Re: Exposure Draft 2015/1: Classification of Liabilities Proposed Amendments to IAS 1

Re: Exposure Draft 2015/1: Classification of Liabilities Proposed Amendments to IAS 1

June 9, 2015

The IFRS Foundation

30 Cannon Street

London, United Kingdom

EC4M 6XH

Re: Exposure Draft 2015/1: Classification of Liabilities – proposed amendments to IAS 1

The Committee on Corporate Reporting (CCR) of Financial Executives International Canada (FEI Canada) is pleased to respond to your request for comment on the Exposure Draft: Classification of Liabilities – proposed amendments to IAS 1.

FEI Canada is the all-industry professional membership association for senior financial executives. With eleven chapters across Canada and more than 1,600 members, FEI Canada provides professional development, thought leadership and advocacy services to its members. The association membership, which consists of Chief Financial Officers, Audit Committee Directors and senior executives in the Finance, Controller, Treasury and Taxation functions, represents a significant number of Canada’s leading and most influential corporations.

CCR is one of seven thought leadership committees of FEI Canada. CCR is devoted to improving the awareness of issues and educating FEI Canada members on the implications of the issues it addresses, and is focused on continually improving the standards and regulations impacting corporate reporting.

Overall, CCR understands the conclusions reached in the Exposure Draft, however, we have a number of matters that we believe, when addressed, will enhance the exposure draft recommendations. Our answers to the questions asked in the exposure draft are found below:

Question No 1 – Classification based on the entity’s rights at the end of the reporting period

The IASB proposes clarifying that the classification of liabilities as either current or non-current should be based on the entity’s rights at the end of the reporting period. To make that clear, the IASB proposes:

a) replacing ‘discretion’ in paragraph 73 of the standard with ‘right’ to align it with the requirements of paragraph 69(d) of the standard;

b) making it explicit in paragraph 69(d) and 73 of the standard that only rights in place at the reporting date should affect this classification of a liability; and

c) deleting ‘unconditional’ from paragraph 69(d) of the standard so that ‘an unconditional right’ is replaced by ‘a right’.

Do you agree? Why or why not?

CCR Perspective

After review, CCR disagrees with recommendation for a number of reasons. We also believe that this ED oversimplifies what could be a rather complex transaction.

First, CCR believes that if the primary classification determination for the liability is to be based on a ‘right’ and counterparty, then the exposure draft should provide definitions of each for use in classification. We believe that this will enhance the implementation of the exposure draft recommendations.

Second, we would like to draw your attention to inconsistencies with the exposure draft in paragraphs 69(a) and 69(d). In paragraph 69(a), the term ‘expects’ is used which implies the use of management’s intention whereas in paragraph 69(d) there is no such allowance for managements intention. As an example, in the case where management expects and intends to use an inflow of financing from a new counterparty to repay existing long-term debt with another counterparty in the current period, before it is legally due to be repaid, the existing long term debt could be classified as a long term liability, using the criteria under paragraph 69(d) despite managements intention to extinguish the debt during its normal operating cycle which, using paragraph 69(a), would show it as a current liability.

Third, while the updated conceptual framework (framework) has only recently been issued, we believe that the prescriptive nature of the exposure draft is not in alignment with paragraph 2.14 of the framework describing faithful representation as “A faithful representation provides information about the substance of an economic phenomenon instead of merely providing information about its legal form. Providing information only about a legal form that differs from the economic substance of the underlying economic phenomenon would not result in a faithful representation.” In a situation where management expects and intends to use the inflow of financing from a new counterparty to repay existing long-term debt in the current period, the exposure draft would suggest that the original borrowing would become current. In this case, we believe that the existing long-term debt would more appropriately continue to be classified as a long-term liability despite management’s intention to extinguish the debt during the current period.

Question No 2 – Linking settlement with the outflow of resources

The IASB proposes making clear the link between the settlement of the liability and the outflow of resources from the entity by adding ‘by the transfer to the counterparty of cash, equity instruments, other assets or services’ to paragraph 69 of the standard.

Do you agree? Why or why not?

CCR Perspective

We agree generally, subject to our comments as identified in Question No 1.

Question No 3 – Transition arrangements

The IASB proposes that the proposed amendments should be applied retroactively.

Do you agree? Why or why not?

CCR Perspective

We agree.

Thank you for allowing us the opportunity to respond the proposal.

Sincerely,

Neil Robertson

Chair

Committee on Corporate Reporting

FEI Canada

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