Cash credit classification

This query is : Resolved

mahak katyal (Querist)
Follow

02 May 2012 why is cash credit shown in current liabilities as well as current assets(smetimes) both??
what is the method of categorizing it!

Guest

Guest (Expert)

02 May 2012 Cash credit is similar to loan taken from bank. It operates like a running current account and is in the nature of working capital loan. We are sanctioned some amount and we can utilize it through our current account.

Whenever we have debit balance in our account it appears in Asset side and vice versa

Message likes : 1 times

Amol S Joglekar

Amol S Joglekar (Expert)
Follow

02 May 2012 As per revised schedule VI guidelines, it is suggested to show the same under LONG TERM

Upgrade to CAclubindia Pro. Subscribe Now!

Guest

Guest (Expert)

02 May 2012 As per guidance note to the revised schedule VI, cash credit will come under short term borrowings. Its tenure is not fixed, while sanction amount is fixed, drawing power fluctuates.

Message likes : 1 times

Amol S Joglekar

Amol S Joglekar (Expert)
Follow

02 May 2012 I beg to differ. The whole exercise is basically to make our companies "IFRS Compliant" We need to take into account following: A liability shall be classified as current when it satisfies any of the following criteria: (emphasis added)
(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; or
(d) the company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. 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.

All other liabilities shall be classified as non-current. I think cash credit (Although demand pro note is signed) should be classified under NON CURRENT

Message likes : 1 times

Guest

Guest (Expert)

03 May 2012 Dear Amol
Technically speaking, still it form part of current liability.

For eg.
1. If we consider term loan, the portion which is due after 12 months shall come under non current and the rest will come under current.

2. The non current portion is never going to fluctuate for the next reporting period. (unless we make prepayment)

3. This is not the case with cash credit. It may be 'nil' on the last day of year or we may utilize the whole of the sanction limit.

I am still not convinced with the reasons given by you. Can you explain how come the cash credit does not fit into the definition of current liability

Amol S Joglekar

Amol S Joglekar (Expert)
Follow

03 May 2012 Yes Ashwin, I understand your way of putting the things. Probably what I am trying to tell is the RADICAL change that is going to occur in this IFRS transformation phase. We need to digest the same. Let us not confuse the word "CURRENT" in the context of current liability and current Vs non-current. Although it was customary to classify cash credit under "current liability" hence ahead it should go to "non current" unless otherwise the comapny has serious intentions to close the limit in forthcoming 12 months.

Online classes for CA CS CMA