Exercise 1

Skye Co has a long-term loan facility with SR bank. Under the terms of the loan facility, outstanding amounts are due to be repaid in Feb. 20x8, unless the facility is rolled over as agreed with the bank. The director of Skye Co intend to repay amounts outstanding by February 20x8, however, as a precaution, on 20 December 20x7, the directors of Skye Co agreed with SR Bank that it could choose to roll over the loan facility for a further 12 months, so that repayment of any outstanding amounts would be deferred to Feb. 20x9. At the reporting date of 31 December 20x7, Skye Co classified the loan as a current liability, reflecting the intention to settle the loan in February 20x8.

Required: Discuss whether the classification of the loan as a current liability is correct and whether it provides useful information to investors.

 Answer

IAS 1 makes it clear that if an entity has the right, at the end of the reporting period, to roll over an obligation for at least twelve months after 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. (If the entity has no such right, the entity does not consider the potential to refinance the obligation and classifies the obligation as current) In case of Skye, since it has a right to defer settlement of the loan until February 20x9, the loan should be classified as non-current at 31 Dec. 20x7. Whether or not the directors intend to repay the loan in Feb. 20x8 is irrelevant in determining the classification.

According to the Conceptual Framework, useful information is both relevant and a faithful representation of the transaction. It would be argured that classifying the loan as current is more relevant to user’s decision making, as it will help them to predict the future cash flow. However, this will be in direct contravention of the requirement of IAS 1 and so is not permitted as the Conceptual Framework does not override individual IFRS standard. In order to be useful, additional disclosure could be given in notes about the expected timing of settlement.

(Amended by Keryn)