The right to defer settlement: substance and existence at the end of the period

Learning objectives

• Explain when a right to defer settlement that is subject to conditions exists at the end of the reporting period.L2
• Determine whether a right to defer settlement exists in a case involving conditions.L2, L3

Normative references

• IAS 1 §72AThe right to defer settlement of a liability for at least twelve months after the reporting period must have substance and must exist at the end of the reporting period; paras. 72B to 75 illustrate this requirement (covenants, breach, period of grace).
• IAS 1 §72BFor a liability arising from a loan arrangement, the right to defer settlement may be subject to compliance with conditions of the arrangement (covenants): covenants with which the entity must comply on or before the end of the reporting period determine whether the right exists at that date, even if compliance is assessed only after the reporting period; covenants with which it must comply only after the reporting period do not affect classification at that date.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• A right to defer settlement of a loan obtained after the closing date allows that loan to be classified as a non-current liability at the closing date.L2
• At 31 December 2026, Boreas SA must repay a loan of EUR 4,000,000 in 2029. The contract requires Boreas to comply, at each 31 December, with a ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) of at most 3.0. At 31 December 2026, the ratio is 3.4 (case facts). The lender will test the ratio only on 30 June 2027, using the 2026 accounts. How is the loan classified at 31 December 2026?L3
• Cedar SA must repay a loan of EUR 6,000,000 in 2029, subject to maintaining an interest cover ratio of at least 2.5 at each 31 December (contractual condition of the case). At 31 December 2026, the ratio is 2.7. Management nevertheless forecasts a ratio of 2.1 at 31 December 2027 and is negotiating an amendment of the contract with the bank, which tests the ratio each year using the annual accounts. Write a short note concluding on the classification of the loan at 31 December 2026, distinguishing rule, case facts and professional judgement.L3