Learning Outcomes
After reading this article, you will be able to explain how to distinguish and present current and non-current assets and liabilities under IAS 1. You will know the criteria for classification, the significance for the statement of financial position, common examples, and how exam questions may test your understanding of required disclosures and potential pitfalls.
ACCA Financial Reporting (FR) Syllabus
For ACCA Financial Reporting (FR), you are required to understand how entities must classify and present their assets and liabilities in line with IAS 1 requirements. The following syllabus areas are addressed in this article:
- Differentiate between current and non-current assets and liabilities per IAS 1
- Apply the recognition and classification criteria for current and non-current items
- Prepare and interpret a statement of financial position with appropriate classifications
- Identify the effects of improper classification on interpretation and ratio analysis
- Recognise disclosure and presentation requirements in published accounts
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which TWO criteria, if either is met, require an asset to be classified as current under IAS 1?
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True or false? A loan repayable in 15 months but callable by the lender at any time must always be shown as non-current.
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For each of the following, state whether it is current or non-current in the statement of financial position:
- Inventory
- Trade receivables
- Land held for long-term development
- A bank loan due in 10 months
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What is the principal reason for classifying items as current vs non-current for users of financial statements?
Introduction
A key aspect of presenting financial statements under IAS 1 is distinguishing between current and non-current assets and liabilities. This classification provides users with a clear picture of liquidity, operational cycles, and longer-term financial health. Understanding the exact criteria for these categories is an essential skill for the ACCA FR exam and for good reporting practice.
The statement of financial position must group assets and liabilities as current and non-current, unless a presentation based on liquidity provides more relevant information. This simple split is essential for assessing the company's ability to meet short-term obligations and for calculating key financial ratios.
Key Term: current asset
An asset that is expected to be realised, sold, or consumed in the entity’s normal operating cycle; held primarily for trading; expected to be realised within twelve months after the reporting period; or is cash or a cash equivalent not restricted from use.Key Term: non-current asset
Any asset that does not meet the definition of a current asset. These typically provide benefits to the entity beyond the next twelve months or normal operating cycle.Key Term: current liability
A liability that is expected to be settled within the entity’s normal operating cycle; held primarily for trading; due to be settled within twelve months of the reporting period; or for which the entity does not have an unconditional right to defer settlement for at least twelve months after the period end.Key Term: non-current liability
Any liability that does not satisfy the criteria for current classification. These are typically obligations due to be settled more than twelve months after the reporting date.
The Current/Non-current Split – Why It Matters
Classifying items as current or non-current is not just a procedural step. The distinction gives users important information about the timing of cash flows and helps creditors and investors assess how liquid and solvent a business is.
Entities must classify each asset and each liability as either current or non-current according to strict IAS 1 conditions.
Criteria for Classification
Current Assets
An asset is classified as current if it meets any of the following criteria:
- It is expected to be realised, sold, or consumed in the entity’s normal operating cycle
- It is held primarily for trading
- It is expected to be realised within twelve months after the reporting period
- It is cash or a cash equivalent (unless restricted from use beyond twelve months)
All other assets are classified as non-current.
Current Liabilities
A liability is classified as current if it meets any of the following criteria:
- It is expected to be settled in the entity’s normal operating cycle
- It is held primarily for trading
- It is due to be settled within twelve months after the reporting period
- The entity does not have an unconditional right to defer settlement for at least twelve months
Liabilities not meeting any of these are non-current.
The Operating Cycle
The operating cycle is the time between acquiring assets for processing and their realisation in cash or cash equivalents. For most trading and manufacturing firms, this is less than twelve months, but in certain industries it may be longer. If the operating cycle is not clearly identifiable, it is assumed to be twelve months.
Disclosure and Statement Layout
IAS 1 requires presentation of current and non-current items as separate groupings, normally in order of liquidity, unless another order provides more relevant information.
A typical order for assets is:
- Non-current assets first, then current assets
Liabilities are similarly grouped:
- Non-current liabilities first, then current liabilities
Worked Example 1.1
Question:
A company presents the following balances at 31 December 20X4:
- Raw materials inventory: expected to be used within 5 months
- Trade receivables: payment expected in 8 months
- Property: held for use, not intended for sale
- Bank loan: due for repayment in 16 months, but contract allows lender to demand repayment at any time
How should each item be classified?
Answer:
- Inventory: Current asset. Expected to be consumed in normal operating cycle (even if more than 12 months, if operating cycle is longer).
- Trade receivables: Current asset. Expected to be realised in normal operating cycle.
- Property: Non-current asset. Not held for trading, not expected to be realised within 12 months.
- Bank loan: Current liability. The company does NOT have an unconditional right to defer payment for at least twelve months, as the lender can demand repayment at any time.
Liabilities: The Unconditional Right to Defer
A key test for the classification of liabilities is whether the entity has an unconditional right to defer settlement for at least twelve months after the reporting period.
If a liability is due in more than twelve months, but the agreement includes a covenant breach that makes repayment demandable within twelve months, it should be shown as current.
If a refinancing arrangement is completed after the end of the reporting period, but before the financial statements are authorised, this is treated as a non-adjusting event. The liability remains current unless the new arrangement is in place before the reporting date.
Worked Example 1.2
Question: EcoTech Ltd has a five-year loan, but breached a loan covenant shortly before the year end. As a result, the lender is contractually entitled to demand immediate repayment. However, after the year end but before the financial statements are issued, the bank waives its right.
What is the classification of the loan at year end?
Answer:
The loan is classified as current. At year end the entity did not have an unconditional right to defer settlement for at least 12 months. The subsequent waiver is a non-adjusting event.
Other Matters: Presentation and Disclosure
- Items expected to be realised/settled within twelve months, even if part of longer-term arrangements, are current.
- Disclosure is needed where amounts expected to be settled/realised after 12 months are significant.
- Deferred tax assets and liabilities are always classified as non-current.
Exam Warning
Exam questions often present borderline cases. Pay close attention to the right to defer settlement and the normal operating cycle. Classification errors can affect key ratios and are frequently tested.
Current/Non-current and Ratio Analysis
The split directly affects liquidity ratios (current ratio, quick ratio) and can alter users' perception of short-term solvency. Misclassification can give a misleading picture of a company’s liquidity or gearing.
Summary
Distinguishing between current and non-current assets or liabilities is based on clear IAS 1 rules, especially regarding the normal operating cycle, twelve-month expectation, and the right to defer settlement. Accurate presentation helps users assess liquidity and longer-term financial position and is testable in both computational and narrative exam questions.
Key Point Checklist
This article has covered the following key knowledge points:
- Define "current" and "non-current" assets and liabilities per IAS 1
- State the criteria for classifying items as current or non-current
- Explain the role of the normal operating cycle in classification
- Describe the layout requirements for presenting the statement of financial position
- Identify typical items and their correct classification
- Recognise the exam significance of classification for ratios and disclosure
Key Terms and Concepts
- current asset
- non-current asset
- current liability
- non-current liability