The classification of financial liabilities into current and non-current is governed by the condition of those liabilities at balance sheet date. Current and Non-current liabilities
Where rescheduling or refinancing is at the lender’s discretion, and it occurs after the balance sheet date, it does not alter the liability’s condition at balance sheet date. Accordingly, it is regarded as a non-adjusting post balance sheet event and it is not taken into account in determining the current/non-current classification of the debt. On the other hand where refinancing or rescheduling is at the entity’s discretion and the entity can elect to roll over an obligation for at least one year after the balance sheet date, the obligation is classified as non-current, even if it would otherwise be due within a shorter period. (IAS 1 73) However, if the entity expects to settle the obligation within 12 months, despite having the discretion to settle the obligation within 12 months, despite having the discretion to refinance for a longer period, then the debt should be classified to current. Current and Non-current liabilities
Example – Rolling-over bank facilities
A entity has entered into a facility arrangement with a bank. It has a committed facility that the bank cannot cancel unilaterally and the scheduled maturity of this facility is 3 years from the balance sheet date. The entity has drawn down funds in this facility and these funds are due to be repaid 6 months after the balance sheet date. The entity intends to roll over this debt through the three year facility arrangement. How should this borrowing be shown in the entity’s balance sheet? Current and Non-current liabilities
The borrowing should be shown as non-current. Although the loan is due for repayment within six months of the balance sheet date, the entity is entitled to ‘roll-over’ this borrowing into a ‘new loan’. The substance is, therefore, that the debt is not repayable until 3 years after the balance sheet date when the committed facility expires. In addition, the entity expects to roll-over the debt, so does not expect to repay within 12 months.
Would the answer be different if the facility and existing draw-down loan were with different banks? Current and Non-current liabilities
The position would be different if the facility was with a different bank or if the loan was in the form of commercial paper. In the first case, the entity would have a loan repayable in six months, but would be entitled to take out a new loan to settle its existing debt. These two loans are separate and the new loan is not, either in substance or in fact, an extension of the existing. Similarly if the loan was in the form of commercial paper, which typically has a maturity of 90 to 180 days, it would be classified as a current liability as it is likely that the backup facility would be provided by a different bank.