Table of Contents

1.0 Summary of Classification of liabilities………………………………….

2.0 H
3.0 H
4.0 H
5.0 Nature of The Classification Liabilities
6.0 H
7.0 H
1.0 SUMMARY OF CLASSIFICATION OF LIABILITIES (ED/2015/1)

The International Accounting Standards Board (IASB) has published this Exposure
Draft of proposed amendments to IAS 1 Presentation of Financial Statements to clarify the
criteria for the classification of a liability as either current or non-current. The proposals clarify
that classification of liabilities as either current or non-current is based on the rights that are in
existence at the end of the reporting period. In order to make this clear, The Exposure Draft
Classification of Liabilities published in February 2015 (ED) proposed amendments to
requirements in IAS 1 Presentation of Financial Statements. Those requirements relate to the
classification of liabilities as current or non-current.

The IASB propose to replacing ‘discretion’ in paragraph 73 of the Standard with ‘right’
to align it with the requirements of paragraph 69(d) of the Standard, making it explicit in
paragraphs 69(d) and 73 of the Standard that only rights in place at the reporting date should
affect this classification of a liability; and deleting ‘unconditional’ from paragraph 69(d) of
the Standard so that ‘an unconditional right’ is replaced by ‘a right’.

At its meeting in September 2018, the Board received an update on the status of the
project and further work planned by staff. At this meeting, the Board will consider whether to
revise any proposals in the ED in light of the concerns raised about the implication of the
proposals for particular facts and circumstances. One of the criteria for classifying a liability
as current in IAS 1 is that the entity does not have a right to defer settlement of the liability for
at least twelve months after the reporting period. In the ED, the IASB proposed to clarify that
this assessment should be based on rights that are in existence at the end of the reporting period.

In addition the IASB received a number of concerns and questions on this clarification.
It was unclear to constituents how, applying the proposed wording, liabilities would be
classified under certain facts and circumstances. The staff have analysed some of the scenarios
raised in the comment letters and concluded the following, a lender’s right to require repayment
on demand would result in classification of a liability as current even if the lender is unlikely
to exercise that right. An entity’s right to defer settlement of a liability for at least twelve
months after the reporting period would affect the classification outcome even if the right to
defer settlement arises from a right to roll over the liability on terms that are potentially
uneconomic.
 Classification of an existing loan with one lender is not affected by a refinancing
agreement with another lender. Depending on the facts and circumstances, obligations to
provide warranty cover for periods of more than twelve months may need to be split between
current and non-current components.The staff think that, although some of the outcomes
described above seemed counterintuitive to some respondents, they are consistent with the
overall purpose of the statement of financial position. However, the staff think that it would be
helpful to add some clarifications to the proposed amendments with regard to the above items.

However the staff recommended that, as proposed in the ED, IAS 1 should require an
entity to classify a liability as current if the entity does not have a right at the end of the
reporting period to defer settlement of the liability for at least twelve months after the reporting
period.

Besides, One Board member suggested to provide guidance on how to make the
assessment of whether a liability is current or non-current at 31 December, when the testing of
a covenant is, for example, in March of the following year. Another Board member asked about
the difference between ‘uneconomic’ and ‘without substance’, to which the staff replied that
‘without substance’ is so unlikely that both parties would know from the onset that it will not
occur, while ‘uneconomic’ can change over time. One Board member warned to be careful
about any interaction with the concept of ‘economic compulsion’ in the Board’s Financial
Instruments with Characteristics of Equity project. On the question of whether there was an
implication of the revised Conceptual Framework on this project, the staff negated that as
nothing in the Framework that is relevant to this project had changed.
2.0 THREE THEORIES THAT EXPLAIN THE DEVELOPMENT/FORMULATION
OF IASB ED/2015/1

As we know, accounting theories are the fundamental in developing for International

Accounting Standards Board (IASB) to publish the Exposure Draft of proposed amendments
to IAS 1 Presentation of Financial Statements to clarify the criteria for the classification of a
liability as either current or non-current. Three theories that explain the development or
formulation the Exposure Draft of proposed amendments to IAS 1 Presentation of Financial
Statements.

Firstly, normative theory which explain more on what on ‘what should be done’ rather
than ‘what is’. Deductive method is used to derive these theories and also inductive method,
however it does not consider other practices acceptable, rather it comes up with new practices.
In the formulation of the Exposure Draft of proposed amendments to IAS 1 Presentation of
Financial Statements that criteria for the classification of a liability as either current or non-
current. The proposals clarify that classification of liabilities as either current or non-current is
based on rights that are in existence at the end of the reporting period. In order to make this
clear, the IASB proposes. It replacing ‘discretion’ in paragraph 73 of the Standard with ‘right’
to align it with the requirements of paragraph 69(d) of the Standard. In making it explicit in
paragraphs 69(d) and 73 of the Standard that only rights in place at the reporting date should
affect this classification of a liability; and deleting ‘unconditional’ from paragraph 69(d) of the
Standard so that ‘an unconditional right’ is replaced by ‘a right.

Next, the positive theory which describe, explain or predict what is happening in the
world. This theory is derived using the Inductive Method. The method enables describing of
the current accounting practice in different firms with the available assumptions. Descriptions
given will further enhance logical analysis to make predictions of the most suitable or
acceptable accounting practice or standards among different firms. In a way, positive theories
provide an optional practice for firms to choose from. The central ideal of the positive approach
is to develop hypotheses about factors that influence the world of accounting practices and to
test the validity of these hypotheses to enhance the reliability of prediction and to reduce the
uncertainty cause by the fluctuations of income numbers in general and the decreasing of
systematic risk in particular by reducing the covariance of the firm’s returns with the market
returns. In the formulation of the Exposure Draft of proposed amendments to IAS 1
Presentation of Financial Statements that criteria for the classification of a liability as either
current or non-current in proposes making clear the link between the settlement of the liability
and the outflow of resources from the entity by adding that settlement ‘refers to the transfer to
the counterparty of cash, equity instruments, other assets or services’ to paragraph 69 of the
Standard. The IASB further proposes that guidance in the Standard should be reorganised so
that similar examples are grouped together. Finally, the IASB proposes that retrospective
application should be required and that early application should be permitted.

Besides, third theory that is relevant to the standard is the pragmatic theory. Pragmatic
theory depends on observations of the reaction of users to the accountants output and a reaction
is taken as evidence that the output are useful and contain relevant information
3.0 THE MAIN PARTIES INVOLVED IN DEVELOPMENT/FORMULATION OF
IASB ED/2015/1

The International Accounting Standard Board (IASB) has published an exposure draft
as a proposal where it is considers a revision and amendment of the existing Conceptual
Framework necessary. Exposure draft ED/2015/1 Classification of Liabilities is on
amendments to International Accounting Standard (IAS) 1 Presentation of Financial
Statements. There are parties that involved in the development of IASB ED/2015/1
Classification of Liabilities. The parties that involved are International Accounting Standard
Board (IASB), International Financial Reporting Standard (IFRS) Foundation, Malaysian
Accounting Standard Board (MASB) and public interest.

IASB is a private-sector body and independent group of experts that mix their recent
practical experience in setting accounting standard and approves IFRS. The board operates
under the oversight of the IFRS Foundation. Besides, the board has published the exposure
draft ED/2015/1 for users give their comment and feedback about the standard. There are some
questions inside the exposure draft such as about classification based on the entity’s right and
linking settlement with the outflow resources. After go through all the comments from
respondent, they may be modified the standard if necessary before issued the final form. The
feedback from user is important in order to meet the needs and suitable for all situations. For
example, the board has suggested providing guidance on how to make the assessment of
whether a liability is current or non-current at 31 December when the testing of a covenant is
for example in March of the following year.

Next, the party involved is International Financial Reporting Standard (IFRS)

Foundation. It is a not-for-profit international organisation which responsible for developing
a single set of high-quality global accounting standards known as IFRS Standards. IFRS
Foundation is a legal entity under IASB operates. This entity do not involve in technical matter
related to the standard but they promote the use and rigorous on application of the standards.
It is because any changes or amendments on the standard they need to aware and informed to
the public. For example, in the standard they need to clearly explain the meaning of term
settlement for the purposes of the classification of liabilities. This is because the user will refer
and apply it based on the standard. The changes of classification of liabilities will be updated
in International Accounting Standard (IAS) 1 Presentation of Financial Statement. The IFRS
Foundation also approved amendments to this Constitution after following a due process and
publication of the exposure draft for public comment.

Malaysian Accounting Standard Board (MASB) also is the one of the parties that
involved in development of exposure draft classification of liabilities. MASB is a local
accounting board established under the Financial Reporting Act 1997. MASB has issue and
develop new accounting and financial reporting standard in Malaysia. Besides, MASB is
institution that works together with IASB in order to come out with similar and identical
standard. Exposure draft is important for MASB to revise because the framework which is
Malaysia Financial and Reporting Standard (MFRS) are fully converged with IFRS. MASB
also collect all the comments from respondents on ED/2015/1 Classification of Liabilities,
make some conclusion and summary, give suggestion and send to IASB to be review. For
example, they suggest to the IASB to replace ‘it expects to settle the liability in its normal
operating cycle’ in paragraph 69(a) with ‘the liability is due to be settled in its normal operating
cycle rather than delete the words ‘expects’ in paragraph 72R(a).

Lastly, the public interest also involved in development of exposure draft classification
of liabilities. In order for MASB and IFRS Foundation to set up the new standard or make
amendment to the standard, they will release the exposure draft and seek for public comment
on the draft. All the comment will be records and posted on the IFRS website unless
confidentiality is requested. When they want response from public, it means that the
respondents also contribute in the development of the standard. The public can give comments
and suggestions on the exposure draft. For example, they support the proposed emphasis on
the situation at the end of reporting period (proposed Para 69(d)). Changes to the classification
of a liability shortly after the period-end can be appropriately reflected via disclosure note.
4.0 BASES USED TO VERIFY THE CLASSIFICATION OF LIABILITIES (ED/2015/1)

The classification of liabilities also have the procedure that how we had to verify it as
the liabilities in the organization. There was a comparison on what based that had been use to
verify it as the liabilities in the presentation of financial statement according to the International
Financial Reporting Standard (IFRS). Dogmatic is defined as believes that whatever statement
made by others and the statement is true as we follow on what the others have been made.
Scientific basis is use of scientific method to develop, tested and formulated in order to
ascertain the statement as valid or invalid. Meanwhile, self-evident basis is more to believe that
the truth of the information is based on the reasonableness of our general knowledge,
experience and observation.

Verification of liabilities is equally important as that of verification of assets. The

Balance Sheet will reveal the true and fair view of the state of affairs of the business concerns
only when the liabilities as well as assets are properly valued and verified. It aims at
ascertaining whether all the liabilities of the business are properly disclosed, valued, classified,
and shown in the Balance Sheet. The auditor should see that they are correctly stated in the
Balance Sheet. He should obtain a certificate from the responsible official as to the correctness
of liabilities. The International Accounting Standards Board (IASB) asked staff to develop a
more general approach to the classification of liabilities that is based on the contractual
arrangements in place at the reporting date. For the purposes of classification as current or non-
current, settlement of a liability refers to the transfer to the counterparty of cash, equity
instruments, other assets or services that results in the extinguishment of the liability.

Some current liabilities, such as trade payables and some accruals for employee and
other operating costs, are part of the working capital used in the entity’s normal operating
cycle. An entity classifies such operating items as current liabilities even if they are due to be
settled more than twelve months after the reporting period. The same normal operating cycle
applies to the of an entity’s assets and liabilities. When the entity’s normal operating cycle is
not clearly identifiable, it is assumed to be twelve months. There must be considered a number
of examples of conditions that could be placed on exercising a right. It concluded that when a
right is subject to a condition, it is whether the entity complies with that condition as at the end
of the reporting period that determines whether the right should affect classification. It
also confirmed that the criteria for classification of a liability as non-current in accordance with
paragraphs 69 (d) and 73 should be based on the rights in existence at the end of the reporting
period. Rights granted after the end of the reporting period should not affect the classification
of a liability as at the end of the reporting period.

Next, Examination of public records to verify the liability as they may necessary to
consult the public records in order to verify mortgages outstanding. They may also
communicate with the creditor to verify the amount of the mortgage and the interest dates as
well as the due date, and to note the security underlying the mortgage. Communication with
the creditor would also disclose whether or not payments alleged to have been made in
reduction of the amount of the mortgage have actually been made. From an examination of the
public records, judgments against an organization may be revealed. Judgments are rarely
recorded on the books of the debtor until they are paid. There may be other liens against the
real property, such as assessments, overdue taxes or water rates, all of which may be
determined by a proper inspection of the public records.

From the reason that we had found that the verification of the liabilities was suitable as
the scientific based was the main factor that they use because it included the systematic process
and procedure we have to follow to make sure it eligible to assume as the liability for the entity.
For the verification of the liabilities and in a business organization, they will not only use the
books of account in his examination, but should also have access to any other data and
memorandum such as contracts, minute book, memorandum of agreement, or correspondence,
in order to enable him to assure himself as far as possible, of the accuracy of the statement
which he is expected to certify. This prove that the basis is use of scientific method to develop,
tested and formulated in order to ascertain the statement as valid or invalid.
5.0 NATURE OF THE SELECTION OF CLASSIFICATION OF LIABILITIES
(ED/2015/1)

Based on our findings, this standard is more on the principle - based accounting.
Basically, classification of liabilities consists in presentation of financial statement that are
prepared using International Financial Reporting Standard (IFRS). It lays out the guidelines for
preparing all financial statements and lists the minimum content requirements, including the
balance sheet, which is known under IFRS as the statement of financial position. While IAS 1
has some similarities and differences to the United States Generally Accepted Accounting
Principles (U.S. GAAP) in regarding to the presentation of the statement of financial position.
According to the principle-based accounting, IFRS states that a company’s financial statements
must be understandable, readable, comparable and relevant to current financial transactions.

Classification of liabilities consists of current liabilities and non-current liabilities.

Current liabilities, also known as short-term liabilities, are debts or obligations that need to be
repaid within a year. Current liabilities should be closely watched by management to make sure
that the company possesses enough liquidity from current assets to guarantee that the debts or
obligations can be repaid.

Under IAS 1, the classification of liabilities on the statement of financial position is

essential. According to IAS 1 mention in paragraph 69 a-d, states that liabilities are to be
classified as current liabilities if any one of four specified conditions is met. The conditions are
it expects to settle the liability in its current operating cycle, it holds the liability primarily for
trading, the liability is due to be settled within 12 months and it does not have right to defer
settlement of the liability for at least 12 months after the reporting period. This is unlike U.S
GAAP, there is no specific requirement that states companies must classify their liabilities in
financial position.

Besides, non-current liabilities also known as long-term liabilities, are debts or

obligations that are due in over a year’s time. Long-term liabilities are an important source of
a company’s long-term financing. Companies take on long-term debt to acquire immediate
capital to fund the purchase of capital assets or invest in new capital projects. Long-term
liabilities are crucial in determining a company’s long-term solvency. If companies are unable
to repay their long-term liabilities as they become due, then the company will face a solvency
crisis.

Hence, the new principles-based guidance would require noncurrent classification of

debt if one of the following criteria is met such as the debt must be settled 12 months or more
(or operating cycle, if longer) after the reporting date and the lender agreed by the end of the
reporting period to provide a period of grace ending at least twelve months after the reporting
period, within which the entity can rectify the breach and during which the lender cannot
demand immediate repayment. In addition, IFRS states that all other liabilities are to be
classified as non-current liabilities. For GAAP, there is no explicit requirement that the
effectiveness of the liabilities can be measured reliably.

In conclusion, multiple differences between GAAP and IFRS have been noted within
the standards themselves and within actual financial statements, but there is currently a
proposal that will effectively converge GAAP and IFRS into one set of standards. IFRS usually
used principle-based accounting in presentation of financial statement unlike GAAP used rule-
based accounting.
6.0 LIMITATIONS OF THE SELECTION IN (ED/2015/1)

Based on selected accounting exposure draft, we have counter some limitation in

analyses this exposure draft. The exposure draft that we have selected is Exposure Draft
ED/2015/1 where it about Classification of Liabilities. One of the limitations that we have to
counter is, the exposure draft is hard to understand and too wordy. In order to summarize the
exposure draft, we have to read and understand the exposure draft. Most of the language and
verb using in this draft is so high level. This situation made us hard time in summarize this
exposure draft.

The second limitations that we need to faced is finding relevant theories that related to
this exposures. The theories is important in order to support the explanation in development or
formulation that exist in this draft exposures. The right information about the theories is crucial
in avoiding misleading to happen.

The next limitation is to identify the main parties that involved in development or
formulation of the draft. This is because we have to know responsibilities and the role of the
parties in related to selected exposures draft. A researches must be conduct which in order to
know the function of these parties and information about. This has given us such a time
consuming in doing this researches.

Other limitation regarding this exposure draft is to identify bases used to verify the
exposure draft. Every exposure draft need to verify in order to confirm it. We have to analyses
and check bases that suitable for the confirmation of the exposure draft.

Last but not least we have to identify nature of the exposure draft whether principles-
based or rules-based accounting. This is important in order to know why the exposure draft is
needed. Moreover, when conducting this analyses, the source of information is very limited
and so hard to find. This situation made us hard to understand the nature of exposure draft.
7.0 SUGGESTIONS OR RECOMMENDATION TO OVERCOME THE
LIMITATIONS AS DISCUSSED

In order to solve the problem that occur in process analyses of the exposure draft, we
had come with some suggestion or recommendations to overcome the limitations. For first
limitation, we had to brainstorming between our team to summarize the exposure draft. The
brainstorming had come to conclusion when we decided to separate and divided the subtopic
of exposure draft between us. Then each of us will explain and elaborate their subtopic to other
teammate. This will make others teammate understand the exposure draft.

The next suggestion to overcome the second limitation is, finding the theories in other
source of information like article or books. This information is needed for further researches
to support the development and formulation of the exposure draft.

As suggestion to overcome the third limitation is, instead of identify the main parties
that involved in development or formulation of the draft, IASB should invite main parties that
involved and held a workshop to explain about the exposure draft to accountants. The
workshops and training program should be free of charge and must be made compulsory to
every accountant. This will enable accountant to amend the exposure draft and comment on a
proposed new accounting standard, in order to minimize any unintended consequences before
it becomes law.

Other alternatives that can be implemented to solve the limitations is such as, IASB
could make exposure draft easier by highlighting important expects of the standards by only
putting in the key and main points of the standards. This is to ensure that accountants can
understand and also quickly capture key points of what the accounting standard is trying deliver
to the accountants.
REFERENCE

REFERENCE
There are no sources in the current document.