than twelve months; and
(ii) an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the end of the reporting period, and before the financial statements are approved for issue.

EXAMPLE- refinancing after the end of the reporting period
You need to refinance your long-term loan. Your end of the reporting period is December, you sign the refinancing in January and approve your financial statements in February.

The long-term loan is shown as a current liability, as it was not refinanced by the end of the reporting period.

If an undertaking has the discretion to refinance (or roll over) an obligation for at least twelve months after the end of the reporting period, under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period.

EXAMPLE- refinancing after the end of the reporting period, but with an option
You need to refinance your long-term loan. You have an option to renew your facility. Your end of the reporting period is December, you sign the refinancing in January and approve your financial statements in February.

The long-term loan is shown as a non-current liability, as you had the refinancing option.


EXAMPLE- Classification of liability with roll-over facilities

Issue
If an obligation can be refinanced or rolled over at the discretion of the undertaking for at least twelve months after the date of the end of the reporting period under an existing loan facility, it shall be classified as non-current.

This rule applies even if the obligation would otherwise be due within a shorter period. However, when the undertaking has not the discretion to refinance or roll over the obligation (for example, there is no agreement to refinance), the potential to refinance is not considered and the obligation is classified as current.

What are the conditions under which an undertaking might classify borrowings to be repaid within the operating cycle as non-current liabilities?

Background
Undertaking A’s management has entered into a facility arrangement with a financial institution to ensure the availability of A’s bank financing over the long term.

The committed facility has a scheduled maturity and the lender is not able to cancel unilaterally. This facility does not expire within the next 12 months.

Solution
Undertaking A should classify the borrowing as a non-current liability.

The borrowing can be rolled over at the undertaking’s discretion and is not therefore part of its working capital.

Conversely, where an undertaking does not have the discretion to refinance its borrowings, amounts due should be classified as current liabilities.

When refinancing (or rolling over) the obligation is not at the discretion of the undertaking (there is no agreement to refinance), the obligation is classified as current.

When an undertaking breaches a covenant of a long-term loan agreement on, or before, the end of the reporting period, with the impact that the liability becomes payable on demand, the liability is classified as current.

This applies even if the lender has agreed, after the end of the reporting period, and before the approval of the financial statements for issue, not to demand payment, as a consequence of the breach.

EXAMPLE- amending a breach of covenant, after the end of the reporting period
You breach the terms of your long-term loan. It becomes payable on demand.

Your end of the reporting period is December, the lender agrees not to demand payment as a consequence of the breach in January, and you approve your financial statements in February.

The long-term loan is shown as a current liability: you were in breach at the end of the reporting period.

The liability is classified as current because, at the end of the reporting period, the undertaking does not have an unconditional right to defer its settlement for at least twelve months, after that date.

However, the liability is classified as non-current, if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the end of the reporting period, within which the undertaking can rectify the breach, and during which, the lender cannot demand immediate repayment.