Current and non-current assets

Most financial positions present individual items in distinction to current and non-current (except for banks and relevant institutions).

From many people point of view that they do not really need to think about classifying individual assets and liabilities as current ad non- current, because we do it automatically but this approach is not always correct.

For instance, one of the significant mistakes I have seen in this area is presenting the long-term loans.

Many companies present them automatically as non-current liabilities – while they are not!

Why?

Just go on reading!

What do the rules say?

The standard IAS 1 Presentation of Financial Statements clearly states when to present particular asset or liability as current. many people would say that “12 months” is the fundamental formula and sufficient sign that precisely determines what is current or non-current.

However, this is not always true.

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More specifically, an asset is presented as current when:

• It is expected to be realized (sold, consumed) in its normal operating cycle.
• Here, the standard does not specify what the normal operating cycle is, as it varies from business to business. Sometimes it’s not so clear – in these cases, it is assumed to be 12 months.
• An asset is held for trading.
• It does not matter that the company will probably not sell an asset within 12 months; as soon as its purpose is trading, then it’s current.
• It is expected to be realized within 12 months after the reporting period, or
• It is a cash or cash equivalent (not restricted in any way)

The same applies for liabilities, too, but the standard IAS 1 adds that when there is no unconditional right to defer settlement of the liability for at least 12 months after the reporting period, then it is current.

Everything else is non-current.

Typical examples of current items are inventories, trade receivables, prepayments, cash, bank accounts, etc.

Typical examples of non-current items are long-term loans or provisions, property, plant and equipment, intangibles, investments in subsidiaries, etc.

These are just examples, but there are a few items that are not that outright and need to be assessed carefully.

Property, plant and equipment

Typically, property, plant and equipment (PPE) is categorised as non-current, as a result of the businesses use these assets for a interval longer than 12 months, or longer than only one operating cycle.

This additionally applies for many intangible assets and investment properties.

Nevertheless, there’s a few exceptions or conditions, when you need to present your PPE as current:

Non-current assets classified as held for sale under IFRS 5

When some non-current assets meets the standards of IFRS 5 to be categorised as held for sale, it shall not be presented within non-current assets.

As an alternative, all assets held for sale or of a disposal group shall be introduced individually from different assets within the statement of financial position. The identical applies for liabilities, too.

So that you would come with one separate line item within your current assets, labeled something like “Assets categorised as held for sale”.

Non-current assets routinely sold after rental

Some firms maintain non-current assets for leases after which they routinely sell them after a while.

For instance, car-rental firm routinely rents out its vehicles to numerous clients for a short time frame after which these vehicles are offered after 1 or 2 years. Right here, I’m not speaking about any finance lease – I mean short-term, or even long-term operating lease.

These property shall be introduced as non-current throughout their rental interval, however when a company stops renting them out and needs to promote them, they shall be transferred to inventories.

Inventories

Inventories are a typical current asset, as stock manufacturing often determines the size of firm’s working cycle.

It doesn’t matter whether or not the asset produced has the economic life shorter than 12 months or not – when you produce equipment or vehicles, out of your standpoint it’s nonetheless a bit of stock (except you’d like to make use of some items to your personal business, for instance for check drives, promoting functions or so).

I’d wish to point out that additionally inventories whose manufacturing interval is longer than 12 months and are anticipated to be realized (offered) past 12 months after the top of the reporting period, are categorised as current assets.

For instance, cheese, wine or whiskey that must mature for just a few years, are nonetheless categorised as current assets.

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Deferred tax assets and liabilities

No discussion right here.

Deferred tax assets and liabilities are at all times categorised as non-current.

Loans with covenants

That is the trickiest one in my view. Right here, the businesses make massive errors in presenting their loans.

The standard IAS 1 particularly says that when an entity breaches some provisions of a long-term mortgage association earlier than the period finish and the impact is that the loan turn into repayable on demand, the mortgage have to be introduced as current.

The usual could be very strict right here – it applies additionally within the case when the lender (financial institution) agreed to not demand the fee because the consequence of breach after the end of the reporting period, however earlier than the financial statements are authorized for issue.

Let me illustrate it on a brief example:

Question:

ABC took a loan from StrictBank repayable in 5 years. The mortgage settlement requires ABC to keep up debt service cover ratio at minimal stage of 1,2 all through the lifetime of the mortgage, in any other case the mortgage might turn out to be repayable on demand.

ABC discovered that the debt service cover ratio was 1.05 on the end of November 20X1 and reported the breach to Strick Bank. How ought to ABC current the mortgage in its monetary statements for the 12 months ended 31 December 20X1?

Answer:

The reply is dependent upon the response of the StrictBank.

If StrictBank agrees NOT to demand quick reimbursement of the mortgage as a result of breach of the covenant at or earlier than the period end (31 December 20X1) and this settlement is legitimate:

• For greater than 12 months after the top of the reporting interval => the mortgage is assessed as non-current.
• For lower than 12 months after the top of the reporting interval => the mortgage is assessed as present.

If StrictBank agrees NOT to demand quick reimbursement of the mortgage as a result of breach of the covenant after the interval finish (31 December 20X1), however earlier than the monetary statements are licensed for concern, the mortgage is assessed as present, as a result of ABC doesn’t have an unconditional proper to defer the mortgage settlement for a minimum of 12 months after that date.

The impression of presenting the mortgage as present as an alternative of non-current might be large, as all liquidity rations worsen instantly.

Subsequently, if your organization took some loans from the banks, I might strongly encourage you to revise and test retaining the covenants properly earlier than the top of the reporting interval, so that you’ve sufficient time to ask your financial institution for settlement with non-repayment on demand.

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