Current and Non-current: the Classification That Drives the Format
Chapter Forty-Six
Syllabus topic 4, "Schedule III of the Companies Act, 2013"
Pages 142 to 144 of 168
In one line
An asset or a liability is current if it meets any one of four tests, and non-current if it meets none of them.
The four tests for an asset
Schedule III, general instructions for the balance sheet, instruction 1. An asset shall be classified as current when it satisfies any of the following criteria:
| Test | In plain terms | |
|---|---|---|
| (a) | It is expected to be realised in, or is intended for sale or consumption in, the company's normal operating cycle | It is part of the trading round |
| (b) | It is held primarily for the purpose of being traded | It is stock in substance |
| (c) | It is expected to be realised within twelve months after the reporting date | It turns to cash inside a year |
| (d) | It is cash or a cash equivalent, unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date | It is money now |
All other assets shall be classified as non-current.
Any one is enough. The criteria are alternatives, not conditions, and the word in the Schedule is "any".
The four tests for a liability
Instruction 3. A liability shall be classified as current when it satisfies any of the following:
| Test | |
|---|---|
| (a) | It is expected to be settled in the company's normal operating cycle |
| (b) | It is held primarily for the purpose of being traded |
| (c) | It is due to be settled within twelve months after the reporting date |
| (d) | The company does not have an unconditional right to defer settlement for at least twelve months after the reporting date |
All other liabilities shall be classified as non-current.
And a sentence attached to (d) that students misread: terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments, do not affect its classification. So a convertible debenture is not made current merely because the holder may convert it.
The operating cycle
Instruction 2 defines it.
An operating cycle is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents. Where the normal operating cycle cannot be identified, it is assumed to have a duration of twelve months.
Why this matters more than the twelve-month test. Test (a) is about the operating cycle, and test (c) is about twelve months. They are different tests, and the first can be longer than the second.
Take a shipbuilder whose operating cycle is thirty months. Raw material bought today will be consumed in that cycle, so it is a current asset under test (a), even though it will not be realised within twelve months and so fails test (c). The same follows for the amount owed to the yard's suppliers, which is settled within the cycle and so is a current liability under (a).
The rest of this chapter
Module one is free. The rest of this chapter comes with the B.Com. (Accountancy) Semester 3 notes.
You are reading a chapter from a later module. Everything in module one of every subject stays free, and so does the syllabus.
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The rest of this subject
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