Module: | Specialized Audits, Tech & ESG Disclosures
Q83: Consider the following statements regarding the amendments to Ind AS 1 (Presentation of Financial Statements) regarding the classification of liabilities, effective April 2025:
1. A liability must be classified as non-current if the entity has a substantive right to defer settlement for at least twelve months after the reporting period.
2. If the right to defer settlement is subject to the company complying with specified financial covenants, only the covenants with which the entity must comply on or before the reporting date affect the classification.
3. Covenants that the entity must comply with only after the reporting date (e.g., a target based on next year's revenue) do not affect the classification of the liability as current or non-current at the end of the current reporting period.
Which of the above statements is/are correct?
2. If the right to defer settlement is subject to the company complying with specified financial covenants, only the covenants with which the entity must comply on or before the reporting date affect the classification.
3. Covenants that the entity must comply with only after the reporting date (e.g., a target based on next year's revenue) do not affect the classification of the liability as current or non-current at the end of the current reporting period.
Which of the above statements is/are correct?
✅ Correct Answer: D
🎯 Quick Answer:
D. All statements 1, 2, and 3 are correct.Classifying a major loan as "current" (due within a year) versus "non-current" (long-term) drastically impacts the company's perceived liquidity and working capital ratios.
Structural Breakdown: Statement 1 is correct; having the unconditional/substantive right to defer payment is the baseline rule for non-current classification.
Statement 2 is correct; the 2025 amendments clarified that compliance is measured strictly as of the reporting date (e.g., March 31). Statement 3 is correct; future covenants do not retroactively reclassify a long-term loan into a short-term liability on the current balance sheet, though they must be disclosed in the notes.
Historical/Related Context: These amendments were introduced to eliminate widespread confusion and align Ind AS 1 with the IAS 1 updates issued globally.
Previously, auditors and management frequently clashed over whether a loan should be shown as "current" if a future covenant breach was highly likely.
Causal Reasoning: Financial statements are a snapshot of a specific date.
Judging a company's current liabilities based on a covenant that doesn't trigger until six months into the future distorts the reality of the company's legal obligations strictly on the balance sheet date.