satya narayana (Student CA IPC / IPCC) (124 Points)
02 January 2014Hai,
As per Revised Schedule- VI , Current Laibilities are the liabilities when
a. it is to be settled in the company's normal operating cycle
b. it is held for being traded.
c. it is due to be settled within 12 months after the reporting date.
d. the company does not have an unconditional right to defer settlement of the laibility for atleast 12 months after reporting date.
So my doubt is --
I didn't understand the meaning of point- d.
Can anyone explain it with an example.
Deepak Gupta
(CA Student)
(15922 Points)
Replied 02 January 2014
| Originally posted by : satya narayana | ||
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Hai, As per Revised Schedule- VI , Current Laibilities are the liabilities when a. it is to be settled in the company's normal operating cycle b. it is held for being traded. c. it is due to be settled within 12 months after the reporting date. d. the company does not have an unconditional right to defer settlement of the laibility for atleast 12 months after reporting date. So my doubt is -- I didn't understand the meaning of point- d. Can anyone explain it with an example. |
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For clarifications you should refer, Para 7.1.8 of Guidance Note on Revised Schedule VI, published by ICAI.
Relevant extract - Para 7.1.8, Page 16
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Example:- Company X has taken a five year loan. The loan contains certain debt covenants, e.g., filing of quarterly information, failing which the bank can recall the loan and demand repayment thereof. The company has not filed such information in the last quarter; as a result of which the bank has the right to recall the loan. However, based on the past experience and/or based on the discussions with the bank the management believes that default is minor and the bank will not demand the repayment of loan. According to the definition of Current Liability, what is important is, whether a borrower has an unconditional right at the Balance Sheet date to defer the settlement irrespective of the nature of default and whether or not a bank can exercise its right to recall the loan. If the borrower does not have such right, the classification would be “current.” It is pertinent to note that as per the terms and conditions of the aforesaid loan, the loan was not repayable on demand from day one. The loan became repayable on demand only on default in the debt covenant and bank has not demanded the repayment of loan up to the date of approval of the accounts.
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In the Indian context, the criteria of a loan becoming repayable on demand on breach of a covenant, is generally added in the terms and conditions as a matter of abundant caution. Also, banks generally do not demand repayment of loans on such minor defaults of debt covenants. Therefore, in such situations, the companies generally continue to repay the loan as per its original terms and conditions. Hence, considering that the practical implications of such minor breach are negligible in the Indian scenario, an entity could continue to classify the loan as “non-current” as on the Balance Sheet date since the loan is not actually demanded by the bank at any time prior to the date on which the Financial Statements are approved. However, in case a bank has recalled the loan before the date of approval of the accounts on breach of a loan covenant that occurred before the year-end, the loan will have to be classified as current.
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Further, the above situation should not be confused with a loan which is repayable on demand from day one. For such loans, even if the lender does not demand repayment of the loan at any time, the same would have to be continued to be classified as ”current”.
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