Classification test and its timing

• AASB 101 continues to require entities to present current and non-current liabilities separately (see paragraph 60), and it retains the four-part classification rule that makes a liability current if the entity does not have the right at the end of the reporting period to defer settlement for at least twelve months (paragraph 69(d)). The amendments sharpen the temporal and substantive test for that right (paragraph 72A).
• Paragraph 72A states the right to defer settlement must have substance at the end of the reporting period. If the right is subject to specified conditions, the right exists at the reporting date only if the entity complies with those conditions at that date. The Standard expressly requires compliance at the reporting date even if the lender actually tests compliance later.

Covenants and their timing (new paragraph 72B)

• New paragraph 72B isolates covenants in loan arrangements and sets out a two-way rule:
  • 72B(a): If a covenant requires the entity to comply on or before the reporting date (including covenants that are assessed only after the reporting period but which require compliance at the reporting date), that covenant affects whether the right to defer settlement exists at the reporting date.
  • 72B(b): If a covenant requires the entity to comply only after the reporting date (for example, a covenant measured six months post-reporting), the covenant does not affect whether the right exists at the reporting date.
• The Standard illustrates the distinction (see paragraphs 74-75).

Effect of breaches and lender actions (paragraphs 74-75)

• Paragraph 74 clarifies that if an entity breaches a covenant on or before the reporting date and the effect is that the liability becomes payable on demand, the liability is classified as current at the reporting date. That classification stands even where the lender subsequently agrees, after the reporting date but before authorisation of the financial statements, not to demand payment.
• Paragraph 75 creates a second, narrow exception: if by the end of the reporting period the lender has agreed to provide a period of grace that extends at least twelve months after the reporting date and prevents demand during that period, then the liability can be classified as non‑current.

Disclosure (paragraph 76ZA)

• Paragraph 76ZA imposes a note-disclosure obligation when a liability is classified as non-current but the entity’s right to defer settlement of that liability is subject to covenants that must be complied with within twelve months after the reporting date (this refers back to situations falling under paragraph 72B(b)). The required disclosures are:
  • (a) information about the covenants (nature and timing) and the carrying amount of related liabilities;
  • (b) facts and circumstances that indicate the entity may have difficulty complying , including actions taken during or after the reporting period to avoid or mitigate a potential breach, and the fact that the entity would not have complied if covenants were assessed on reporting date.

Interaction with materiality and AASB 7

• The Practice Statement 2 Example P is amended to show how the new paragraph 76ZA interacts with an entity’s materiality assessment and the requirements of AASB 7 for disclosure of risks arising from financial instruments. The example walks through scenarios in which an entity judges covenant information material or immaterial depending on likelihood and consequences.

Transitional and timing complexities

• The Standard contains transition guidance (paragraphs 139U and 139W) that link AASB 2022-6 to earlier AASB 2020-1 amendments (Classification of Liabilities as Current or Non-current). The document contains multiple references to differing effective dates (1 January 2023 and 1 January 2024) across paragraphs and in the Preface and Application sections; the instrument itself commences on 31 December 2022. These provisions require careful reading to determine when each amendment applies and whether earlier application is permitted or requires concurrent application of AASB 2020-1.

Substance-over-form and information objectives

• The amendments emphasise substance at the reporting date over procedural testing dates (i.e., a covenant measured at the reporting date but tested later still affects classification). The disclosure obligation aims to provide users with forward-looking information about the risk of acceleration of liabilities within twelve months.

Primary entities

• All entities that apply AASB 101 under AASB 1057 are within the amendments’ scope (see Application). That includes entities required to prepare general-purpose financial statements under the Corporations Act 2001 and other reporting frameworks that adopt Australian Accounting Standards as set out in AASB 1057. The Standard itself applies to “entities and financial statements in accordance with the application of AASB 101 set out in AASB 1057” (Application).

Borrowers and companies with loan arrangements

• Entities with long-term loans, credit facilities, or other liabilities that contain covenants (for example, financial covenants such as debt-to-equity ratios) are directly affected. They must determine classification and possible disclosures for those liabilities. The Practice Statement example explicitly contemplates an entity with a long-term loan subject to a debt-to-equity covenant.

Lenders and contract drafters

• Lenders and arrangers of financing may be indirectly affected because the timing of covenant tests and the drafting of period-of-grace provisions affect debt classification and disclosure. The Standard’s rules create incentives for borrowers to seek a grace period by the reporting date (paragraph 75) and for lenders to be explicit about when compliance is required.

Auditors and preparers

• Financial statement preparers, accountants and auditors must apply the amended classification tests, evaluate substance at the reporting date, scrutinise timing clauses in loan agreements, and document the judgements used to determine classification and disclosure. Auditors will examine whether the right to defer settlement exists at the reporting date and whether required disclosures in paragraph 76ZA are made when classification remains non-current.

Credit analysts, ratings agencies, and users

• Users of financial statements (analysts, credit rating agencies, bankers) will receive more granular information where covenants could trigger repayment within twelve months but lenders' testing timing does not make the liability current. Disclosure under 76ZA is designed to help them assess the probability that liabilities will be accelerated and the carrying amounts at stake.

Regulators and enforcement bodies

• The Standard was made under section 334 of the Corporations Act 2001 (cover text). Enforcement of accounting standards occurs through the existing regulatory and professional frameworks (audit oversight, ASIC supervision, Corporations Act reporting obligations). The instrument itself does not prescribe statutory penalties; the practical enforcement environment is the prevailing audit and corporate reporting regime.

Entities applying early or with transitional effects

• The Standard permits earlier application but requires that AASB 2020-1 be applied concurrently if earlier application of certain amendments occurs (see paragraphs 139U and 139W). Entities that apply the Standard earlier must disclose that fact. Entities must therefore coordinate the application of multiple amendments if they wish to change classification policies before the mandatory effective date.

Those not directly covered

• The text does not create exemptions for small proprietary companies or other entities outside the scope of AASB 101/AASB 1057. Any exemptions in Australian law that limit the obligation to prepare general-purpose financial statements remain determined by the Corporations Act and other law, not by this Standard.

Preparers’ duties: classification and substance test

• Prepare financial statements that correctly classify liabilities as current or non-current in accordance with paragraphs 66-76B (as amended) and specifically apply the tests in paragraphs 69, 72A and 72B. That duty includes:
  • Determining whether the entity has the right to defer settlement for at least twelve months at the reporting date (paragraph 69(d) read with 72A).
  • Applying the covenant timing rules in 72B to determine whether a covenant affects the existence of that right at the reporting date.
  • Considering that a covenant requiring compliance at or before the reporting date affects classification even if the lender tests later (72B(a)).

Disclosure duty when classification remains non-current but covenants fall within the twelve-month window (76ZA)

• If the entity classifies liabilities as non-current while those liabilities are subject to covenants that must be complied with within twelve months after the reporting date (72B(b) scenario), the entity must disclose, in the notes, information enabling users to understand the risk that the liabilities could become repayable within twelve months. The required information includes:
  • The nature of the covenants and when the entity is required to comply;
  • The carrying amount of the related liabilities;
  • Facts and circumstances that indicate potential difficulty complying, such as actions taken during or after the reporting period to avoid or mitigate a potential breach, and the fact that the entity would not have complied if covenants were assessed on the reporting date (paragraph 76ZA(a)-(b)).

Proof and evidence duties

• Paragraph 72A requires that the right to defer settlement “must have substance” and “must exist at the end of the reporting period.” Preparers must therefore collate and retain contractual evidence, lender communications, and factual circumstances supporting a classification decision. This includes documenting whether the lender’s forbearance, grace period, or other arrangements existed by the reporting date (see paragraph 75 exception).

Materiality judgement under Practice Statement 2

• The amended Example P requires entities to assess whether covenant information is material by weighing likelihood and consequences under AASB 7 and PS2. Preparers must document their assessment of the probability of breach and its expected consequences when deciding whether the information is material beyond the mandatory 76ZA disclosures.

Rights of entities and lenders concerning classification

• Entities retain the right to present a liquidity-based statement of financial position if that presentation is reliable and more relevant (paragraph 60), but the classification tests for current/non-current remain applicable unless such a liquidity presentation is used.
• Lenders retain contractual rights (e.g., to demand repayment upon breach) but where lenders have agreed to a period of grace by the end of the reporting period, the borrower may treat the liability as non-current (paragraph 75). The Standard does not limit the contractual freedom of lenders but translates borrower-lender conduct and written agreements into classification and disclosure outcomes.

Transition and disclosure obligations when applying changes early

• Entities that apply AASB 2022-6 earlier than the mandatory date must apply AASB 2020-1 concurrently and disclose that fact (paragraphs 139U and 139W). The Standard requires disclosure of early application so that users can see changes in classification policy application.

Auditors’ duties and rights

• While the Standard itself does not set audit requirements, auditors will be expected to test the substance of the preparers’ conclusions about the right to defer settlement and review covenant documentation, lender confirmations, and communications. Where classifications or disclosures are inadequate, auditors may need to seek amendments to the financial statements or qualify their opinions under auditing standards (this follows established audit practice; the Standard does not specify audit procedures).

Regulatory link

• The Standard was made under s 334 of the Corporations Act 2001 (cover text). That situates the Standard within the legal framework governing financial reporting obligations for corporations that fall under Australian law, including duties of directors and statutory reporting requirements.

Legal basis and enforcement context

• AASB 2022-6 is an Accounting Standard made by the Australian Accounting Standards Board under section 334 of the Corporations Act 2001 (cover text). The instrument itself does not set out criminal penalties or fines. Enforcement of compliance with Australian Accounting Standards occurs through the broader legal, regulatory and professional frameworks including:
  • The Corporations Act reporting obligations (the Standard is made under s 334, and entities subject to the Corporations Act must prepare financial reports in accordance with applicable accounting standards);
  • Audit standards and auditor responsibilities (auditors assess whether financial statements comply with accounting standards and report modifications where appropriate);
  • Regulatory oversight (for example, ASIC exercises supervision over financial reporting in companies regulated under the Corporations Act); and
  • Professional disciplinary regimes for accountants and auditors.

What the Standard requires that could trigger enforcement responses

• Classification failures: If an entity misclassifies liabilities against the tests in paragraphs 69, 72A, 72B, 74 and 75, that misclassification may lead to audit findings, modified audit opinions, regulatory queries, or corrective disclosure obligations under the Corporations Act. The Standard itself does not prescribe those actions; they are consequences administered under existing oversight and audit frameworks.
• Omitted or inadequate 76ZA disclosures: The new disclosure requirement creates an obligation to provide specific note information in specified circumstances. Omission or materially misleading disclosure may draw regulatory attention or audit qualifications under prevailing auditing standards.

No new statutory fines or sanctions in the instrument text

• The text of AASB 2022-6 does not create new statutory penalties or criminal offences. Any sanctions for non-compliance would derive from existing law and professional standards , for example, directors’ duties under the Corporations Act, continuous disclosure obligations for listed entities, or auditor reporting obligations , not from novel penalty clauses in this Standard.

Practical enforcement mechanisms

• Auditors: The principal practical enforcement mechanism for accounting standards compliance is the external audit. Auditors will evaluate classification, testing of covenant compliance, and adequacy of disclosures and may require amendments or add an emphasis of matter or qualification in the audit report.
• Regulators and market discipline: For listed and public entities, disclosure deficiencies are likely to lead to market scrutiny, potential regulatory action by ASIC, and reputational consequences.
• Corporate governance/compliance functions: Internal controls and governance structures may prompt remediation and restatement if significant non-compliance is identified.

Uncertainty about enforcement timing and consequences

• The Standard’s transitional provisions and interplay with AASB 2020-1 create complexity about the timing for applying certain amendments (paragraphs 139U and 139W). Entities and auditors must determine correct effective dates and documentation for early application; misapplication could create compliance risk. The Standard does not itself describe enforcement timeframes or processes for resolving such ambiguities.

AASB 101, AASB 7, AASB 1057, and AASB 2020-1

• The amendments are made to AASB 101 but explicitly cross-reference AASB 7 Financial Instruments: Disclosures (via Practice Statement 2 Example P) and tie to AASB 1057 Application of Australian Accounting Standards for scope. Paragraphs 139U and 139W link these amendments to AASB 2020-1 Amendments to Australian Accounting Standards - Classification of Liabilities as Current or Non-current, and require coordinated application when entities elect early application.

Corporations Act 2001

• The Standard is made under section 334 of the Corporations Act 2001 (cover text). That locates the Standard within the legal regime that mandates financial reporting for companies governed by the Corporations Act. The Standard does not, however, alter statutory duties directly; it sets accounting rules that affect statutory financial statements.

Audit and professional obligations

• Although the Standard does not change audit law, it affects matters auditors will test. Auditors must consider whether the right to defer settlement exists per 72A/72B, whether a breach occurred by the reporting date (72B(a), 74), and whether a grace period was agreed by the reporting date (75). Auditing standards require auditors to assess the consistency of financial statements with accounting standards and to report qualifications where appropriate, so the practical interplay with audit obligations is direct.

Contract law and debt agreements

• The Standard interacts operationally with the contractual terms of loan agreements because classification and disclosure hinge on the precise wording and timing provisions in such contracts (72B, 74, 75). The Standard does not change contractual rights, but it translates contractually defined events (e.g., time of covenant compliance, grace period commencement) into accounting outcomes. This means the drafting of covenants and lender forbearance letters will affect financial reporting treatment.

Continuous disclosure and securities law

• For entities with securities admitted to trading, securities law and listing rules impose continuous disclosure obligations. While the Standard does not itself alter continuous disclosure law, the required information under paragraph 76ZA (e.g., carrying amount of related liabilities and facts indicating difficulty complying with covenants) may overlap with what market participants consider material information for continuous disclosure. Entities should coordinate accounting disclosures with continuous disclosure obligations where relevant.

Tax law and regulatory filings

• The Standard affects the presentation of liabilities and related disclosures in financial statements, which can feed into tax filings and other regulatory submissions that reference financial statements. The Standard does not change tax rules, but classification changes can affect statutory computations or representations made to tax authorities if those computations reference the financial statements.

International standards and IASB amendments

• The amendments arise from the IASB’s October 2022 amendments to IAS 1 (Non-current Liabilities with Covenants). AASB 2022-6 implements those IASB changes into Australian GAAP. Where entities prepare IFRS-based statements or report under IFRS jurisdictions, the content will be aligned with IASB’s amendments.

No conflict-resolution text beyond cross-references

• The instrument itself includes cross-references that require applying AASB 2020-1 when earlier application occurs and directs retrospective application “in accordance with AASB 108” for certain amendments (see paragraphs 139U and 139W). Entities must follow AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors for retrospective application. The Standard does not create special carve-outs from those principles.

Issuance and legislative authority

• AASB 2022-6 was made by the Australian Accounting Standards Board and is dated 15 December 2022 (cover text). It was made under section 334 of the Corporations Act 2001 (cover text). The legislative instrument commences on 31 December 2022 (Commencement section).

Standards amended

• The Standard amends:
  • AASB 101 Presentation of Financial Statements (July 2015): paragraphs 60, 71, 72A, 74 and 139U are amended; paragraphs 72B and 139W are added; paragraph 76ZA is added after paragraph 76. Paragraphs 69 and 75 are included for ease of reference and are not amended.
  • AASB Practice Statement 2 Making Materiality Judgements (December 2017): Example P is amended to incorporate the new requirements and cross-references to paragraph 76ZA and AASB 7.

Relation to IASB amendments

• The Preface states these amendments arise from the IASB’s issuance of International Financial Reporting Standard Non-current Liabilities with Covenants (Amendments to IAS 1) in October 2022. The AASB text includes the IASB Basis for Conclusions as part of the issued Standard (contents list).

Interaction with AASB 2020-1

• The Standard references AASB 2020-1 Amendments to Australian Accounting Standards - Classification of Liabilities as Current or Non-current, which previously amended paragraphs 69, 73, 74 and 76 and added other paragraphs (139U describes that history). AASB 2022-6 amends paragraph 139U to change effective date references and adds paragraph 139W stating application timing for AASB 2022-6 itself.

Effective dates and transitional provisions

• Multiple statements on effective dates appear:
  • The Preface and Application sections say the Standard applies to annual periods beginning on or after 1 January 2023 and that earlier application is permitted provided AASB 2020-1 is also applied.
  • Paragraph 139U recounts that AASB 2020-1 amended certain paragraphs and states an entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2023, and that earlier application is permitted. It further provides that if an entity applies those amendments for an earlier period, it shall also apply AASB 2022-6 for that period and disclose that fact.
  • Paragraph 139W states AASB 2022-6 amended paragraph 139U; it requires the amendment to paragraph 139U to be applied immediately upon issue of AASB 2022-6 and states that “all other amendments” are to be applied for annual reporting periods beginning on or after 1 January 2024, retrospectively under AASB 108, with earlier application permitted if AASB 2020-1 is also applied. This creates an apparent sequencing and dating complexity that preparers must resolve by reading the transitional paragraphs carefully.
• The legislative instrument’s formal commencement date is 31 December 2022 (Commencement).

Typographical and drafting aids

• The Standard uses underlining and strike-through in the published text to show amendments, but the Preface clarifies that the amendments themselves do not include the underlining/strike-through text. Ellipses are used in the published instrument to show unamended text for context.

Document structure and authority

• The Preface states the Accounting Standard (AASB 2022-6) is set out on pages 5-8 and that “all the paragraphs have equal authority.” The Standard is accompanied by the IASB Basis for Conclusions.

No cases cited in the Standard

• The text of AASB 2022-6 contains no litigation history and does not cite cases. The instrument itself is an accounting pronouncement and does not include judicial decisions.

No judicial interpretation included in the source

• The Standard provides authoritative guidance on accounting classification and disclosure but does not record any court or tribunal decisions interpreting the amended paragraphs. The document includes the IASB Basis for Conclusions but not case law.

Implication for future litigation

• The Standard’s substantive rules on when covenants affect classification (for example, whether a covenant assessed after the reporting period but referring to the reporting date affects classification) may generate future disputes where facts are borderline. The Standard creates potentially litigation-relevant lines: whether compliance was required “on or before” the reporting date; whether the lender’s actions constituted a grace period “by the end of the reporting period” (paragraph 75); and whether disclosures required by 76ZA were adequate. The source contains no litigation examples or precedent.

Audit and regulatory determinations

• While there is no litigation history in the instrument, enforcement and audit practice will likely generate practice notes, regulatory guidance, and possibly litigation or public administrative decisions in future cases. Those outcomes are outside the instrument and are not described in the source.

Timing versus testing date

• A core subtlety is the distinction between when compliance is required and when compliance is tested. Paragraph 72B(a) makes clear that a covenant that requires compliance at the reporting date affects classification even if the lender only tests compliance after the reporting date. Practitioners must not assume that a late test avoids current classification. The “required to comply” language is the decisive factor, not the timing of the lender’s actual measurement.

Grace periods must exist by the reporting date

• Paragraph 75 allows a liability to be classified as non-current where the lender agreed by the end of the reporting period to provide a period of grace extending at least twelve months after the reporting date. That agreement must exist by the reporting date. A forbearance letter signed after the reporting date but purportedly retroactive to the reporting date may not satisfy the test unless it can be shown that the agreement existed (in the sense required by paragraph 75) by the reporting date. The Standard gives no instruction on what proof suffices; documentation and contemporaneous evidence will be crucial.

Disclosure required even when classification remains non‑current

• Paragraph 76ZA requires disclosure where liabilities are classified as non-current and covenants must be complied with within twelve months after the reporting date. That means entities cannot avoid disclosing covenant risks simply by negotiating contractual timing that pushes compliance tests into the post-reporting period. The Standard requires disclosure of nature, timing, carrying amount and facts and circumstances indicating likely breach, including actions taken to avoid a breach.

Ambiguous effective dates and concurrent application with AASB 2020-1

• The Standard repeats different effective dates in various parts (Preface/Application says apply from annual periods beginning on or after 1 January 2023; paragraph 139W references 1 January 2024 for “all other amendments” while directing immediate application of the amended paragraph 139U). Practitioners must read transitional paragraphs 139U and 139W carefully and cross-check with AASB 2020-1 to determine the correct application date for each amendment. If electing early application, AASB 2020-1 must also be applied for the same period and the entity must disclose that fact (paragraphs 139U and 139W).

Materiality assessment complexity

• The Practice Statement 2 Example P demonstrates that entities must balance likelihood and consequence to decide whether covenant information is material (and thus requires disclosure beyond 76ZA). The example’s scenarios show that the same covenant could be material in one factual context and immaterial in another depending on tolerance ranges and the entity’s history. Preparers must document the analysis supporting materiality judgements.

Interactions with liquidity presentation option

• Paragraph 60 preserves the exception allowing a liquidity-based presentation if that is more reliable and relevant. Entities that choose liquidity presentation must still track covenant implications for financial statement users. Choosing liquidity presentation does not obviate the need to apply the covenant timing rules for notes and classification elsewhere.

Incentives to renegotiate or reword covenants

• The amendments create an incentive for borrowers and lenders to negotiate the timing of covenant compliance and to document grace periods or forbearance explicitly by the reporting date, because the existence (or not) of those arrangements will determine classification and disclosure outcomes. That may create commercial pressure and negotiation over drafting nuances (for example, whether a covenant is “measured at each reporting date” versus “measured at a specified later date”).

Disclosure may create market signalling risks

• Paragraph 76ZA requires disclosure of facts and circumstances indicating difficulty complying, including actions taken to avoid breach. That disclosure may reveal to markets, competitors, or lenders that the entity faces liquidity constraints or has taken remedies. Entities must weigh this signalling risk when drafting the facts-and-circumstances narrative, but the Standard mandates disclosure where the conditions in 76ZA apply.

Retrospective application complications

• The Standard requires retrospective application “in accordance with AASB 108” for certain amendments (paragraph 139W). Entities that restate prior periods must consider the availability of historical evidence (e.g., whether a grace period existed by a prior reporting date) and the burden of documenting decisions for prior periods.

Carrying amount disclosure linkage

• Paragraph 76ZA requires the carrying amount of the related liabilities to be disclosed. This is a concrete amount tied to classification and measurement in the balance sheet; preparers must ensure amounts tied to that disclosure are reconciled and consistent with other notes (for example, liquidity risk tables in AASB 7).

Step-by-step practical checklist

1. Identify all loan arrangements and liabilities with covenant clauses, including long-term loans, credit facilities, and guarantees. Obtain all loan agreements, side letters, and forbearance/grace documentation.
2. For each covenant, determine the exact covenant terms and the timing of required compliance:
   • Is compliance required “on or before” the reporting date (including covenants expressed as being measured at the reporting date even if tests occur later)? If so, treat under paragraph 72B(a).
   • Is compliance required only after the reporting date (for example, a covenant based on a future measurement date)? If so, treat under paragraph 72B(b).
3. Apply the substance test (72A):
   • Establish whether the entity had the substantive right at the reporting date to defer settlement for at least twelve months. Document the factual basis.
   • If the right is subject to conditions, confirm the entity complied with those conditions at the reporting date.
4. Determine classification using paragraph 69 read with 72A/72B, and apply paragraphs 74-75:
   • If a breach occurred on or before the reporting date and the breach made the liability payable on demand, classify as current (paragraph 74).
   • If lender agreed by the reporting date to a period of grace ending at least twelve months after the reporting date and preventing demand, classify as non-current (paragraph 75). Retain contemporaneous evidence that the agreement existed by the reporting date.
5. For liabilities classified as non-current but subject to covenants that must be complied with within twelve months after the reporting date (72B(b) scenario), prepare disclosures required by paragraph 76ZA:
   • Describe the covenants (nature and timing), and provide the carrying amount of the related liabilities.
   • Disclose facts and circumstances indicating difficulty in complying, including actions during or after the reporting period taken to avoid/mitigate breach and whether the entity would not have complied if the covenant were assessed on the reporting date.

Documentation and evidence

• Keep copies of loan agreements, board minutes, lender correspondence, side letters, formal forbearance agreements and any contemporaneous evidence that a grace period existed by the reporting date.
• Maintain calculations showing measurement of covenant tests per the contract and reconciliations to figures reported in the financial statements.
• Record the rationale for classification decisions and the timing-based analysis under paragraph 72B.

Drafting notes and disclosures

• Draft a 76ZA note that is clear on:
  • What the covenant is (for example, debt-to-equity ratio) and how it is measured.
  • When compliance is required (reporting date, quarterly test, six months after reporting date, etc.).
  • The carrying amount of the related liability or liabilities.
  • Any facts or circumstances indicating risk of non-compliance, including actions taken to avoid a breach (for example, sale of assets, renegotiation attempts) and whether the entity would have complied had the covenant been assessed on the reporting date.
• Align the 76ZA note with AASB 7 risk disclosures and consider whether extra disclosures are material under Practice Statement 2 Example P and should be included.

Coordinate with auditors early

• Discuss the covenant timing analysis, classification outcomes, and the proposed 76ZA disclosure with auditors during interim and final audit planning. Provide auditors with the contractual evidence and the entity’s documentation that demonstrates whether the right to defer settlement had substance at the reporting date.

Consider contractual remediation before reporting date

• If the entity’s classification depends on whether a lender agreed to a period of grace by the reporting date (paragraph 75), consider seeking an explicit, documented agreement from the lender before the reporting date. If that is not possible, document attempts and any subsequent agreements, but understand that post-reporting-date agreements may not support a non-current classification unless they can be shown to have existed by the reporting date.

Materiality assessment process

• Use Practice Statement 2 and AASB 7 to assess materiality for covenant information beyond 76ZA. Document the likelihood and consequence assessments as in Example P and explain why certain covenant information is material or immaterial under those standards.

Transition and effective-date compliance

• Decide whether to apply the amendment early. If early application is chosen, apply AASB 2020-1 concurrently for the same period and disclose that fact (paragraphs 139U and 139W).
• Review paragraph 139W carefully to determine which amendments apply from which date; consult the AASB’s issued guidance or reach out to the AASB if the retrospective application sequencing is unclear.

Integrate with other financial statement notes

• Ensure carrying amounts disclosed under 76ZA reconcile with the statement of financial position and the financial instruments notes under AASB 7. Update liquidity, covenant, and subsequent-events notes to avoid inconsistency.

Board and governance reporting

• Prepare a summary for the board and audit committee showing:
  • Each covenant, its timing, the classification decision, and the disclosure approach;
  • Any remediation or renegotiation steps taken and their effect on classification;
  • The materiality judgement under Practice Statement 2 and AASB 7.

Practical drafting suggestions (grounded in the Standard)

• When preparing the 76ZA disclosure, use language that mirrors the Standard: specify the nature of the covenant, the date(s) when compliance is required, and the carrying amounts of the related liabilities. If there are facts or circumstances indicating possible difficulty complying, describe those facts rather than offering speculative commentary.
• If the entity acted during or after the reporting period to mitigate a potential breach, disclose the action and the timing in factual terms (paragraph 76ZA(b) example).

Monitor post-reporting events

• Because paragraph 72B(a) addresses covenants assessed after the reporting period but requiring compliance at the reporting date, keep a close chronology of post-reporting events and testing outcomes. If a lender tests compliance after the reporting date and determines breach, that outcome will not change the classification if the covenant required compliance at the reporting date and the entity had complied at that date; conversely, a breach at reporting date that is only discovered after the reporting date requires current classification.

Seek clarification on ambiguous or borderline cases

• Where covenant wording is ambiguous about when compliance is required, or where the substance of a purported grace period is unclear, seek lender confirmation or legal advice and document the basis for the accounting treatment.

Final note

• Ensure the entity’s disclosure policy and internal controls capture covenant monitoring and reporting, so that decisions required by paragraphs 72A, 72B, 74, 75 and 76ZA are based on verifiable evidence and the disclosures are consistent with the rest of the financial statements.