Ind AS 1 Current vs Non-Current: Covenants, Rollover Rights & the Settlement Test
If you have ever stared at a balance sheet and wondered why a five-year loan suddenly appears under current liabilities*, you are not alone. This is one of the most nuanced areas tested in CA Final Financial Reporting — and it all comes down to Ind AS 1 and the rules on classifying a liability as current or non-current.
Let us break this down the way Sir explains in class: step by step, with clear logic.
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Why Classification Matters at All
Where a liability sits on the balance sheet sends a strong signal to lenders, investors, and auditors about a company's short-term financial health. Misclassifying a liability — even unintentionally — can make a struggling company look financially comfortable, or a healthy company look stressed. ICAI therefore expects CA Final students to understand every nuance of this classification.
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The Basic Rule Under Ind AS 1
A liability is current if any one of the following conditions is met on the reporting date:
- It is expected to be settled within the entity's normal operating cycle.
- It is held primarily for the purpose of trading.
- It is due to be settled within twelve months after the reporting date.
- The entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date.
If none of these conditions apply, the liability is non-current.
The fourth condition is the one that trips most students — and it connects directly to loan covenants.
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Loan Covenants: The Real Exam Trap
Imagine ABC Ltd takes a five-year term loan repayable in Year 5. On the surface, it looks non-current. But the loan agreement contains a covenant — say, the company must maintain a debt-to-equity ratio below 2:1 at every year-end. If the company breaches this covenant, the lender has the right to demand immediate repayment.
What Happens on Breach?
If the covenant is breached on or before the reporting date, the liability becomes payable on demand. The entity loses its unconditional right to defer settlement. Under Ind AS 1, this means the entire loan is reclassified as current — even if repayment is not actually expected for years.
This makes sense: the legal right of the lender to call the loan is what matters, not the probability that the lender will actually do so.
What If the Lender Agrees to Waive the Breach?
Here the timing becomes critical:
- Waiver obtained on or before the reporting date → The entity regains the unconditional right to defer. Loan stays non-current (provided the waiver gives at least twelve months from the reporting date).
- Waiver obtained after the reporting date but before financial statements are authorised → This is an adjusting event question under Ind AS 10. Ind AS 1 says the loan is still current on the reporting date because at that point the breach existed. The post-balance-sheet waiver is disclosed but does not change the classification.
Memorising this sequence — breach date vs waiver date vs reporting date — is the key to answering covenant questions correctly.
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Rollover Rights: Long-Term Refinancing Before Year-End
Now suppose a loan is due within twelve months, but the company has already rolled it over (refinanced it) for another three years before the reporting date. Does it stay current?
No. If the rollover or refinancing agreement is completed on or before the reporting date, the liability is non-current — because the entity now has the right to defer settlement beyond twelve months.
But if the rollover is completed after the reporting date? The liability is current at the balance sheet date. The subsequent refinancing is a non-adjusting event under Ind AS 10 and should be disclosed in the notes.
A Simple Logic Table
| Situation | Classification | |---|---| | Loan due in 3 years, no covenant breach | Non-current | | Covenant breached before year-end, no waiver | Current | | Covenant breached before year-end, waiver before year-end (≥12 months) | Non-current | | Covenant breached before year-end, waiver after year-end | Current | | Loan due in 8 months, rolled over before year-end | Non-current | | Loan due in 8 months, rolled over after year-end | Current |
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The Settlement Test — What Does 'Settle' Actually Mean?
Under Ind AS 1, settlement means transferring economic resources — cash, other assets, services, or even equity instruments (in some cases). The entity must look at how the liability will actually be extinguished, not just when.
For financial liabilities, the critical question is whether the entity can compel the counterparty to accept deferred repayment. If it cannot — because a covenant has been breached or the contractual terms give the lender a call option — the entity has no unconditional right to defer, and the liability is current.
For lease liabilities and deferred revenue, the operating cycle concept and the specific standard rules also play a role — verify the interaction with Ind AS 116 and Ind AS 115 in the latest ICAI study material.
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A Quick Worked Logic Example
XYZ Ltd has a ₹50 crore bank loan repayable on 31 March 2028. The loan agreement requires XYZ to maintain a minimum interest coverage ratio of 1.5x at every 31 March. On 31 March 2024 (the reporting date), the actual ratio is 1.2x — a breach. The bank sends a waiver letter on 15 May 2024, allowing XYZ to defer repayment.
Question: How should the loan be classified in the 31 March 2024 financial statements?
Analysis:
- Breach exists on the reporting date → entity has no unconditional right to defer.
- Waiver is received after the reporting date → does not restore the right retroactively.
- Conclusion: Classify as current liability of ₹50 crore. Disclose the post-balance-sheet waiver as a non-adjusting event in the notes.
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Key Takeaways to Remember
- The unconditional right test is the core of Ind AS 1 current/non-current classification.
- Covenants can flip a non-current liability to current overnight if breached at year-end.
- Timing of waiver and rollover relative to the reporting date is everything.
- Probability of the lender actually demanding repayment is irrelevant — the legal right is what counts.
- Always cross-check the latest MCA notification and ICAI study material for any amendments, as this area has seen global updates (IASB has issued amendments; verify their adoption status in India in the latest ICAI material).
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FAQs
Q1. Can part of a loan be current and part non-current? Yes. For example, if scheduled EMI instalments due within twelve months total ₹10 crore and the balance ₹40 crore is due in Year 4, classify ₹10 crore as current and ₹40 crore as non-current — provided no covenant breach affects the remaining balance.
Q2. Does a covenant breach on a subsidiary's loan affect the parent's classification? In consolidated financial statements, yes — the group must apply the same Ind AS 1 principles. The classification follows the terms of the loan agreement at the entity (or group) level that is the borrower.
Q3. Is subjective management intent enough to classify a liability as non-current? No. Ind AS 1 is clear: classification depends on the entity's rights under the existing agreement on the reporting date, not on what management intends or expects to happen.
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Covenants, rollover rights, and the settlement test are areas where a single sentence in the exam question can change your entire answer — so practise varied scenarios until the logic feels automatic. Start building that habit today with the free day-by-day study planner at https://caparveensharma.com/free-planner?src=article, and sharpen your case-scenario thinking with the free practice resources available at https://caparveensharma.com — because in CA Final, it is application speed that separates the toppers.