IAS 1 (Presentation of financial statements):

Class examples
Example 1

Sharks Traders is a retailer of swimming gear and has a year end of 30 June.

On 1 March 2010, Sharks Traders took out a loan with DBSA Bank for R60 000. The loan is
repayable in equal annual installments of R15 000 (excluding interest), over a period of four
years, starting from 28 February 2011; interest on the loan is charged and payable annually at
9.5% per annum. Assume that the impact of discounting is immaterial.

While preparing the financial statements for the year ended 30 June 2010, the accountant
determined that the loan balance meets the definition and recognition criteria of a liability in
terms of the Conceptual Framework; however he is not certain about how the liability should be
classified on the face of the Statement of Financial Position.
You are required to:

Explain how the loan balance should be classified on the face of the Statement of Financial
Position as at 30 June 2010.

A Liability can be classified as either current or non-current in the statement of financial position.

In terms of IAS 1 a Liability should be classified as current when –

It is expected to be settled as part of the normal operating cycle - The loan does not form part of the
normal operating cycle of Sharks Traders.

It holds the liability primarily for the purpose of trading -The loan is not held for sale but rather for
starting up the business. Sharks sells swimming gear.

The liability is due to be settled within 12 months after the reporting period-The interest and loan
instalment are payable on 28 February 2011 which is within 12 months after the reporting period.

The loan payment due on 28 February 2011 is due to be settled within 12 months (8 Months) after the
reporting period. Loan repayments: 15 000 capital repayment, 5700 interest (60000*9.5%)

The entity does not have an unconditional right to defer settlement of the liability for at least 12 months
after the reporting period- Sharks Traders does not have a right to defer paying the Loan and interest
payments due 28 February 2011

An entity shall classify all other liabilities as non-current.

R15 000 of the loan balance should therefore presented as a current liability (Short-term portion of
long-term loan) as it is due to be settled within 12 months after the reporting period.

The R 1900 (60 000* 9.5% * 4/12) interest payable should also be presented as a current liability, as it is
due to be settled within 12 months after the reporting period (8 months)

The remainder of the loan balance R 45 000 should be classified and presented as a non-current liability
as it did not meet any of the criteria to be classified as current.
Example 2

On 2 January 2012; your friend, Sipho started a business to sell and deliver textbooks (Books
on the Move) and contributed R 1000 into the business account.

On 4 January 2012, the business received a start-up loan of R 7 000 from Sipho’s uncle.

Explain how the loan would be recognized and classified in the financial statements for the
month ended 31 January 2012, had the terms of the loan agreement stipulated the following:

1. The loan is repayable in 7 equal annual installments when Sipho believes the business
can manage the cash outflows relating to the loan and no interest would be charged on
the loan.
2. The loan is repayable in 14 equal annual installments commencing on the 31 January
2012 and no interest would be charged on the loan
3. The loan is repayable in full when Sipho believes the business can manage the cash
outflows relating to the loan and no interest would be charged on the loan

Solution

1,2,3 (Definition and recognition criteria):

A liability is defined as a present obligation (Sipho is obliged to pay his uncle the money that he
borrowed from him),

To transfer an economic resource (cash will flow out of the entity when Sipho pays back his
uncle). as a result of a past event (the receipt of the loan).

Consider the recognition criteria is met.

The uncertainty of existence is low as Sipho has received the loan amount. There is no
measurement uncertainty as the loan amount received is R7000.

The loan will therefore be recognised as a liability.

1. A liability can be classified in the face of the Statement of Financial Position as either
current or non-current.
A liability is classified as current when:
 It expects to settle the liability in its normal operating cycle: the loan is not part of the
operating cycle of the entity; or
 It holds the liability primarily for trading: Books on the Move sells and delivers books and
does not hold the loan for the purpose of trading; or

 The liability is due to be settled within twelve months after the reporting date: the loan
will not be settled within 12 months after the reporting period; or
  It does not have an unconditional right to defer settlement of the liability for at least
twelve months: Sipho does have the option to defer payment until he believes that the
entity can manage paying back the loan.

None of the current liability criteria were met, thus Sipho will classify the loan of R7000 as a
non-current liability.

2. A liability can be classified in the face of the Statement of Financial Position as either
current or non-current. A liability is classified as current when:
 It expects to settle the liability in its normal operating cycle: the loan will not be settled
within the normal operating cycle of Books on the Move; or
 It holds the liability primarily for trading: Books on the Move sells and delivers books and
does not hold the loan for the purpose of trading; or
 The liability is due to be settled within twelve months after the reporting date: a portion of
the loan is due to be paid within twelve months after the reporting period. R500 will be
repaid on 31 January 2013; or
 It does not have an unconditional right to defer settlement of the liability for at least
twelve months: Sipho does not have this right.

R500 of the loan will be classified as a current liability and R6 000 will be classified as non-
current liability.

 The loan meets the definition and recognition criteria of a liability, therefore the R 7000
would be presented on the face of the Statement of Financial Position in the non-current
section of liabilities as at 31 January 2012, because there is no specific repayment date
and Sipho does have the option to defer payment until he believes that the entity can
manage paying back the loan.