PHILIPPINE INTERPRETATIONS COMMITTEE (PIC)

QUESTIONS AND ANSWERS (Q&As)

Q&A No. 201003

PAS 1 Presentation of Financial Statements Current/ non-current

classification of a callable term loan
Issue
Is a term loan that is not repayable within twelve months after the reporting period but callable by
the lender at anytime classified as a current or non-current liability by the borrower?

Background
In general, banks normally grant loans that are either demand loans (e.g., loans that are
repayable at any time at the discretion of the lender), and term loans (e.g., loans that are
repayable at specified terms or repayable on demand upon the occurrence of a specified breach
or default). The terms and conditions of the loans are normally stated in the loan agreement, in
the loan facility agreement, in the general terms and conditions of the loan agreement, or in the
loan facility agreement.
PAS 1, paragraph 69 states that:
An entity shall classify a liability as current when:
(a)

it expects to settle the liability in its normal operating cycle;

(b)

it holds the liability primarily for the purpose of trading;

(c)

the liability is due to be settled within twelve months after the reporting period; or

(d)

the entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period (see paragraph 73). 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.

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

Demand loans are classified as current liabilities because the borrower does not have an
unconditional right to defer settlement of the liability for at least twelve months from the reporting
period since the lender may demand for repayment at any time. Conversely, term loans not due
to be settled within twelve months from the reporting date and do not meet the other criteria
described in PAS 1, paragraph 69, are classified as non-current liabilities.
Banks have provided loans to borrowers with the characteristics of both demand loans and term
loans (hereinafter referred to as Hybrid Loans). Typically, the loan agreements or loan facility
agreements of these Hybrid Loans include payment terms, maturity date, and other provisions
that are normally found in term loan facilities. The loan facility agreements also may or may not
include contingent demand repayment provisions triggered upon events of default or debt
covenant violations. In addition to these provisions typically found in term loan agreements, the
loan agreements or loan facility agreements would also include an encompassing repayment on
demand provision which allows the lender to demand repayment at anytime.

Below are some examples of typical repayment on demand provisions found in these loan
agreements or loan facility agreements for Hybrid Loans:
1. The facilities are subject to review at any time and also subject to the Bank's overriding
right of withdrawal and repayment on demand, including the right to call for cash cover on
demand for prospective and contingent liabilities.
2. By signing this letter, you expressly acknowledge that we may suspend, withdraw or
make demand for repayment of the whole or any part of the facilities at any time
notwithstanding the fact that the following covenants/undertakings are included in this
letter and whether or not the Guarantor is in breach of any such covenants/undertakings.
3. As a general banking practice and notwithstanding any terms and conditions specified
above, the Lender reserves its overriding right to cancel or to modify the Facility, or to
demand immediate repayment of all outstanding balances whether due or owing, actual
or contingent under the Facility without prior notice.
4. Notwithstanding any provisions stated in this letter, the Facilities are repayable on
demand by the Bank. The Bank has the overriding right at any time to require immediate
payment (of all principal, interest, fees and other amounts outstanding under this letter or
any part thereof) and/or to require cash collateralization of all or any sums actually or
contingently owing to it under the Facilities.
5. Notwithstanding anything contained in this letter, the Facilities are subject to the Bank's
overriding right of repayment on demand, to review, amend, and/or cancel any or all of
the Facilities at its sole discretion.

Consensus
PAS 1, paragraph 69(d) states that, "an entity shall classify a liability as current when it does not
have an unconditional right to defer settlement of the liability for at least twelve months after the
reporting period".
Based on the repayment on demand terms typically found in these Hybrid Loan agreements, the
lender has a clear and unambiguous right to demand repayment at any time at its sole discretion
notwithstanding any provisions stated in the agreement.
Consequently, the borrower does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period since the lender may demand
repayment at anytime if the lender chooses to do so. Therefore, all loans with repayment on
demand provisions should be classified as current liabilities instead of non-current liabilities
despite any other terms within the agreement which may indicate that the loan should be
classified as a non-current liability. In relation to the required disclosures on the contractual
maturity analysis under PFRS 7, paragraph 39(a), such amount classified as current liability shall
be presented in the earliest time band, in accordance with the guidance in PFRS 7,
paragraph B11(a).

Effective Date
The consensus in this Q&A is effective from the date of approval by the FRSC.

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Q&A approved by PIC: September 29, 2010 (Original signed)

PIC Members

Dalisay B. Duque, Chairman

Wilfredo A. Baltazar

Rosario S. Bernaldo

Lyn I. Javier/Reynold E Afable

Judith V. Lopez

Ma. Elenita B. Cabrera/Rufo Mendoza

Ma. Concepcion Y. Lupisan

Ma. Gracia Casals-Diaz

Ruby R. Seballe

Sharon G.Dayoan

Wilson P. Tan

Edmund Go

Normita L. Villaruz

Q&A approved by FRSC: April 25, 2012