Page 1 of 12The guidance below was developed by the Financial Reporting StandardsCommittee (FRSC) of the Hong Kong Institute of Certified Public Accountants(HKICPA) and is for general reference only. The HKICPA, FRSC and their staff donot accept any responsibility or liability, and disclaim all responsibility and liabilityin respect of the guidance and any consequences that may arise from any personacting or refraining from action as a result of any materials in the guidance.Members of the HKICPA and other users of this guidance should also read theoriginal text of HKAS 1 Presentation of Financial Statements, as found in theHKICPA Members’ Handbook for further reference, and seek professional advicewhere necessary when applying the references contained in this guidance.The HKICPA's Standard Setting Department welcomes your comments and feedback onthis guidance, which should be sent to commentletters@hkicpa.org.hk.Illustrative examples on classification of liabilities as current or non-currentIn August 2020, the HKICPA issued Classification of Liabilities as Current or Non-current- Amendments to HKAS 1 Presentation of Financial Statements (2020 Amendments)
which clarified certain aspects of how entities classify liabilities as current or non-current.In December 2022, the HKICPA issued further amendments to HKAS 1 Non-currentLiabilities with Covenants (2022 Amendments) which clarified how conditions with whichan entity must comply in a loan arrangement affect the classification of the loan as currentor non-current and deferred the effective date of the 2020 Amendments. Both the 2020Amendments and the 2022 Amendments (collectively “the Amendments”) are to beapplied as a package and are effective for annual reporting periods beginning on or after1 January 2024, with early adoption permitted. Entities will need to apply theseAmendments retrospectively in accordance with HKAS 8 Accounting Policies, Changesin Accounting Estimates and Errors.The Amendments affect only the presentation of liabilities as current or non-current inthe statement of financial position and disclosure of liabilities in the notes to the financialstatements, and not the recognition or measurement of these liabilities. However, theAmendments may change the classification of some liabilities from current to non-current,and vice versa, potentially affecting those entities’ compliance with loan covenants.Consequently, entities are recommended to assess the potential impact of theAmendments early and if the Amendments could change the classification of certainliabilities from non-current to current, entities may want to consider renegotiatingcovenants or other terms of the agreements with the banks or other financial institutions.Page 2 of 12Furthermore, in reporting periods before the Amendments are effective, entities arerequired to disclose known or reasonably estimable information relevant to assessingthe possible impact of application of the Amendments on their financial statements[paragraph 30 of HKAS 81].Key changes from the current HKAS 1 due to the AmendmentsRight to defer settlement for at least twelve months
1.The word “unconditional” has been removed from paragraph 69 of HKAS 1 so thatthis paragraph no longer refers to an “unconditional” right to defer settlement. A newparagraph has been added which requires that an entity’s right to defer settlementfor at least twelve months after the reporting period must have substance and existat the end of the reporting period. [paragraph 72A of HKAS 1]Liabilities with covenants
2.An entity’s right to defer settlement may be subject to its compliance with covenantsspecified in a loan arrangement. The Amendments clarify that covenants with whichan entity must comply after the reporting date do not affect the classification of aliability as current or non-current at the reporting date (i.e. future covenants).However, covenants with which an entity is required to comply on or before thereporting date affect the classification, even if the covenant is assessed only after theentity’s reporting date. [paragraph 72B of HKAS 1] [see Example 1, Example 2 andExample 3]1Applying paragraph 30 of HKAS 8, when an entity has not applied a new HKFRS that has been issued but is not yeteffective, the entity shall disclose this fact and known or reasonably estimable information relevant to assessing thepossible impact that application of the new HKFRS will have on the entity’s financial statements in the period of initialapplication.Is the covenant required to be complied withon or before the reporting date?YesNoAffects whether the right todefer settlement exists at theend of the reporting period(even if the covenant isassessed only after thereporting date)
Does not affect whether theright to defer settlementexists at the end of thereporting periodPage 3 of 12Management’s expectations
3.The Amendments clarify that a liability’s classification as current or non-current isunaffected by management’s intentions or expectations about whether an entity willexercise its right to defer settlement of the liability for at least twelve months after thereporting period. If a liability meets the criteria in paragraph 69 of HKAS 1 to beclassified as non-current, it is classified as non-current even if management intendsor expects the entity to settle the liability within twelve months after the reportingperiod, or even if the entity settles the liability between the end of the reporting periodand the date the financial statements are authorised for issue. [paragraph 75A ofHKAS 1] [see Example 3]
4.The Amendments also align the terminology by replacing “discretion” with “right” inparagraph 73 of HKAS 1 and clarify that the classification principle requires an entityto assess whether it has the right to defer settlement of a liability and not whether itwill exercise that right. [paragraph 73 of HKAS 1] [see Example 3]Settlement by way of own equity instruments
5.The Amendments clarify the meaning of “settlement” for the purpose of classifying aliability as current or non-current. Settlement refers to a transfer to the counterpartythat results in the extinguishment of the liability. The transfer could be of cash, goodsor services, or the entity’s own equity instruments. [paragraph 76A of HKAS 1]
6.The Amendments also clarify how an entity classifies a liability that can be settled inits own equity instruments, e.g. convertible debt. If a liability has terms that could, atthe option of the counterparty, result in its settlement by the transfer of the entity’sown equity instruments, these terms do not affect its classification as current or non-current if the conversion option is accounted for as equity under HKAS 32 FinancialInstruments: Presentation. In other cases, the transfer of equity instruments wouldconstitute settlement of the liability for the purpose of classifying it as current or non-current (e.g. if an obligation to transfer equity instruments is accounted for as aderivative). [paragraph 76B of HKAS 1] [see Example 4]Page 4 of 12Disclosure requirements
7.The Amendments introduce additional disclosure requirements for non-currentliabilities that are subject to future covenants (see paragraph 2 above). Thedisclosures aim to enable investors to assess the risk that those liabilities couldbecome repayable within twelve months after the reporting date. These disclosuresinclude i) information about the covenants and the carrying amount of the relatedliabilities; and ii) facts and circumstances, if any, that indicate the entity may havedifficulty complying with the covenants. [paragraph 76ZA of HKAS 1] [see Example1, Example 2 and Example 3]Illustrative examplesIn this publication, we provide examples to illustrate the application of the Amendmentsin classifying some common loan arrangements in Hong Kong. Since the term “loanarrangement” is not defined in the extant HKAS 1 or in the Amendments, entities willneed to exercise judgement to determine what constitutes a loan arrangement within thecontext of the revised HKAS 1 when classifying liabilities as current or non-current.In these examples, we assume that the entity’s right to defer settlement of the liabilitieshas substance under paragraph 72A of HKAS 1. In addition, these examples aresimplified for illustration purposes only. In practice, the terms of loan arrangements maybe different from and/or more complicated than those in this publication and there mayLiabilities that can be settled in a company’sown shares (e.g. convertible debts)
Conversion option meets thedefinition of an equityinstrumentConversion option does notmeet the definition of anequity instrumentTiming of when sharesettlement can take placedoes not affect theclassification of the hostliability as current or non-currentTiming of when sharesettlement can take placeaffects the classification ofthe host liability as current ornon-currentPage 5 of 12be additional clauses in the loan arrangements that could impact the classification of theloans as current or non-current. For example, certain loan arrangements contain anoverriding repayment on demand clause which gives the lender the right to demandrepayment at any time at its sole discretion, irrespective of whether a default event hasoccurred and notwithstanding any other terms and maturity stated in the arrangement.In accordance with HK Interpretation 5 (Revised) Presentation of Financial Statements– Classification by the Borrower of a Term Loan that Contains a Repayment on DemandClause, loan arrangements containing such clauses shall be classified as currentapplying paragraph 69(d) of HKAS 1 because the borrower does not have the right todefer settlement of the loan for at least twelve months after the reporting period undersuch an arrangement. Entities may need to perform additional analysis and seekprofessional advice when necessary.Example 1: Term loan with financial covenantsCommon facts for variations 1, 2 and 3:
Company A enters into a 3-year loan agreement with a bank on 1 March 20X3.Among the terms and conditions as stipulated in the loan agreement, the bank hasa right to demand full repayment of the loan immediately if Company A does notcomply with specified covenants. Company A’s reporting period ends on 31December 20X3.Variation 1The covenant is that Company A must comply with a specified debt to equity ratioas at each calendar year-end. Company A breaches the covenant on 31 December20X3 but obtains a waiver in respect of the breach under cases A to C. The termsof the waiver provide Company A with a period of grace and during this time thebank cannot demand repayment as a result of the breach.Case A – The waiver obtained before year-end is for a period of more than twelvemonths after the reporting period.Case B – The waiver obtained before year-end is for a period of less than twelvemonths after the reporting period.Case C – The waiver is obtained after year-end but before the financial statementsare authorised for issue.Page 6 of 12Analysis:
Case ACase BCase CDoes Company A have the right to defersettlement for at least twelve months afterthe reporting date?YesNoNoClassification of the loan at the reportingdateNon-currentCurrentCurrentCase AApplying paragraphs 72B(a) and 74 of HKAS 1, in the absence of the waiver,Company A does not have the right to defer settlement of the loan for at least twelvemonths after the reporting period because of the breach of the covenant at year-end. However, the waiver in respect of the breach was obtained before the end ofthe reporting period which provided Company A with the right to defer settlement ofthe loan for at least twelve months after the reporting period. Applying paragraph 75of HKAS 1, the loan under Case A is classified as non-current as at 31 December20X3.Case BThe waiver under Case B provides Company A with the right to defer settlement ofthe loan for a period of less than twelve months after the reporting period. Therequirements in paragraph 75 of HKAS 1 are not met in this case and the loan underCase B is classified as current as at 31 December 20X3 due to the breach of thecovenant test at the reporting date.Case CApplying paragraphs 72B(a) and 74 of HKAS 1, the loan under Case C is classifiedas current as at 31 December 20X3 even though the lender has agreed, after thereporting date but before the financial statements are authorised for issue, not todemand payment as a consequence of the breach. Since Company A only obtainedthe waiver after year-end, it does not have a right at the reporting date to defer thesettlement of the loan for at least twelve months after the reporting period.Variation 2The covenant is assessed based on Company A’s financial position after thereporting period (e.g. 31 March of the following year).Page 7 of 12Analysis:
Paragraph 72B(b) of HKAS 1 states that if an entity is required to comply with acovenant only after the reporting period, such covenant does not affect whether theright to defer settlement exists at the end of the reporting period. In this example,Company A is required to comply with the covenant only after the year-end. Thecovenant does not affect Company A’s right to defer settlement as at year-end.Therefore, the loan is classified as non-current as at 31 December 20X3.Also, Company A is required to disclose information in the notes to the financialstatements, including (i) information about the covenant and the carrying amount ofthe loan; and (ii) facts and circumstances, if any, that indicate Company A may havedifficulty complying with the covenants in accordance with paragraph 76ZA of HKAS
1.Variation 3The covenant is assessed based on certain metrics or ratios determined using theaudited financial statements for each financial year ending 31 December that areprovided to the bank on 31 March of the following year. Company A must complywith the covenant as at each calendar year-end. Based on the audited financialstatements, Company A breaches the covenant as at 31 December 20X3.Analysis:
Paragraph 72B(a) of HKAS 1 states that a covenant affects whether an entity’s rightto defer settlement for at least twelve months after the reporting period exists at thereporting date if an entity is required to comply with the covenant on or before theend of the reporting period even if compliance with the covenant is assessed onlyafter the reporting period. In this example, even though the covenant is tested afteryear-end, Company A does not have the right to defer settlement of the loan for atleast twelve months after the reporting period because it has breached the covenantas at the year-end. Therefore, the loan is classified as current as at 31 December20X3.Disclosures of breachesThere are a few cases in this example where Company A breaches the covenantsat the end of the reporting period and those breaches permit the bank to demandimmediate payment. Applying paragraph 18 of HKFRS 7 Financial Instruments:
Disclosures, Company A is required to disclose i) details of the breaches during theperiod; ii) the carrying amount of the related loans at the reporting date; and iii)
Page 8 of 12whether the breach was remedied or the terms of the loans were renegotiated beforethe financial statements were authorised for issue.Example 2: Term loan with non-financial covenants/conditionsCompany B enters into a 3-year loan agreement with a bank on 1 March 20X3.Among the terms and conditions as stipulated in the loan agreement, the bank hasa right to demand full repayment of the loan immediately upon the occurrence ofcertain events (i.e. the “covenants/conditions”) as described in Cases 1 to 3 below.Company B’s reporting period ends on 31 December 20X3.Case 1 – a change in Company B’s controlling shareholdersCase 2 – deterioration of Company B’s external credit risk rating (e.g. frominvestment grade to non-investment grade)
Case 3 – failure to complete an initial public offering by 30 June 20X4Analysis:
Case 1 and Case 2Paragraph 72B of HKAS 1 states that covenants/conditions with which an entitymust comply on or before the reporting date affect the classification of a liability ascurrent or non-current at the reporting date while covenants/conditions with whichan entity must comply after the reporting date do not affect the classification.Case 1 and Case 2 do not specify when the entity is required to comply with thecovenants/conditions. If there is no actual breach of the covenants/conditions on orbefore the reporting date, applying paragraphs 72B(a) and 74 of HKAS 1, CompanyB has the right to defer settlement of the loan for at least twelve months after thereporting period and so the loan is classified as non-current as at 31 December20X3. If, on the other hand, Company B has breached these covenants/conditionson or before the reporting date, the loan would be classified as current at thereporting date.Case 3Paragraph 72B(b) of HKAS 1 states that if an entity is required to comply with acovenant/condition only after the reporting period, such covenant/condition does notaffect whether the right to defer settlement exists at the end of the reporting period.Company B is required to comply with the covenant/condition only after the year-Page 9 of 12end. The covenant/condition does not affect Company B’s right to defer settlementas at year-end. As the loan is repayable in three years’ time, it is classified as non-current as at 31 December 20X3.DisclosuresFor Cases 1-3 above, Company B is required to disclose information in the notes tothe financial statements, including (i) information about the covenant/condition andthe carrying amount of the loan; and (ii) facts and circumstances, if any, that indicateCompany B may have difficulty complying with the covenants/conditions inaccordance with paragraph 76ZA of HKAS 1.Example 3: Revolving loan facilityFacts:
Company C enters into a 3-year revolving loan facility with a bank. The facility is fullydrawn down on 1 February 20X3 as a one-year loan with repayment due on 31January 20X4. Company C has the right to roll over the loan for another year subjectto complying with an annual covenant test, which requires Company C to maintaina specified debt to equity ratio on 31 January each year. The bank will testcompliance with the loan covenant before rolling over the loan. The loan will be rolledover at the borrower’s sole discretion (i.e. the lender cannot reject the roll overrequest) as long as the loan covenant is complied with. Management intends to rollover the loan on 31 January 20X4 and settle the loan by the end of 20X4. CompanyC’s reporting period ends on 31 December 20X3.Analysis:
In this example, the facility is drawn down as a one-year loan with a repayment datewithin twelve months after the reporting date (i.e. on 31 January 20X4). However,paragraph 69(c) of HKAS 1 does not apply in this case because Company C has theright to roll over the loan for another year subject to an annual covenant test on 31January each year. Company C therefore assesses whether it has the right to defersettlement for at least twelve months after the reporting period (paragraph 69(d) ofHKAS 1). In performing such an assessment, paragraph 73 of HKAS 1 sets outspecific requirements for roll over obligations − if an entity has the right, at the endof the reporting period, to roll over an obligation for at least twelve months after thereporting period under an existing loan facility, it classifies the obligation asnon-current, even if it would otherwise be due within a shorter period.Since its “right” to roll over the loan is subject to complying with an annual covenantPage 10 of 12test, Company C applies paragraph 72B of HKAS 1 which is applicable to all loanarrangements, including long-term revolving loan facilities. In this example,Company C is required to comply with the covenant only after the reporting period.Applying paragraph 72B(b) of HKAS 1, the covenant does not affect thedetermination of whether Company C has the right to defer settlement for at leasttwelve months after the end of the reporting period. At the reporting date (i.e. 31December 20X3), Company C has the right to defer settlement of the liability underthe revolving loan facility for at least twelve months after the reporting period, andhence it is classified as non-current as at 31 December 20X3.Even though management intends to settle the loan within twelve months after thereporting period (i.e. by the end of 20X4), such intention does not affect theclassification of the loan as current or non-current applying paragraph 75A of HKAS
1.However, Company C may need to disclose information about the expected timingof settlement to enable users of its financial statements to understand the impact ofthe loan on its financial position (paragraph 17(c) of HKAS 1).Also, paragraph 76ZA of HKAS 1 requires Company C to disclose information in thenotes to the financial statements that enables users of financial statements tounderstand the risk that non-current liabilities with future covenants could becomerepayable within twelve months after the reporting period.Notes:
In this example, Company C has the right to roll over the loan which is conditionalon compliance with the loan covenant annually on 31 January. Prior to theAmendments, HKAS 1 required an entity’s right to defer settlement of a loan to be“unconditional”, failure of which would have resulted in a current classification of therevolving loan in this example. The Amendments replaced “an unconditional right”
with “a right at the end of the reporting period”, and so the loan drawn down underthe revolving loan facility will be classified as non-current if Company C has aconditional right to roll over the loan at the end of the reporting period, which issubject to the compliance with the covenant after the reporting date.This example is simplified for illustration purposes. In practice, the revolving loanfacility may have different and/or more complicated terms than those in this example.Entities may need to perform additional analysis and seek professional advice whennecessary.Page 11 of 12Example 4: Convertible bonds4(a) Functional currency-denominated convertible bondFacts:
Company D has a Hong Kong dollar (HKD) functional currency and it issues a five-year HKD-denominated convertible bond on 1 May 20X3 that matures on 30 April20X8. The convertible bond includes a contractual obligation to deliver cash to theholder of the bond at maturity (host liability) and a conversion option. The holder hasthe option to convert the bond into a fixed number of Company C’s ordinary sharesat any time before maturity at the holder’s discretion. The convertible bond is acompound financial instrument. Applying HKAS 32, the conversion option isrecognised as an equity instrument separately from the host liability. Company D’sreporting period ends on 31 December 20X3.Analysis:
Applying paragraph 76B of HKAS 1, the conversion option does not affect theclassification of the host liability as current or non-current because the conversionoption is separately classified as an equity instrument. The host liability matures on30 April 20X8 and, therefore, it is classified as non-current as at 31 December 20X3applying paragraph 69 of HKAS 1 despite the fact that the liability could beextinguished due to conversion into shares within the next twelve months.4(b) Foreign currency-denominated convertible bondFacts:
The facts are the same as those in Example 4(a), except the functional currency ofCompany D is Renminbi (RMB). The conversion option does not meet the definitionof equity instrument in HKAS 32 because it obliges Company D to exchange avariable amount of cash in RMB for a fixed number of its own equity instruments (i.e.it fails the “fixed-for-fixed” criterion in HKAS 32). The conversion option is recognisedas an embedded derivative separately from the host liability applying paragraph
4.3.3 of HKFRS 9 (unless Company D designates the entire instrument under thefair value option).Analysis:
Given the conversion option is not classified as an equity instrument in terms ofHKAS 32, paragraph 76B of HKAS 1 is not applicable. The transfer of Company D’sPage 12 of 12equity instruments is a form of settlement applying paragraph 76A of HKAS 1. Sincethe holder has an option to convert the bond into Company D’s ordinary shares atany time at the holder’s discretion, Company D does not have the right to defersettlement for at least twelve months after the reporting period. Therefore, the hostliability (or the entire convertible bond if it is designated in its entirety as a financialliability at fair value through profit or loss) is classified as current as at 31 December20X3 applying paragraph 69(d) of HKAS 1.Notes:
Settlement by way of own equity instrumentsA transfer of the entity’s own equity instruments is treated as an outflow of economicresources if the obligation to make that transfer is classified as a liability. This isbecause paragraph 4.26 of Conceptual Framework for Financial Reporting definesa liability as a present obligation to transfer an economic resource as a result of pastevents.Paragraph 21 of HKAS 32 explains that if an entity has a contractual obligation todeliver a variable number of its own equity instruments, such contractual obligationis not an equity instrument of the entity. Paragraph BC10(b) of HKAS 32 explainsthat such contractual obligation is a liability because the entity is using its own equityinstruments “as currency”, which is an economic resource.ObservationThe clarification of the meaning of “settlement” in the Amendments might result in asignificant change for entities that currently only consider the date at which cashpayment is required and any early redemption options when classifying the hostliability of a convertible bond as current or non-current. Some entities may haveignored the conversion options when making this classification as the exercise ofsuch options neither have any cash flow effect nor affect the liquidity position of theissuers. Therefore, practice may change following the adoption of the Amendments.
Illustrative examples on classification of liabilities as current or non-current
下载原件Page 1 of 12The guidance below was developed by the Financial Reporting StandardsCommittee (FRSC) of the Hong Kong Institute of Certified Public Accountants(HKICPA) and is for general reference only. The HKICPA, FRSC and their staff donot accept any responsibility or liability, and disclaim all responsibility and liabilityin respect of the guidance and any consequences that may arise from any personacting or refraining from action as a result of any materials in the guidance.Members of the HKICPA and other users of this guidance should also read theoriginal text of HKAS 1 Presentation of Financial Statements, as found in theHKICPA Members’ Handbook for further reference, and seek professional advicewhere necessary when applying the references contained in this guidance.The HKICPA's Standard Setting Department welcomes your comments and feedback onthis guidance, which should be sent to commentletters@hkicpa.org.hk.Illustrative examples on classification of liabilities as current or non-currentIn August 2020, the HKICPA issued Classification of Liabilities as Current or Non-current- Amendments to HKAS 1 Presentation of Financial Statements (2020 Amendments)
which clarified certain aspects of how entities classify liabilities as current or non-current.In December 2022, the HKICPA issued further amendments to HKAS 1 Non-currentLiabilities with Covenants (2022 Amendments) which clarified how conditions with whichan entity must comply in a loan arrangement affect the classification of the loan as currentor non-current and deferred the effective date of the 2020 Amendments. Both the 2020Amendments and the 2022 Amendments (collectively “the Amendments”) are to beapplied as a package and are effective for annual reporting periods beginning on or after1 January 2024, with early adoption permitted. Entities will need to apply theseAmendments retrospectively in accordance with HKAS 8 Accounting Policies, Changesin Accounting Estimates and Errors.The Amendments affect only the presentation of liabilities as current or non-current inthe statement of financial position and disclosure of liabilities in the notes to the financialstatements, and not the recognition or measurement of these liabilities. However, theAmendments may change the classification of some liabilities from current to non-current,and vice versa, potentially affecting those entities’ compliance with loan covenants.Consequently, entities are recommended to assess the potential impact of theAmendments early and if the Amendments could change the classification of certainliabilities from non-current to current, entities may want to consider renegotiatingcovenants or other terms of the agreements with the banks or other financial institutions.Page 2 of 12Furthermore, in reporting periods before the Amendments are effective, entities arerequired to disclose known or reasonably estimable information relevant to assessingthe possible impact of application of the Amendments on their financial statements[paragraph 30 of HKAS 81].Key changes from the current HKAS 1 due to the AmendmentsRight to defer settlement for at least twelve months
1.The word “unconditional” has been removed from paragraph 69 of HKAS 1 so thatthis paragraph no longer refers to an “unconditional” right to defer settlement. A newparagraph has been added which requires that an entity’s right to defer settlementfor at least twelve months after the reporting period must have substance and existat the end of the reporting period. [paragraph 72A of HKAS 1]Liabilities with covenants
2.An entity’s right to defer settlement may be subject to its compliance with covenantsspecified in a loan arrangement. The Amendments clarify that covenants with whichan entity must comply after the reporting date do not affect the classification of aliability as current or non-current at the reporting date (i.e. future covenants).However, covenants with which an entity is required to comply on or before thereporting date affect the classification, even if the covenant is assessed only after theentity’s reporting date. [paragraph 72B of HKAS 1] [see Example 1, Example 2 andExample 3]1Applying paragraph 30 of HKAS 8, when an entity has not applied a new HKFRS that has been issued but is not yeteffective, the entity shall disclose this fact and known or reasonably estimable information relevant to assessing thepossible impact that application of the new HKFRS will have on the entity’s financial statements in the period of initialapplication.Is the covenant required to be complied withon or before the reporting date?YesNoAffects whether the right todefer settlement exists at theend of the reporting period(even if the covenant isassessed only after thereporting date)
Does not affect whether theright to defer settlementexists at the end of thereporting periodPage 3 of 12Management’s expectations
3.The Amendments clarify that a liability’s classification as current or non-current isunaffected by management’s intentions or expectations about whether an entity willexercise its right to defer settlement of the liability for at least twelve months after thereporting period. If a liability meets the criteria in paragraph 69 of HKAS 1 to beclassified as non-current, it is classified as non-current even if management intendsor expects the entity to settle the liability within twelve months after the reportingperiod, or even if the entity settles the liability between the end of the reporting periodand the date the financial statements are authorised for issue. [paragraph 75A ofHKAS 1] [see Example 3]
4.The Amendments also align the terminology by replacing “discretion” with “right” inparagraph 73 of HKAS 1 and clarify that the classification principle requires an entityto assess whether it has the right to defer settlement of a liability and not whether itwill exercise that right. [paragraph 73 of HKAS 1] [see Example 3]Settlement by way of own equity instruments
5.The Amendments clarify the meaning of “settlement” for the purpose of classifying aliability as current or non-current. Settlement refers to a transfer to the counterpartythat results in the extinguishment of the liability. The transfer could be of cash, goodsor services, or the entity’s own equity instruments. [paragraph 76A of HKAS 1]
6.The Amendments also clarify how an entity classifies a liability that can be settled inits own equity instruments, e.g. convertible debt. If a liability has terms that could, atthe option of the counterparty, result in its settlement by the transfer of the entity’sown equity instruments, these terms do not affect its classification as current or non-current if the conversion option is accounted for as equity under HKAS 32 FinancialInstruments: Presentation. In other cases, the transfer of equity instruments wouldconstitute settlement of the liability for the purpose of classifying it as current or non-current (e.g. if an obligation to transfer equity instruments is accounted for as aderivative). [paragraph 76B of HKAS 1] [see Example 4]Page 4 of 12Disclosure requirements
7.The Amendments introduce additional disclosure requirements for non-currentliabilities that are subject to future covenants (see paragraph 2 above). Thedisclosures aim to enable investors to assess the risk that those liabilities couldbecome repayable within twelve months after the reporting date. These disclosuresinclude i) information about the covenants and the carrying amount of the relatedliabilities; and ii) facts and circumstances, if any, that indicate the entity may havedifficulty complying with the covenants. [paragraph 76ZA of HKAS 1] [see Example1, Example 2 and Example 3]Illustrative examplesIn this publication, we provide examples to illustrate the application of the Amendmentsin classifying some common loan arrangements in Hong Kong. Since the term “loanarrangement” is not defined in the extant HKAS 1 or in the Amendments, entities willneed to exercise judgement to determine what constitutes a loan arrangement within thecontext of the revised HKAS 1 when classifying liabilities as current or non-current.In these examples, we assume that the entity’s right to defer settlement of the liabilitieshas substance under paragraph 72A of HKAS 1. In addition, these examples aresimplified for illustration purposes only. In practice, the terms of loan arrangements maybe different from and/or more complicated than those in this publication and there mayLiabilities that can be settled in a company’sown shares (e.g. convertible debts)
Conversion option meets thedefinition of an equityinstrumentConversion option does notmeet the definition of anequity instrumentTiming of when sharesettlement can take placedoes not affect theclassification of the hostliability as current or non-currentTiming of when sharesettlement can take placeaffects the classification ofthe host liability as current ornon-currentPage 5 of 12be additional clauses in the loan arrangements that could impact the classification of theloans as current or non-current. For example, certain loan arrangements contain anoverriding repayment on demand clause which gives the lender the right to demandrepayment at any time at its sole discretion, irrespective of whether a default event hasoccurred and notwithstanding any other terms and maturity stated in the arrangement.In accordance with HK Interpretation 5 (Revised) Presentation of Financial Statements– Classification by the Borrower of a Term Loan that Contains a Repayment on DemandClause, loan arrangements containing such clauses shall be classified as currentapplying paragraph 69(d) of HKAS 1 because the borrower does not have the right todefer settlement of the loan for at least twelve months after the reporting period undersuch an arrangement. Entities may need to perform additional analysis and seekprofessional advice when necessary.Example 1: Term loan with financial covenantsCommon facts for variations 1, 2 and 3:
Company A enters into a 3-year loan agreement with a bank on 1 March 20X3.Among the terms and conditions as stipulated in the loan agreement, the bank hasa right to demand full repayment of the loan immediately if Company A does notcomply with specified covenants. Company A’s reporting period ends on 31December 20X3.Variation 1The covenant is that Company A must comply with a specified debt to equity ratioas at each calendar year-end. Company A breaches the covenant on 31 December20X3 but obtains a waiver in respect of the breach under cases A to C. The termsof the waiver provide Company A with a period of grace and during this time thebank cannot demand repayment as a result of the breach.Case A – The waiver obtained before year-end is for a period of more than twelvemonths after the reporting period.Case B – The waiver obtained before year-end is for a period of less than twelvemonths after the reporting period.Case C – The waiver is obtained after year-end but before the financial statementsare authorised for issue.Page 6 of 12Analysis:
Case ACase BCase CDoes Company A have the right to defersettlement for at least twelve months afterthe reporting date?YesNoNoClassification of the loan at the reportingdateNon-currentCurrentCurrentCase AApplying paragraphs 72B(a) and 74 of HKAS 1, in the absence of the waiver,Company A does not have the right to defer settlement of the loan for at least twelvemonths after the reporting period because of the breach of the covenant at year-end. However, the waiver in respect of the breach was obtained before the end ofthe reporting period which provided Company A with the right to defer settlement ofthe loan for at least twelve months after the reporting period. Applying paragraph 75of HKAS 1, the loan under Case A is classified as non-current as at 31 December20X3.Case BThe waiver under Case B provides Company A with the right to defer settlement ofthe loan for a period of less than twelve months after the reporting period. Therequirements in paragraph 75 of HKAS 1 are not met in this case and the loan underCase B is classified as current as at 31 December 20X3 due to the breach of thecovenant test at the reporting date.Case CApplying paragraphs 72B(a) and 74 of HKAS 1, the loan under Case C is classifiedas current as at 31 December 20X3 even though the lender has agreed, after thereporting date but before the financial statements are authorised for issue, not todemand payment as a consequence of the breach. Since Company A only obtainedthe waiver after year-end, it does not have a right at the reporting date to defer thesettlement of the loan for at least twelve months after the reporting period.Variation 2The covenant is assessed based on Company A’s financial position after thereporting period (e.g. 31 March of the following year).Page 7 of 12Analysis:
Paragraph 72B(b) of HKAS 1 states that if an entity is required to comply with acovenant only after the reporting period, such covenant does not affect whether theright to defer settlement exists at the end of the reporting period. In this example,Company A is required to comply with the covenant only after the year-end. Thecovenant does not affect Company A’s right to defer settlement as at year-end.Therefore, the loan is classified as non-current as at 31 December 20X3.Also, Company A is required to disclose information in the notes to the financialstatements, including (i) information about the covenant and the carrying amount ofthe loan; and (ii) facts and circumstances, if any, that indicate Company A may havedifficulty complying with the covenants in accordance with paragraph 76ZA of HKAS
1.Variation 3The covenant is assessed based on certain metrics or ratios determined using theaudited financial statements for each financial year ending 31 December that areprovided to the bank on 31 March of the following year. Company A must complywith the covenant as at each calendar year-end. Based on the audited financialstatements, Company A breaches the covenant as at 31 December 20X3.Analysis:
Paragraph 72B(a) of HKAS 1 states that a covenant affects whether an entity’s rightto defer settlement for at least twelve months after the reporting period exists at thereporting date if an entity is required to comply with the covenant on or before theend of the reporting period even if compliance with the covenant is assessed onlyafter the reporting period. In this example, even though the covenant is tested afteryear-end, Company A does not have the right to defer settlement of the loan for atleast twelve months after the reporting period because it has breached the covenantas at the year-end. Therefore, the loan is classified as current as at 31 December20X3.Disclosures of breachesThere are a few cases in this example where Company A breaches the covenantsat the end of the reporting period and those breaches permit the bank to demandimmediate payment. Applying paragraph 18 of HKFRS 7 Financial Instruments:
Disclosures, Company A is required to disclose i) details of the breaches during theperiod; ii) the carrying amount of the related loans at the reporting date; and iii)
Page 8 of 12whether the breach was remedied or the terms of the loans were renegotiated beforethe financial statements were authorised for issue.Example 2: Term loan with non-financial covenants/conditionsCompany B enters into a 3-year loan agreement with a bank on 1 March 20X3.Among the terms and conditions as stipulated in the loan agreement, the bank hasa right to demand full repayment of the loan immediately upon the occurrence ofcertain events (i.e. the “covenants/conditions”) as described in Cases 1 to 3 below.Company B’s reporting period ends on 31 December 20X3.Case 1 – a change in Company B’s controlling shareholdersCase 2 – deterioration of Company B’s external credit risk rating (e.g. frominvestment grade to non-investment grade)
Case 3 – failure to complete an initial public offering by 30 June 20X4Analysis:
Case 1 and Case 2Paragraph 72B of HKAS 1 states that covenants/conditions with which an entitymust comply on or before the reporting date affect the classification of a liability ascurrent or non-current at the reporting date while covenants/conditions with whichan entity must comply after the reporting date do not affect the classification.Case 1 and Case 2 do not specify when the entity is required to comply with thecovenants/conditions. If there is no actual breach of the covenants/conditions on orbefore the reporting date, applying paragraphs 72B(a) and 74 of HKAS 1, CompanyB has the right to defer settlement of the loan for at least twelve months after thereporting period and so the loan is classified as non-current as at 31 December20X3. If, on the other hand, Company B has breached these covenants/conditionson or before the reporting date, the loan would be classified as current at thereporting date.Case 3Paragraph 72B(b) of HKAS 1 states that if an entity is required to comply with acovenant/condition only after the reporting period, such covenant/condition does notaffect whether the right to defer settlement exists at the end of the reporting period.Company B is required to comply with the covenant/condition only after the year-Page 9 of 12end. The covenant/condition does not affect Company B’s right to defer settlementas at year-end. As the loan is repayable in three years’ time, it is classified as non-current as at 31 December 20X3.DisclosuresFor Cases 1-3 above, Company B is required to disclose information in the notes tothe financial statements, including (i) information about the covenant/condition andthe carrying amount of the loan; and (ii) facts and circumstances, if any, that indicateCompany B may have difficulty complying with the covenants/conditions inaccordance with paragraph 76ZA of HKAS 1.Example 3: Revolving loan facilityFacts:
Company C enters into a 3-year revolving loan facility with a bank. The facility is fullydrawn down on 1 February 20X3 as a one-year loan with repayment due on 31January 20X4. Company C has the right to roll over the loan for another year subjectto complying with an annual covenant test, which requires Company C to maintaina specified debt to equity ratio on 31 January each year. The bank will testcompliance with the loan covenant before rolling over the loan. The loan will be rolledover at the borrower’s sole discretion (i.e. the lender cannot reject the roll overrequest) as long as the loan covenant is complied with. Management intends to rollover the loan on 31 January 20X4 and settle the loan by the end of 20X4. CompanyC’s reporting period ends on 31 December 20X3.Analysis:
In this example, the facility is drawn down as a one-year loan with a repayment datewithin twelve months after the reporting date (i.e. on 31 January 20X4). However,paragraph 69(c) of HKAS 1 does not apply in this case because Company C has theright to roll over the loan for another year subject to an annual covenant test on 31January each year. Company C therefore assesses whether it has the right to defersettlement for at least twelve months after the reporting period (paragraph 69(d) ofHKAS 1). In performing such an assessment, paragraph 73 of HKAS 1 sets outspecific requirements for roll over obligations − if an entity has the right, at the endof the reporting period, to roll over an obligation for at least twelve months after thereporting period under an existing loan facility, it classifies the obligation asnon-current, even if it would otherwise be due within a shorter period.Since its “right” to roll over the loan is subject to complying with an annual covenantPage 10 of 12test, Company C applies paragraph 72B of HKAS 1 which is applicable to all loanarrangements, including long-term revolving loan facilities. In this example,Company C is required to comply with the covenant only after the reporting period.Applying paragraph 72B(b) of HKAS 1, the covenant does not affect thedetermination of whether Company C has the right to defer settlement for at leasttwelve months after the end of the reporting period. At the reporting date (i.e. 31December 20X3), Company C has the right to defer settlement of the liability underthe revolving loan facility for at least twelve months after the reporting period, andhence it is classified as non-current as at 31 December 20X3.Even though management intends to settle the loan within twelve months after thereporting period (i.e. by the end of 20X4), such intention does not affect theclassification of the loan as current or non-current applying paragraph 75A of HKAS
1.However, Company C may need to disclose information about the expected timingof settlement to enable users of its financial statements to understand the impact ofthe loan on its financial position (paragraph 17(c) of HKAS 1).Also, paragraph 76ZA of HKAS 1 requires Company C to disclose information in thenotes to the financial statements that enables users of financial statements tounderstand the risk that non-current liabilities with future covenants could becomerepayable within twelve months after the reporting period.Notes:
In this example, Company C has the right to roll over the loan which is conditionalon compliance with the loan covenant annually on 31 January. Prior to theAmendments, HKAS 1 required an entity’s right to defer settlement of a loan to be“unconditional”, failure of which would have resulted in a current classification of therevolving loan in this example. The Amendments replaced “an unconditional right”
with “a right at the end of the reporting period”, and so the loan drawn down underthe revolving loan facility will be classified as non-current if Company C has aconditional right to roll over the loan at the end of the reporting period, which issubject to the compliance with the covenant after the reporting date.This example is simplified for illustration purposes. In practice, the revolving loanfacility may have different and/or more complicated terms than those in this example.Entities may need to perform additional analysis and seek professional advice whennecessary.Page 11 of 12Example 4: Convertible bonds4(a) Functional currency-denominated convertible bondFacts:
Company D has a Hong Kong dollar (HKD) functional currency and it issues a five-year HKD-denominated convertible bond on 1 May 20X3 that matures on 30 April20X8. The convertible bond includes a contractual obligation to deliver cash to theholder of the bond at maturity (host liability) and a conversion option. The holder hasthe option to convert the bond into a fixed number of Company C’s ordinary sharesat any time before maturity at the holder’s discretion. The convertible bond is acompound financial instrument. Applying HKAS 32, the conversion option isrecognised as an equity instrument separately from the host liability. Company D’sreporting period ends on 31 December 20X3.Analysis:
Applying paragraph 76B of HKAS 1, the conversion option does not affect theclassification of the host liability as current or non-current because the conversionoption is separately classified as an equity instrument. The host liability matures on30 April 20X8 and, therefore, it is classified as non-current as at 31 December 20X3applying paragraph 69 of HKAS 1 despite the fact that the liability could beextinguished due to conversion into shares within the next twelve months.4(b) Foreign currency-denominated convertible bondFacts:
The facts are the same as those in Example 4(a), except the functional currency ofCompany D is Renminbi (RMB). The conversion option does not meet the definitionof equity instrument in HKAS 32 because it obliges Company D to exchange avariable amount of cash in RMB for a fixed number of its own equity instruments (i.e.it fails the “fixed-for-fixed” criterion in HKAS 32). The conversion option is recognisedas an embedded derivative separately from the host liability applying paragraph
4.3.3 of HKFRS 9 (unless Company D designates the entire instrument under thefair value option).Analysis:
Given the conversion option is not classified as an equity instrument in terms ofHKAS 32, paragraph 76B of HKAS 1 is not applicable. The transfer of Company D’sPage 12 of 12equity instruments is a form of settlement applying paragraph 76A of HKAS 1. Sincethe holder has an option to convert the bond into Company D’s ordinary shares atany time at the holder’s discretion, Company D does not have the right to defersettlement for at least twelve months after the reporting period. Therefore, the hostliability (or the entire convertible bond if it is designated in its entirety as a financialliability at fair value through profit or loss) is classified as current as at 31 December20X3 applying paragraph 69(d) of HKAS 1.Notes:
Settlement by way of own equity instrumentsA transfer of the entity’s own equity instruments is treated as an outflow of economicresources if the obligation to make that transfer is classified as a liability. This isbecause paragraph 4.26 of Conceptual Framework for Financial Reporting definesa liability as a present obligation to transfer an economic resource as a result of pastevents.Paragraph 21 of HKAS 32 explains that if an entity has a contractual obligation todeliver a variable number of its own equity instruments, such contractual obligationis not an equity instrument of the entity. Paragraph BC10(b) of HKAS 32 explainsthat such contractual obligation is a liability because the entity is using its own equityinstruments “as currency”, which is an economic resource.ObservationThe clarification of the meaning of “settlement” in the Amendments might result in asignificant change for entities that currently only consider the date at which cashpayment is required and any early redemption options when classifying the hostliability of a convertible bond as current or non-current. Some entities may haveignored the conversion options when making this classification as the exercise ofsuch options neither have any cash flow effect nor affect the liquidity position of theissuers. Therefore, practice may change following the adoption of the Amendments.