Changes to current vs. non-current classification of liabilities: Are you ready?

On 19 August 2025, the Ministry of Corporate Affairs (MCA) has notified, among other changes to Indian Accounting Standards (Ind AS), amendments to Ind AS 1, Presentation of Financial Statements dealing with classification of liabilities as current or non-current. The amendments will require entities to revisit classification of liabilities with covenants as current or non-current. Also, the amendments will require additional disclosures in the financial statements. In this article, we look at the key changes and their impact.

Overview of key amendments

Right to defer settlement

The pre-amended Ind AS 1 required that an entity should have an unconditional right to defer settlement for at least 12 months after the reporting date to classify a liability as non-current.

In practice, many loan agreements may include debt covenants which the borrower is required to comply with either on an ongoing basis (e.g., there should be no change in control and/or there should be no material adverse event) or more frequently than an annual basis (e.g., the borrower should ensure specified debt-equity ratio and/or current ratio on a quarterly or half-yearly basis). Hence, there was an issue whether such loans/financial liabilities meet Ind AS 1 criteria for classification as non-current liabilities.

To address the above matter, Ind AS 1 has been amended by replacing reference to the words “an unconditional right” with the words “a right to defer settlement.” Further, a new paragraph has also been added which clarifies that the ‘right’ to defer settlement of liability for at least 12 months must have substance and should exist at the end of the reporting period in order to classify a liability as non-current.

It has also been clarified that covenants requiring compliance only after the reporting date (i.e., future covenants) will not affect a liability’s classification at the reporting date. Instead, the amendments require entities to disclose information about such covenants and related liabilities in the notes.

Though the wording used in the pre-amended Ind AS 1 was ambiguous, it appears many entities have interpreted the standard in a manner that only debt covenants requiring compliance on or before the reporting date are relevant for non-current classification of liabilities. For these entities, this amendment will not have any material impact

Management intention/ expectation for early settlement

The amendments clarify that management’s intention/ expectation for early settlement does not play a role in classification of liabilities. Thus, a liability meeting Ind AS 1 criteria for classification as non-current will still be classified as non-current even if management intends or expects the entity to settle the liability within 12 months after the reporting period, or even if the liability is settled between the end of the reporting period and the date on which financial statements are approved for issue. Despite ignoring management’s intention with regards to classification, the event is not ignored for disclosure purposes. It may still be necessary to disclose information relating to the timing of the settlement in order for users of the financial statements to understand the impact of the liability on the entity’s financial position.

The requirement to ignore management’s intent in respect of classification may represent a change in practice for some entities, as previous practice may have taken into account management’s expectations and the discretion afforded to management.

Settlement through equity instruments

Pre-amendment, Ind AS 1 stated that if a liability could, at the option of the counterparty, be settled through the issue of equity instruments, this did not affect current or non-current classification of liability. For example, a convertible bond that allowed the holder to demand conversion into equity at any time could still be shown as non-current if the cash maturity were more than twelve months away

The amendments are likely to change how settlement through issue of equity instruments affects classification. The amendments state that settlement through issue of equity shares is treated as a form of settlement when determining current or non-current classification of liability. However, there is only one exception, if the embedded equity conversion option itself is classified as an equity instrument based on principles laid down in Ind AS 32 Financial Instruments: Presentation. This means that if the holder could trigger equity settlement within twelve months and the said conversion is treated as liability and not equity, then financial liability will need to be shown as current.

Example

Query

An entity has issued optionally convertible redeemable preference shares (OCRPS). The OCRPS are redeemable after 10 years. However, the holder can require the entity to convert OCRPS into equity shares at any time after the issuance date. Consider the following scenarios for the conversion formula:

• An entity has issued optionally convertible redeemable preference shares (OCRPS). The OCRPS are redeemable after 10 years. However, the holder can require the entity to convert OCRPS into equity shares at any time after the issuance date. Consider the following scenarios for the conversion formula:
• Scenario 2: The OCRPS are convertible into a fixed number of shares decided upfront. However, the issuer has down-round protection, which can trigger a change in the number of shares to be issued on conversion if the entity issues new shares at a lower than fair value.
• Scenario 3: The OCRPS are convertible into fixed number of shares decided upfront and there is no down-round protection or other clause which may change the number of shares to be issued on conversion

How should the above instruments be classified in the balance sheet for years one to nine?

Response

Prior to the amendments, the terms of a liability that could, at the option of the counterparty, result in its settlement by the issuance of equity instruments did not affect its classification. Hence, one may argue that in all three scenarios, the holder’s option to require early conversion was ignored when deciding current vs. nonclassification. As a result, in the pre-amended standard, one may have classified OCRPS liability as non-current in the balance sheet for years one to nine.

Post amendment, the equity conversion option is ignored only if it is classified as equity under Ind AS 32. Hence, the following positions will apply in the balance sheet for years one to nine

• Scenario 1: Since the OCRPS are convertible into a variable number of shares decided based on the fair value of equity shares at the conversion date, the equity conversion option is liability under Ind AS 32. Since the holder can require settlement in a variable number of shares at any time, the entire instrument is classified as current liability
• Scenario 2: Although the OCRPS are convertible into a fixed number of shares decided upfront, the number of equity shares to be issued on conversion could change due to the application of the down-round protection lause. Considering that the host instrument itself is a financial liability, even such a conversion option does not meet fixed-for-fixed criterion to classify the conversion option as equity under Ind AS 32. Rather, it is an embedded derivative. Under Ind AS 109 Financial Instruments, the issuer entity may either designate the instrument at fair value through profit or loss (FVTPL) or it can separate embedded derivative to be measured as at FVTPL and the host liability at amortized cost. Irrespective of the accounting approach followed, the conversion option is not treated as equity under Ind AS 32. This requires the issuer to classify the entire instrument (either fully measured as at fair value or liability at amortized cost plus embedded derivative components at fair value) as a current liability
• Scenario 3: Since the OCRPS are convertible into a fixed number of shares decided upfront and there is no down-round protection or other clause which may change the number of shares to be issued on conversion, the conversion option is classified as equity under Ind AS 32. However, the issuer will classify the host instrument as a financial liability. In this case, embedded conversion option is ignored for deciding current vs. non-current classification. As a result, OCRPS liability is classified as non-current in the balance sheet for years one to nine

It is obvious that the liability is classified as current in the balance sheet of year 10 in all the scenarios and both under pre-amended and post-amendment standards.

Many entities have issued convertible instruments that are either non-redeemable or redeemable at the end of a fixed period. However, the holder can opt to convert such instruments into a variable number of equity shares at any time. Earlier, such instruments were classified as noncurrent liabilities. Post-amendment, these instruments will be classified as current liabilities.

New Disclosure Requirements

The amendments to Ind AS 1 introduce specific disclosure requirements for situations where liabilities are classified as non-current and the right to defer settlement depends on compliance with covenants falling due within twelve months from the reporting date. The required disclosures include:

1. Information about the covenants, including the nature of the covenants, when compliance is required, and the carrying amount of the related liabilities.
2. Facts and circumstances that indicate potential difficulty in compliance. Examples include

• Actions taken before or after the reporting date to avoid or mitigate a possible breach, or
• Situations where the entity would not have complied if the covenant were assessed based on conditions at the reporting date.

he above disclosures are new for most entities. Consider an entity having a number of loan arrangements that are classified as non-current and each loan requires compliance with many covenants on a quarterly/ half-yearly basis. It may need to disclose a long list of covenants.

Sample disclosure for one loan

ecured bank loan

This loan has been drawn down under a six-year multioption facility (MOF). The loan is repayable within 12 months after the reporting date but has been classified as long term because the Group expects, and has the discretion, to exercise its rights under the MOF to refinance this funding. Such immediate replacement funding is available until 31 July 2029. The total amount repayable on maturity is INR3,500 million. The facility is secured by a first charge over certain of the Group’s land and buildings, with a carrying value of INR5,000 million(31 March 2025: INR 5,000 million).

The secured bank loan is subject to the following covenants:

• Interest cover ratio greater than five. The interest cover ratio in the secured bank loan is calculated as profit before tax divided by interests on debts and borrowings. The interest cover ratio was 11.1 as of 31 March 2026 (31 March 2025: 9.1)
• Gearing ratio below 45%. Gearing ratio is the entity’s total debt (i.e., interest-bearing loans and borrowings other than convertible preference shares) divided by its shareholder’s equity. The gearing ratio was 26% as of 31 March 2026 (31 March 2025: 38%)

Both covenants are tested half-yearly, on 30 September and 31 March. The Group has no indication that it will have difficulty complying with these covenants.

Applicability date and transitional provisions

The above amendments to Ind AS 1 are applicable for the financial year beginning on or after 1 April 2025, i.e., for financial year 2025–26. The amendment needs to be applied retrospectively. Given below is an overview of how these changes will affect various sets of financial statements:

a) Financial statements for year ended 31 March 2025:

Entities will not give effect to these changes while finalizing financial statements for the year ended 31 March 2025, even if such financial statements are approved for issue after notification of the amendments to Ind AS 1. However, entities will need to make disclosures regarding standards issued but not effective as required under paragraphs 30 and 31 of Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Financial results prepared in accordance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations (SEBI LODR):

It may be noted that quarterly results are prepared in accordance with the format prescribed by the SEBI and financial results for the first and third quarters do not include a balance sheet. Since these changes affect only the current or non-current classification of liabilities, they are unlikely to have a material impact on the financial results for the first and third quarters. However, if it is expected that there will be a material change in current or non-current classification of liabilities pursuant to these new requirements vis-àvis the classification used in previously issued financial statements, then entities should consider including an appropriate explanatory disclosure in the notes to the quarterly results.

Financial results for the second and fourth quarters of the financial year need to include a balance sheet at the end of the reporting period and comparative information at the end of the previous financial year. Accordingly, entities will need to ensure current and non-current classification of financial liabilities as per the new requirements. This will include reclassification of amounts presented in the comparative balance sheet. The change is treated as change in accounting policy and entities will also need to disclose the impact of reclassification through an appropriate note in the financial results. It may be noted that the SEBI format does not specifically require a third balance sheet to be presented. Hence, one may argue that there is no need to present a third balance sheet in financial results even if there is a material change in the classification of liabilities due to the new requirements.

Financial results for the second and fourth quarters of the financial year need to include a balance sheet at the end of the reporting period and comparative information at the end of the previous financial year. Accordingly, entities will need to ensure current and non-current classification of financial liabilities as per the new requirements. This will include reclassification of amounts presented in the comparative balance sheet. The change is treated as change in accounting policy and entities will also need to disclose the impact of reclassification through an appropriate note in the financial results. It may be noted that the SEBI format does not specifically require a third balance sheet to be presented. Hence, one may argue that there is no need to present a third balance sheet in financial results even if there is a material change in the classification of liabilities due to the new requirements.

c) Interim financial statements prepared for part of the financial year 2025–26:

The amended Ind AS 1 will apply to any interim financial statements prepared for part of the financial year 2025–26. Accordingly, entities will need to ensure current and non-current classification of financial liabilities as per the new requirements. This will include reclassification of amounts presented in the comparative balance sheet. The change is treated as a change in accounting policy and entities will also need to ensure disclosures accordingly, including disclosure regarding the impact of reclassification

The presentation of a third balance sheet with related notes will depend on whether the change has a material impact on the classification of liabilities in the balance sheet at the beginning of the comparative period and on whether the entity prepares complete or condensed financial statements

• If the change has a material impact on the classification of liabilities in the balance sheet at the beginning of the comparative period and the entity is preparing a complete set of financial statements, then the entity must present a third balance sheet with related notes at the beginning of the earliest comparative period
• However, if the entity is preparing only condensed set of financial statements, then the entity need not present a third balance sheet at the beginning of the earliest comparative period, irrespective of whether the change has a material impact on the classification of liabilities.

d) Annual financial statements for the financial year 2025–26:

The amended Ind AS 1 will apply, and entities will need to ensure current and non-current classification of financial liabilities as per the new requirements. This will include reclassification of amounts presented in the comparative balance sheet. The change is treated as a change in accounting policy and entities will also need to ensure disclosures accordingly, including disclosure regarding the impact of reclassification. Entities will also need to make specific disclosures regarding debt covenants as required under Ind AS 1. Entities will also need to present a third balance sheet with related notes if the change has a material impact on the classification of liabilities in the balance sheet at the beginning of the comparative period.

Summary - Key impact

* Ind AS 34 Interim Finance Reporting has not been consequentially amended, and thus, new disclosure requirements of Ind AS 1 will not necessarily apply in the context of condensed interim financial statements. However, under Ind AS 34, judgment needs to be exercised to ensure that information which is significant to an understanding of the changes since the end of the last financial year is disclosed. Thus, entities may consider the new disclosure requirements in Ind AS 1 relevant for interim financial statements also

Similar changes have not been made in Schedule III to the Companies Act 2013 (as amended). However, it may not create any issue in implementation of new requirements since Schedule III already provides that Ind AS requirements will prevail if there is any inconsistency between the requirements of Ind AS and Schedule III

Amendments effective from financial year 2026-27 onward

Breach of covenants

To classify a financial liability as non-current, the entity must have an unconditional right or right to defer settlement at least for 12 months after the reporting date. If an entity breaches a covenant of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, the entity will not have such an unconditional right. The consequence is that the entity needs to classify the liability as current unless the lender has waived the breach and thereby agreed on or before the reporting date to not demand repayment of loan for at least 12 months after the reporting date as a consequence of the breach.

In many cases, it may be practically impossible/ difficult for entities to obtain such a waiver before the reporting date. To address such practical issues, pre-amended Ind AS 1 contained two key carve-outs vis-à-vis the corresponding IAS 1

• aterial vs. minor breach:Only a breach of a material provision/ covenant of a long-term loan will trigger current classification of the liability. If there was a breach of a minor provision/ covenant, the entity can continue classifying the loan as non-current. In practice, differentiation between breach of material and minor covenants may require exercise of judgment and such assessment/ determination may change from one entity to another and for the same entity over different periods
• Post-period waiver relief: If there is a breach of a material covenant of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand on the reporting date and the lender has agreed, after the reporting period and before the approval of the financial statements for issue, not to demand payment for at least 12 months as a consequence of the breach, then the entity was not required to classify the liability as current. In other words, under pre-amended Ind AS 1, the waiver granted by the lender after the reporting date and before the approval of the financial statements for issue was treated as an adjusting event

In accordance with the final amendments notified by the MCA, the above carve-outs will continue to apply for financial year 2025–26 as well. However, from the financial year beginning 1 April 2026, both these carve-outs will be removed. Consequently, a breach of a covenant (without differentiation between material or immaterial covenants) occurring on or before the reporting date will require the liability to be classified as current, unless the lender has granted a waiver of breach on or before the reporting date and agreed not to demand payment for at least 12 months after the reporting date as a result of breach. Any waiver obtained after year-end will be treated as non-adjusting event

A corresponding change has also been made in Ind AS 10 Events after the Reporting Period. These changes will apply retrospectively from financial year 2026–27.

The following examples explain the application of requirements.

* Considering retrospective application, the presentation of liabilities for comparative periods will need to be reassessed and updated based on Ind AS 1 amendments. A third balance sheet with related notes is required if the change has a material impact on classification of liabilities in the balance sheet at the beginning of the comparative period.

** Liability will be reclassified as non-current only if the lender has granted a waiver of breach on or before the reporting date and agreed not to demand payment for at least 12 months after the reporting date as a result of breach.

Concluding remarks

For most entities engaged in manufacturing/ supply of goods or services, separate classification of current and non-current assets and liabilities in the balance sheet provides useful information by distinguishing the net assets that are continuously circulating as working capital from those used in the entity’s long-term operations. It also highlights assets that are expected to be realized within the current operating cycle, and liabilities that are due for settlement within the same period. In practice, current vs. non-current classification of assets and liabilities also helps users of financial statements in better understanding/ evaluating the short-term liquidity position of the entity. Also, there may be debt covenants and other key performance indicators (KPIs) linked to the current ratio. Hence, there is no doubt that current vs. non-current classification of assets and liabilities is one of the key focus areas for the preparers as well as users of the financial statements

As indicated above, Ind AS 1 amendments may have a significant impact on current vs. non-current classification of liabilities for many entities. Considering importance and likely impact, it is imperative that entities likely to be impacted by the new requirements evaluate potential impact in advance and take appropriate action such as amendment in loan agreement or upfront waiver from the lender to avoid any unwarranted outcomes. An amendment regarding breach of covenants applicable from FY 2026-27 onward will require entities to obtain a waiver letter of any breach on or before reporting date to avoid current classification of liabilities. To ensure that while presenting financial statements for financial year 2026–27 entities are not required to change classification of liability in comparative period as current, they should endeavor that waiver for any breach of covenant, which occurs on or before 31 March 2026, is obtained on or before 31 March 2026