Current or non-current: classifying a liability
When a client's liability is non-current under the right-to-defer test now carried in IFRS 18, and how to split and move a misclassified balance.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A client's bank loan runs for several more years. Its overdraft is renewed every year without fuss. The director's loan account has never been repaid and nobody expects it to be. In the trial balance all three sit under "Long-term liabilities". The classification feels obvious until someone asks the question the standards actually ask: at the reporting date, does the client have the right to put off paying?
The right-to-defer test, and where IFRS 18 carries it
The IFRS Foundation states that the criterion for classifying a liability as non-current is that the entity has the right to defer settlement of the liability for at least twelve months after the reporting period. That criterion was clarified in IAS 1 by the amendments Classification of Liabilities as Current or Non-current, issued in January 2020, and it is now carried in paragraph 101 and related application paragraphs of IFRS 18, which replaces IAS 1. The Foundation notes that the IASB did not reconsider every aspect of IAS 1 when developing IFRS 18, concentrating instead on the statement of profit or loss.
As a plain starting point, Investopedia explains that "current" means a period of one year or less: current liabilities must be paid within 12 months. The IFRS test sharpens that. It does not ask what the client expects to pay; it asks whether the client has a right to put payment off.
Loans on demand, revolving facilities and covenants
The right has to exist at the reporting date. Some common situations:
- A loan repayable on demand. If the lender can call for repayment at any time, the client has no right to defer, however unlikely a demand may be. Current.
- A director's loan with no written terms. Without terms it may well be repayable on demand, and then it is current, unless an agreement gives the company a right to defer. A subordination agreement signed for the bank may change the picture, so read it. See loans from directors and shareholders.
- An overdraft renewed every year. An expectation of renewal is not a right. Read the facility letter.
- A revolving facility. If, at year end, the client has a right to keep the balance drawn for at least twelve months beyond the reporting period, the drawn amount may qualify as non-current. The facility terms decide.
- A term loan with covenants. A breach at or before year end can affect the right to defer, so read the agreement and the standard's guidance on covenants with care. Covenants also raise materiality questions; IFAC's article on materiality notes that IFRS Practice Statement 2 includes specific guidance on materiality judgements about covenants.
Splitting one loan between current and non-current
A term loan repaid in instalments has both parts. Instalments falling due within twelve months of the reporting date, together with anything the lender could call, are current. The rest is non-current if the client has the right to defer it.
Most small clients keep the whole loan in one account, so the preparer needs the repayment schedule and a year-end reclassification:
- Obtain the bank's repayment schedule as at the reporting date.
- Add up the capital due within twelve months.
- Move that portion to a current liability line; the remainder stays non-current.
- Keep the schedule on file so next year's split can be checked against it.
Moving the portion in the Studio
In Achekam's Financials Studio, a firm can add its own statement lines and groups and reword any row title, and later builds keep those choices. A line such as "Current portion of long-term borrowings" can sit under current liabilities while still totalling into a standard line, so notes and cash flow stay consistent.
When the Studio builds a draft, AI mapping suggestions with confidence of 0.5 or more go straight into the draft and are listed as proposals a person can accept, move or set aside. The mapping workbench (Canvas, then "Mapping") shows each account's line and note and lets staff move accounts by hand. Where the client already splits the loan across two accounts, map each to its line. Where it keeps one account, the split needs a reclassifying entry or a second account. Moving whole accounts between lines is covered in moving accounts between lines.
Staff can also run an automated review of a draft, which lists findings for a person to accept, resolve or dismiss. It is advice only and does not block signing. Treat any finding about liability classification as a prompt to read the agreements, not as the answer.
What a reviewer should ask before accepting "non-current"
- Which document gives the client the right to defer, and was it in force at the reporting date?
- Can the lender demand repayment at any time, under any clause?
- Were all covenants met at the reporting date?
- Is the split between current and non-current portions supported by a schedule?
- Has a director's or shareholder's loan been classified on its terms rather than on hopes?
- Does the classification sit comfortably with the going-concern assessment and the liquidity disclosures?
A wider review routine is described in reviewing the statement of financial position.
The IFRS Foundation's IFRS 18 page explains the new standard on presentation and disclosure that replaces IAS 1, and records where the current or non-current criterion now sits.
The classification is a legal question dressed as an accounting one. Read the agreements, and the answer usually follows. Where the client cannot produce an agreement at all, that silence is itself an answer: without a documented right to defer, the balance belongs with current liabilities until the client puts proper terms in writing.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
