10 June 2015 BHP Billiton Limited 171 Collins Street Melbourne Victoria 3000 Australia GPO Box 86 Melbourne Victoria 3001 Australia Tel +61 1300 55 47 57 Fax +61 3 9609 3015 bhpbilliton.com Hans Hoogervorst Chairman International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom Dear Mr Hoogervorst Exposure Draft "Classification of Liabilities" We welcome the opportunity to comment on Exposure Draft Classification of Liabilities (the exposure draft) issued by the IASB in February 2015. Question 1 Classification based on the entity s rights at the end of the reporting period: The IASB proposes clarifying that the classification of liabilities as either current or non-current should be based on the entity s rights at the end of the reporting period. To make that clear, the IASB proposes: (a) (b) (c) 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. Do you agree with the proposed amendments? Why or why not? We believe that the classification of a liability as current or non-current should have regard to the entity s rights at the end of the reporting period. In the first instance, we consider the proposed changes to the paragraphs outlined in the question above to be an improvement on the current wording in terms of clarifying the principle that it is only rights at the end of the reporting period that may be considered. However, we have the following concerns regarding the proposed amendments: Expectation of settlement versus rights: the proposed amendments may trigger a change in practice due to some entities currently having regard to existing rights but ultimately classifying liabilities according to expectations of settlement. The proposed amendments suggest that classification should be based on rights and that management expectations/intentions of settlement would not override this classification. Consistency of proposed principle and guidance / Basis for Conclusions: the proposals regarding a right to defer settlement are not clear because of what we perceive to be inconsistencies A member of the BHP Billiton Group which is headquartered in Australia Registered Office: Level 16, 171 Collins Street Melbourne Victoria 3000 Australia ABN 49 004 028 077 Registered in Australia
between the principle in paragraph 69(d) and the proposed guidance in paragraphs 72R 73R and BC7 BC11. Each of these is discussed in turn below: (a) Expectation of settlement versus rights The proposed paragraph 69 is drafted such that a liability would appear to be classified as current if it meets any one of the four criteria. The existing paragraph 69 is drafted in a similar manner. Both the proposed and the existing paragraph 69(d) require an entity to consider a right to defer settlement. However, the proposed changes to the guidance in paragraph 73 (which have been carried forward to some extent in the proposed 72R(a)) suggest that the principle of a right to defer settlement may now be applied differently. It is noteworthy that the existing paragraph 73 requires a non-current classification if an entity: (i) expects; and (ii) has the discretion to refinance or rollover an obligation. In other words, the discretion to rollover/refinance alone does not appear sufficient. To the extent that management does not expect to rollover/refinance then it is likely that this would prompt a current classification despite the discretion (ie ability, or right) to rollover/refinance. Such a current classification would appear consistent with the notion of expectation of settlement within paragraph 69(a) as well as the commentary on the current/non-current distinction in paragraphs 60 65 which also refer to when liabilities are expected to be settled. However, the reference to expect has been removed from the proposed paragraph 72R(a). There is no explicit explanation in either the proposed guidance or the Basis for Conclusions as to why the reference to expect has been removed. Whilst it is acknowledged that the proposed paragraph is just an example rather than a definitive constraint, removing the reference to expect may result in a change in approach to liability classification for some entities. For example, when classifying liabilities BHP Billiton has regard to its rights but also its expectations of settlement by reference to its latest budgets and forecasts. If a liability has a maturity date that is more than twelve months after the reporting period but management expects/intends to settle it early within the next twelve months, then BHP Billiton s current approach would be to classify the liability as current. This is on the basis that it would appear consistent with the notion of expected settlement within paragraph 69(a), the current/non-current distinction commentary and the existing paragraph 73. However, the proposed paragraph 72R(a) suggests that a current classification in this instance may not be appropriate. We note that liabilities could be classified using either an expectation of settlement approach or a rights approach. Of the two approaches, we believe the expectation of settlement approach provides more useful information to users. Classifying liabilities based on expectation of settlement (which ultimately has regard to an entity s rights to defer settlement) would inform users of general purpose financial statements of management s page 2/6
expectations of future cashflows. Arguably this approach enhances the predictive value of the statement of financial position by informing users of the expected timing of outflows. Conversely, classifying liabilities based on rights without an expectation of settlement override would inform users of when an entity is ultimately required to have an outflow to settle an existing obligation (ie when the liability is ultimately due). In other words, management may expect to settle an existing liability within twelve months but if circumstances were to change it does have the right to defer settlement and legally avoid an outflow of resources for at least twelve months. Arguably this approach is consistent with the Framework in providing information about an entity s solvency to enable users to predict the ability of the entity to meet commitments as they fall due. Whichever approach is ultimately adopted, we believe the Standard and the Basis for Conclusions should explicitly state which approach is being applied. As mentioned above, despite the fact that the existing paragraph 69 is drafted in a similar manner to the proposed paragraph, BHP Billiton have applied an expectation of settlement approach because of the current/non-current distinction commentary in paragraphs 60 65 and the guidance in the existing paragraph 73. Other entities may also have adopted such an approach to liability classification. Accordingly, having removed the reference to expect from the proposed paragraph 72R(a) it would be useful for the Board to clearly articulate how the classification criteria should be applied. (b) Consistency of proposed principle and guidance / Basis for Conclusions As mentioned above, the proposals regarding a right to defer settlement are not clear because of what we perceive to be inconsistencies between the principle in paragraph 69(d) and the proposed guidance in paragraphs 72R 73R and BC7 BC11. This may cause some confusion on application of the proposed classification criteria. It would appear from amendments to paragraph 69 that the classification criteria are applied to a liability that exists with a particular counterparty. In particular, the additional black letter text states settlement of a liability refers to the transfer to the counterparty of cash that results in the extinguishment of the liability. (emphasis added) This wording suggests that a right to defer settlement of the liability only refers to rights to defer the settlement of a specified liability with a particular counterparty/lender. Accordingly, a right with a different lender that may enable the entity to defer a net outflow of resources in connection with a specified liability would not be considered in applying the revised classification criteria. For example, assume that Entity has an existing liability with Lender A which is due to be settled within twelve months of the reporting period. Entity also has an existing credit facility with Lender B that gives Entity the right to refinance the liability and defer repayment for twelve months after the reporting period. The credit facility is linked to the liability in such a way that the facility could only be drawn down in connection with repayment of the existing loan. This example typifies a commercial paper program with an associated back-up credit facility. Refinancing would ultimately result in a gross cash outflow to Lender A and a gross cash inflow from Lender B however Entity would achieve an effective deferral of a page 3/6
net outflow of cash resources for a period of twelve months after the reporting period. The amendments to paragraph 69 suggest that the right to refinance with Lender B would not result in a non-current classification for the existing liability. This is because the refinancing would result in a transfer to Lender A ( the counterparty ) of cash that results in the extinguishment of the liability that exists at the end of the reporting period. However, the revised guidance in the Standard and the Basis for Conclusions do not appear to be as clear. Items we view as needing clarification are as follows: the reference to an existing loan facility in paragraphs 72R(a) and BC7 - BC11; the reference to an agreement to refinance in in 73R(b). We believe it can be interpreted that the loan facility or agreement to refinance may be with a different lender which appears contrary to the amendments to paragraph 69. (i) Existing loan facility (Paragraphs 72R(a) and BC7 - BC11) In our view the existing paragraph 73 can be interpreted to mean that a liability could be classified as non-current if the entity had the ability to refinance under an existing loan facility albeit with a different lender (ie the guidance does not require the refinancing to be with the same lender). Paragraphs BC9-11 outlines the IASB s deliberations as to whether the rolled-over lending had to be with the same lender. We note the Board chose not to amend the guidance to require the refinancing/rollover be with the same lender due to complexities relating to a consortia of lenders. In our view the reference to an existing loan facility in the proposed paragraph 72R(a) can still be interpreted as being a facility with a different lender. Whilst paragraph BC11 expands on this and refers to the existing loan facility that directly relates to the loan being classified, we believe that this can still be interpreted as a loan facility with a different lender that is linked or committed to an existing liability. In the example above, the credit facility that Entity has with Lender B can only be drawn down in connection with repayment of the existing loan from Lender A. Arguably this could be viewed as an existing loan facility that directly relates to the loan being classified. On that basis it could be argued that the liability with Lender A could be classified as non-current because of rights that exist at the end of the reporting period albeit with a different lender. Further, whilst the reference to refinance has been removed from paragraph 72R(a), we note that this paragraph is just an example rather than a definitive constraint. Accordingly, the amendments remain unclear as to whether a refinance is also a valid mechanism for non-current classification. (ii) Agreement to refinance (Paragraph 73R(b)) Similarly, we think that the reference to an agreement to refinance in proposed paragraph 73R(b)(ii) can be interpreted to mean that if an entity enters into an agreement before the end of the reporting period page 4/6
giving it the right to refinance then this can be taken into account in classifying an existing loan regardless of whether the agreement is with the same or a different lender. To address these inconsistencies between the principle in paragraph 69(d) and the proposed guidance in paragraphs 72R 73R and BC7 BC11, we believe it would be useful to understand the overriding objective of liability classification and to clarify which rights are considered when classifying a liability. For example, is the objective of classifying liabilities as current or non-current to inform users of general purpose financial statements: (a) (b) when a specified liability with a particular counterparty is due to be settled and result in an outflow of resources to settle that specified liability; or when there is to expected to be a (net) outflow of resources from the entity in respect of its borrowing arrangements? If it is the former then it would be useful for the guidance and Basis for Conclusions to articulate that this is the case and clarify that it is only rights arising from the instrument or facility giving rise to the existing liability that can be taken into consideration. Rights arising from linked or committed facilities/programs do not represent such rights and should not be considered in the applying the revised classification criteria. The availability of the facility would be disclosed in the financial statements. If it is the latter then this basis should be made clear in the principle and the guidance and Basis for Conclusions should be revised accordingly to indicate that this is the intent of the Standard. Arguably this approach considers the substance of the linked arrangements in place rather than simply taking a legal view of when an existing liability is due. The establishment of credit facilities ultimately forms part of an entity s liquidity risk management. Interestingly, IFRS 9 Financial Instruments places an emphasis on management s intention and risk management strategy in applying hedge accounting. We believe that a similar approach should be taken in classifying liabilities and therefore linked or committed facilities/programs should be taken into consideration in the classification of an existing liability. Of the two approaches, we believe the latter provides more useful information to users of general purpose financial statements and is also consistent with the Framework in terms of presenting an entity s borrowing arrangements in accordance with their substance and economic reality and not merely their legal form. Whatever the objective, we believe it should clearly articulated it in the Standard and the Basis for Conclusions. Without this clarity we expect divergence of interpretation and practice to continue in the classification of liabilities between current and non-current. Question 2 Linking settlement with the outflow of resources: The IASB proposes making clear the link between the settlement of the liability and the outflow of resources from the entity by adding by the transfer to the counterparty of cash, equity instruments, other assets or services to paragraph 69 of the Standard. Do you agree with that proposal? Why or why not? page 5/6
We agree with the proposal, although please note our response to question 1 above and our concern that the principle of a right to defer settlement in paragraph 69(d) and the guidance in paragraphs 72R 73R and BC7 BC11 is not entirely consistent. Question 3 Transition arrangements: The IASB proposes that the proposed amendments should be applied retrospectively. Do you agree with that proposal? Why or why not? We agree with this proposal. We would like to thank the IASB in providing the opportunity to comment on this important issue. Yours sincerely Kirsty Wallace Vice President Group Reporting page 6/6