Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
10 June 2015Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Exposure Draft ED/2015/1 Classification of LiabilitiesThe Hong Kong Institute of Certified Public Accountants is the only body authorised by lawto set and promulgate standards relating to financial reporting, auditing and ethics forprofessional accountants in Hong Kong. We are grateful for the opportunity to provide youwith our comments on this Exposure Draft (ED).We support the IASB's initiative to clarify the criteria for classification of a liability as currentor non-current. We generally agree with most of the proposed amendments but haveserious concerns about deleting the term 'unconditional' from paragraph 69(d) of theexisting IAS 1 Presentation of Financial Statements. The term 'unconditional' carriesparamount significance in the determination of a liability's classification in Hong Kong. Weconsider that deleting this term may have unintended consequences on the classification ofa liability.Our responses to the questions raised in the ED are explained in more detail in Appendix 1.If you have any questions regarding the matters raised in this letter, please contact me orEky Liu, Associate Director of Standard Setting, at eky@hkicpa.org.hk.Yours sincerely,Christina NgHead of Financial ReportingCN/ELEncl.Detailed comments on IASB ED/2015/1 Classification of LiabilitiesQuestion 1The IASB proposes clarifying that the classification of liabilities as either currentor non-current should be based on the entity's rights at the end of the reportingperiod. To make that clear, the IASB proposes:
(a) replacing 'discretion' in paragraph 73 of the Standard with 'right' to align itwith the requirements of paragraph 69(d) of the Standard;
(b) making it explicit in paragraphs 69(d) and 73 of the Standard that only rightsin place at the reporting date should affect this classification of a liability;
and(c) deleting 'unconditional' from paragraph 69(d) of the Standard so that 'anunconditional right' is replaced by 'a right'.Do you agree with the proposed amendments? Why or why not?We generally support the proposals in the ED:
(i) to clarify the classification principles in the existing standard by removinginconsistencies in the terms used in paragraph 69(d) and paragraph 73 of IAS 1;
and(ii) to state explicitly in paragraphs 69(d) and paragraph 73 that only rights in place atthe reporting date should affect the classification of a liability.However, we do not support the proposal to delete the term 'unconditional' fromparagraph 69(d) of IAS 1.In Hong Kong, it is common for some term loan agreements to specify a repaymentschedule over time in excess of one year and include an overriding repayment ondemand clause, which gives lenders the right to demand repayment at any time at theirsole discretion and irrespective of whether a default event has occurred. In 2010, theInstitute was asked to consider the practice of some entities in Hong Kong that classifysuch term loans as non-current liabilities. It was the term 'unconditional' in paragraph69(d) of IAS 1 that provided clarity that, in such circumstance, despite a repaymentschedule, the lender has an unconditional right to call the loan at any time, andaccordingly, the borrower does not have an unconditional right to defer settlement ofthe liability for at least twelve months after the reporting date. Considering the widespread implications in Hong Kong, the Institute issued Interpretation 5 Presentation ofFinancial Statements – Classification by the Borrower of a Term Loan that Contains aRepayment on Demand Clause (Appendix 2) to re-emphasise the term 'unconditional'when classifying such term loans. Therefore, we strongly disagree with the viewexpressed in paragraph BC2 of the ED that the lack of clarity in the classificationprinciples arises in part through the use of 'unconditional' in paragraph 69(d) and thatrights to defer settlement are rarely unconditional.We understand that some jurisdictions in the Asian-Oceanian region also share thesame concern about deleting the word 'unconditional' from paragraph 69(d) of IAS 1.Appendix 1In light of the above, we believe that the term 'unconditional' has paramountsignificance in the determination of a liability's classification, and deleting the term'unconditional' from paragraph 69(d) might have unintended consequences to theclassification of liabilities.If the IASB were to proceed with this proposal to delete the term 'unconditional', westrongly recommend that the IASB provide further guidance or clarity in IAS 1 toaddress the following situations:
(i) We were informed that it is common for a borrower to have a right to defersettlement of a liability subject to condition(s) that can only be met after thereporting date. For example, the right to defer settlement may be dependent onloan-to-value ratio of a collateral asset as at a date after the reporting period.Further guidance on how to determine whether the borrower has a right in place todefer settlement as at the reporting date would be necessary.(ii) As mentioned above, it is common for some term loans to be callable by thelender at any time irrespective of a repayment schedule beyond one year. TheIASB should clarify in its application guidance that a borrower should classify suchterm loans as current in its statement of financial position. It would also be helpfulif the IASB adds this clarification in its application guidance even if it were to keepthe term 'unconditional'.Question 2The IASB proposes making clear the link between the settlement of the liabilityand the outflow of resources from the entity by adding 'by the transfer to thecounterparty of cash, equity instruments, other assets or services' to paragraph69 of the Standard.Do you agree with that proposal? Why or why not?We support this proposal to state explicitly the link between the settlement of theliability and the transfer of resources. This proposal would also clarify that rollover ofthe borrowing does not constitute 'settlement' and would not result in the liability beingclassified as current.However, we would like to clarify whether settlement by equity instruments would affectthe classification of liability as current or non-current. We note that in paragraph 69(d)
of the IAS 1 states that "terms of a liability that could, at the option of the counterparty,result in its settlement by the issue of equity instruments do no affect its classification"and, in particular, paragraphs BC38G and BC38H of the existing IAS 1 respectivelystate that:
․liquidity and solvency are associated with the availability of cash to an entity.Issuing equity does not result in an outflow of cash or other assets of the entity;
and․classifying the liability on the basis of the requirements to transfer cash or otherassets rather than on settlement better reflects the liquidity and solvency positionof an entity.We understand that these paragraphs relate to the classification of the liabilitycomponent of a convertible instrument. However, this seems to be inconsistent withthe proposed additional wording in paragraph 69, which states "for the purposes ofclassification, settlement of liability refers to the transfer to the counterparty of cash,equity instruments (emphasis added), other assets or services". We believe that thesettlement of a liability by issuing an entity's own equity instruments would not affectthe classification of such liability as issuing own equity does not result in an outflow ofcash or other assets of the entity. Accordingly, we consider it is necessary to align theintention of the proposed additional text in paragraph 69 with the meaning of paragraph69(d) of the existing IAS 1.Question 3The IASB proposes that the proposed amendments should be appliedretrospectively.Do you agree with that proposal? Why or why not?We support applying the proposed amendments retrospectively as the proposedamendments only clarify existing requirements rather than imposing additionalrequirements. Furthermore, the proposal would be consistent with the existingrequirement in paragraph 41 of IAS 1, which states that comparative amounts shouldbe reclassified if an entity changes the presentation of items in its financial statementsand that would result in comparable financial information.~ End ~HK Interpretation 5Issued 29 November 2010This Interpretation is a clarification of an existing standard,HKAS 1 Presentation of Financial Statements,and shall have immediate effect.Presentation of FinancialStatements – Classification by theBorrower of a Term Loan thatContains a Repayment on DemandClauseHK Interpretation 5Appendix 2Presentation of Financial Statements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause© CopyrightHK-Int 5COPYRIGHT© Copyright 2010 Hong Kong Institute of Certified Public AccountantsThis Hong Kong Interpretation contains Hong Kong Institute of Certified Public Accountants copyrightmaterial. Reproduction in unaltered form (retaining this notice) is permitted for personal and non-commercialuse subject to the inclusion of an acknowledgment of the source. Requests and inquiries concerningreproduction and rights for commercial purposes should be addressed to the Director, Operation andFinance, Hong Kong Institute of Certified Public Accountants, 37/F., Wu Chung House, 213 Queen's RoadEast, Wanchai, Hong Kong.Presentation of Financial Statements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause© CopyrightHK-Int 5HK INTERPRETATION 5PRESENTATION OF FINANCIAL STATEMENTS –CLASSIFICATION BY THE BORROWER OF A TERM LOAN THAT CONTAINS AREPAYMENT ON DEMAND CLAUSECONTENTSParagraphsBackground .................................................................................................................................1 – 5Scope ..........................................................................................................................................6 – 7Issue ...........................................................................................................................................8 – 9Conclusions ................................................................................................................................. 10 – 12Disclosures .................................................................................................................................. 13 – 14Effective date...............................................................................................................................Transition ....................................................................................................................................Consistency with IFRSs............................................................................................ ...................... 17 - 18HK Interpretation 5 Presentation of Financial Statements – Classification by the Borrower of a TermLoan that Contains a Repayment on Demand Clause (HK-Int 5) is set out in paragraphs 1-18. Thescope and authority of Interpretations are set out in the Preface to Hong Kong Financial ReportingStandards.Presentation of Financial Statements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause© CopyrightHK-Int 5ReferencesHKAS 1 Presentation of Financial StatementsHKFRS 7 Financial Instruments: DisclosuresBackground
1.In general, banks normally grant loans that are either demand loans (e.g. loans that are repayable atany time at the discretion of the lender), or term loans (i.e. loans that are repayable on a specifieddate or in instalments over a specified period, usually in excess of one year). The terms andconditions of the loans are normally stated in the loan agreement or in the loan facility agreement.
2.Typically, the loan agreements for term loans will set out the basic terms, such as the scheduledrepayment date(s), interest rates and additional charges for early repayment, and may also includespecific clauses which define default events or debt covenant violations which would give the lenderthe right to accelerate the repayment terms if those events or violations occur.
3.In addition to defining events of default and the consequences of their occurrence, some term loanagreements include an overriding repayment on demand clause, which gives the lender the right todemand repayment at any time at their sole discretion, irrespective of whether a default event hasoccurred and notwithstanding any other terms and maturity stated in the agreement.
4.The HKICPA noted an issue concerning the classification of term loans with repayment on demandclauses as current/non-current liabilities by entities reporting under HKFRSs. This issue relates towhether such a term loan should be classified by the borrower as a non-current liability based on thescheduled repayment date(s) or as a current liability based on the repayment on demand clause setout in the loan agreement.
5.The purpose of this Interpretation is to provide guidance on the classification by the borrower of aterm loan that contains a repayment on demand clause, with reference to the criteria forclassification of liabilities as current or non-current as set out in paragraph 69 of HKAS 1. Paragraph69 states:
“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) it does not have an unconditional right to defer settlement of the liability for at least twelvemonths after the reporting period (see paragraph 73). Terms of a liability that could, at theoption of the counterparty, result in its settlement by the issue of equity instruments do notaffect its classification.An entity shall classify all other liabilities as non-current.”
Scope
6.This Interpretation applies where an entity has entered into a contract to borrow funds and thecontract includes, amongst its terms and conditions, an overriding right for the lender to demandrepayment without notice (or with a notice period of less than 12 months) at its sole discretion.
7.This Interpretation does not address the classification of such contracts by the lender.Presentation of Financial Statements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause© CopyrightHK-Int 5Issue
8.This Interpretation addresses the issue as to whether a term loan that contains a repayment ondemand clause shall be classified as a current or non-current liability in the borrower’s statement offinancial position in accordance with paragraph 69 of HKAS 1.
9.This Interpretation also addresses the issue as to whether the contractual maturity analysis to bedisclosed by the borrower in accordance with paragraph 39(a) of HKFRS 7 should classify the cashflows relating to such term loans based on the contractual repayment dates or with respect to theearliest date on which the lender could demand repayment.Conclusions
10.The classification of a term loan as a current or non-current liability in accordance with paragraph69(d) of HKAS 1 shall be determined by reference to the rights and obligations of the lender and theborrower, as contractually agreed between the two parties and in force as of the reporting date. Inthis regard, the probability of the lender choosing to exercise its rights within the next twelve monthsafter the reporting date is not relevant.
11.The classification of a term loan in accordance with paragraph 69(d) of HKAS 1 shall depend onwhether or not the borrower has an unconditional right to defer payment for at least twelve monthsafter the reporting period. Consequently, amounts repayable under a loan agreement which includesa clause that gives the lender the unconditional right to call the loan at any time shall be classified bythe borrower as current in its statement of financial position. This is because the borrower undersuch an agreement does not have an unconditional right to defer settlement of the liability for at leasttwelve months after the reporting period.
12.Similarly, in the contractual maturity analysis disclosed by the borrower in accordance withparagraph 39(a) of HKFRS 7, amounts repayable under a loan agreement that includes a clausethat gives the lender the unconditional right to call the loan at any time shall be classified in theearliest time bracket, in accordance with the guidance in paragraph B11C(a) of HKFRS 7.Disclosures
13.In accordance with paragraph 39(c) of HKFRS 7, the borrower shall describe how it manages theliquidity risk inherent in the financial liabilities included in the contractual maturity analysis asrequired under paragraph 39(a) of HKFRS 7. This would include the liquidity risk that arises whenthe lender has the right to demand repayment of a term loan at any time.
14.In addition, in accordance with paragraph 34(a) of HKFRS 7, the borrower shall also disclosesummary quantitative data on its exposure to liquidity risk based on the information providedinternally to management, when this information is prepared on a different basis from that disclosedunder paragraph 39(a) of HKFRS 7. This would typically occur in the case of term loans which arecallable by the lender, where management does not expect the lender to exercise its rights todemand repayment. In such cases, the internal information on liquidity risk would generally be basedon expected repayment dates with reference to the schedule of repayments set out in the term loanagreements. Such expected cash flow information should be disclosed in accordance withparagraph 34(a) of HKFRS 7, in addition to the contractual maturity analysis based on the earliestpossible date that the borrower could be required to repay, which is disclosed under paragraph 39(a)
of HKFRS 7.Effective date
15.This Interpretation is a clarification of an existing standard and shall have immediate effect.Presentation of Financial Statements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause© CopyrightHK-Int 5Transition
16.Where the initial application of this Interpretation constitutes a change in accounting policy, it shouldbe accounted for retrospectively in accordance with HKAS 8 Accounting Policies, Changes inAccounting Estimates and Errors.Consistency with IFRSs
17.HKAS 1 and HKFRS 7 are adopted from IAS 1, Presentation of Financial Statements, and IFRS 7,Financial Instruments: Disclosures, respectively.
18.Prior to the issuance of this Interpretation, the HKICPA submitted an agenda request to the IFRSInterpretations Committee (“the Committee”) concerning the issue set out in paragraph 8 of thisInterpretation. The Committee discussed this issue at its meeting on 3 September 2010 and notedthat paragraph 69(d) of IAS 1 requires that a liability must be classified as a current liability if the entitydoes not have the unconditional right at the reporting date to defer settlement for at least twelvemonths after the reporting period. The Committee confirmed its view in the agenda decision whichwas published in the November 2010 edition of IFRIC Update and which is available on the IASB’sofficial website (www.ifrs.org/Updates/Updates.htm). Consequently, the HKICPA considers that theConclusions set out in this Interpretation are consistent with IFRSs.
Institute comments on IASB Exposure Draft ED/2015/1 Classification of Liabilities
下载原件Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)
10 June 2015Mr Hans HoogervorstInternational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited KingdomDear Hans,IASB Exposure Draft ED/2015/1 Classification of LiabilitiesThe Hong Kong Institute of Certified Public Accountants is the only body authorised by lawto set and promulgate standards relating to financial reporting, auditing and ethics forprofessional accountants in Hong Kong. We are grateful for the opportunity to provide youwith our comments on this Exposure Draft (ED).We support the IASB's initiative to clarify the criteria for classification of a liability as currentor non-current. We generally agree with most of the proposed amendments but haveserious concerns about deleting the term 'unconditional' from paragraph 69(d) of theexisting IAS 1 Presentation of Financial Statements. The term 'unconditional' carriesparamount significance in the determination of a liability's classification in Hong Kong. Weconsider that deleting this term may have unintended consequences on the classification ofa liability.Our responses to the questions raised in the ED are explained in more detail in Appendix 1.If you have any questions regarding the matters raised in this letter, please contact me orEky Liu, Associate Director of Standard Setting, at eky@hkicpa.org.hk.Yours sincerely,Christina NgHead of Financial ReportingCN/ELEncl.Detailed comments on IASB ED/2015/1 Classification of LiabilitiesQuestion 1The IASB proposes clarifying that the classification of liabilities as either currentor non-current should be based on the entity's rights at the end of the reportingperiod. To make that clear, the IASB proposes:
(a) replacing 'discretion' in paragraph 73 of the Standard with 'right' to align itwith the requirements of paragraph 69(d) of the Standard;
(b) making it explicit in paragraphs 69(d) and 73 of the Standard that only rightsin place at the reporting date should affect this classification of a liability;
and(c) deleting 'unconditional' from paragraph 69(d) of the Standard so that 'anunconditional right' is replaced by 'a right'.Do you agree with the proposed amendments? Why or why not?We generally support the proposals in the ED:
(i) to clarify the classification principles in the existing standard by removinginconsistencies in the terms used in paragraph 69(d) and paragraph 73 of IAS 1;
and(ii) to state explicitly in paragraphs 69(d) and paragraph 73 that only rights in place atthe reporting date should affect the classification of a liability.However, we do not support the proposal to delete the term 'unconditional' fromparagraph 69(d) of IAS 1.In Hong Kong, it is common for some term loan agreements to specify a repaymentschedule over time in excess of one year and include an overriding repayment ondemand clause, which gives lenders the right to demand repayment at any time at theirsole discretion and irrespective of whether a default event has occurred. In 2010, theInstitute was asked to consider the practice of some entities in Hong Kong that classifysuch term loans as non-current liabilities. It was the term 'unconditional' in paragraph69(d) of IAS 1 that provided clarity that, in such circumstance, despite a repaymentschedule, the lender has an unconditional right to call the loan at any time, andaccordingly, the borrower does not have an unconditional right to defer settlement ofthe liability for at least twelve months after the reporting date. Considering the widespread implications in Hong Kong, the Institute issued Interpretation 5 Presentation ofFinancial Statements – Classification by the Borrower of a Term Loan that Contains aRepayment on Demand Clause (Appendix 2) to re-emphasise the term 'unconditional'when classifying such term loans. Therefore, we strongly disagree with the viewexpressed in paragraph BC2 of the ED that the lack of clarity in the classificationprinciples arises in part through the use of 'unconditional' in paragraph 69(d) and thatrights to defer settlement are rarely unconditional.We understand that some jurisdictions in the Asian-Oceanian region also share thesame concern about deleting the word 'unconditional' from paragraph 69(d) of IAS 1.Appendix 1In light of the above, we believe that the term 'unconditional' has paramountsignificance in the determination of a liability's classification, and deleting the term'unconditional' from paragraph 69(d) might have unintended consequences to theclassification of liabilities.If the IASB were to proceed with this proposal to delete the term 'unconditional', westrongly recommend that the IASB provide further guidance or clarity in IAS 1 toaddress the following situations:
(i) We were informed that it is common for a borrower to have a right to defersettlement of a liability subject to condition(s) that can only be met after thereporting date. For example, the right to defer settlement may be dependent onloan-to-value ratio of a collateral asset as at a date after the reporting period.Further guidance on how to determine whether the borrower has a right in place todefer settlement as at the reporting date would be necessary.(ii) As mentioned above, it is common for some term loans to be callable by thelender at any time irrespective of a repayment schedule beyond one year. TheIASB should clarify in its application guidance that a borrower should classify suchterm loans as current in its statement of financial position. It would also be helpfulif the IASB adds this clarification in its application guidance even if it were to keepthe term 'unconditional'.Question 2The IASB proposes making clear the link between the settlement of the liabilityand the outflow of resources from the entity by adding 'by the transfer to thecounterparty of cash, equity instruments, other assets or services' to paragraph69 of the Standard.Do you agree with that proposal? Why or why not?We support this proposal to state explicitly the link between the settlement of theliability and the transfer of resources. This proposal would also clarify that rollover ofthe borrowing does not constitute 'settlement' and would not result in the liability beingclassified as current.However, we would like to clarify whether settlement by equity instruments would affectthe classification of liability as current or non-current. We note that in paragraph 69(d)
of the IAS 1 states that "terms of a liability that could, at the option of the counterparty,result in its settlement by the issue of equity instruments do no affect its classification"and, in particular, paragraphs BC38G and BC38H of the existing IAS 1 respectivelystate that:
․liquidity and solvency are associated with the availability of cash to an entity.Issuing equity does not result in an outflow of cash or other assets of the entity;
and․classifying the liability on the basis of the requirements to transfer cash or otherassets rather than on settlement better reflects the liquidity and solvency positionof an entity.We understand that these paragraphs relate to the classification of the liabilitycomponent of a convertible instrument. However, this seems to be inconsistent withthe proposed additional wording in paragraph 69, which states "for the purposes ofclassification, settlement of liability refers to the transfer to the counterparty of cash,equity instruments (emphasis added), other assets or services". We believe that thesettlement of a liability by issuing an entity's own equity instruments would not affectthe classification of such liability as issuing own equity does not result in an outflow ofcash or other assets of the entity. Accordingly, we consider it is necessary to align theintention of the proposed additional text in paragraph 69 with the meaning of paragraph69(d) of the existing IAS 1.Question 3The IASB proposes that the proposed amendments should be appliedretrospectively.Do you agree with that proposal? Why or why not?We support applying the proposed amendments retrospectively as the proposedamendments only clarify existing requirements rather than imposing additionalrequirements. Furthermore, the proposal would be consistent with the existingrequirement in paragraph 41 of IAS 1, which states that comparative amounts shouldbe reclassified if an entity changes the presentation of items in its financial statementsand that would result in comparable financial information.~ End ~HK Interpretation 5Issued 29 November 2010This Interpretation is a clarification of an existing standard,HKAS 1 Presentation of Financial Statements,and shall have immediate effect.Presentation of FinancialStatements – Classification by theBorrower of a Term Loan thatContains a Repayment on DemandClauseHK Interpretation 5Appendix 2Presentation of Financial Statements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause© CopyrightHK-Int 5COPYRIGHT© Copyright 2010 Hong Kong Institute of Certified Public AccountantsThis Hong Kong Interpretation contains Hong Kong Institute of Certified Public Accountants copyrightmaterial. Reproduction in unaltered form (retaining this notice) is permitted for personal and non-commercialuse subject to the inclusion of an acknowledgment of the source. Requests and inquiries concerningreproduction and rights for commercial purposes should be addressed to the Director, Operation andFinance, Hong Kong Institute of Certified Public Accountants, 37/F., Wu Chung House, 213 Queen's RoadEast, Wanchai, Hong Kong.Presentation of Financial Statements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause© CopyrightHK-Int 5HK INTERPRETATION 5PRESENTATION OF FINANCIAL STATEMENTS –CLASSIFICATION BY THE BORROWER OF A TERM LOAN THAT CONTAINS AREPAYMENT ON DEMAND CLAUSECONTENTSParagraphsBackground .................................................................................................................................1 – 5Scope ..........................................................................................................................................6 – 7Issue ...........................................................................................................................................8 – 9Conclusions ................................................................................................................................. 10 – 12Disclosures .................................................................................................................................. 13 – 14Effective date...............................................................................................................................Transition ....................................................................................................................................Consistency with IFRSs............................................................................................ ...................... 17 - 18HK Interpretation 5 Presentation of Financial Statements – Classification by the Borrower of a TermLoan that Contains a Repayment on Demand Clause (HK-Int 5) is set out in paragraphs 1-18. Thescope and authority of Interpretations are set out in the Preface to Hong Kong Financial ReportingStandards.Presentation of Financial Statements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause© CopyrightHK-Int 5ReferencesHKAS 1 Presentation of Financial StatementsHKFRS 7 Financial Instruments: DisclosuresBackground
1.In general, banks normally grant loans that are either demand loans (e.g. loans that are repayable atany time at the discretion of the lender), or term loans (i.e. loans that are repayable on a specifieddate or in instalments over a specified period, usually in excess of one year). The terms andconditions of the loans are normally stated in the loan agreement or in the loan facility agreement.
2.Typically, the loan agreements for term loans will set out the basic terms, such as the scheduledrepayment date(s), interest rates and additional charges for early repayment, and may also includespecific clauses which define default events or debt covenant violations which would give the lenderthe right to accelerate the repayment terms if those events or violations occur.
3.In addition to defining events of default and the consequences of their occurrence, some term loanagreements include an overriding repayment on demand clause, which gives the lender the right todemand repayment at any time at their sole discretion, irrespective of whether a default event hasoccurred and notwithstanding any other terms and maturity stated in the agreement.
4.The HKICPA noted an issue concerning the classification of term loans with repayment on demandclauses as current/non-current liabilities by entities reporting under HKFRSs. This issue relates towhether such a term loan should be classified by the borrower as a non-current liability based on thescheduled repayment date(s) or as a current liability based on the repayment on demand clause setout in the loan agreement.
5.The purpose of this Interpretation is to provide guidance on the classification by the borrower of aterm loan that contains a repayment on demand clause, with reference to the criteria forclassification of liabilities as current or non-current as set out in paragraph 69 of HKAS 1. Paragraph69 states:
“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) it does not have an unconditional right to defer settlement of the liability for at least twelvemonths after the reporting period (see paragraph 73). Terms of a liability that could, at theoption of the counterparty, result in its settlement by the issue of equity instruments do notaffect its classification.An entity shall classify all other liabilities as non-current.”
Scope
6.This Interpretation applies where an entity has entered into a contract to borrow funds and thecontract includes, amongst its terms and conditions, an overriding right for the lender to demandrepayment without notice (or with a notice period of less than 12 months) at its sole discretion.
7.This Interpretation does not address the classification of such contracts by the lender.Presentation of Financial Statements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause© CopyrightHK-Int 5Issue
8.This Interpretation addresses the issue as to whether a term loan that contains a repayment ondemand clause shall be classified as a current or non-current liability in the borrower’s statement offinancial position in accordance with paragraph 69 of HKAS 1.
9.This Interpretation also addresses the issue as to whether the contractual maturity analysis to bedisclosed by the borrower in accordance with paragraph 39(a) of HKFRS 7 should classify the cashflows relating to such term loans based on the contractual repayment dates or with respect to theearliest date on which the lender could demand repayment.Conclusions
10.The classification of a term loan as a current or non-current liability in accordance with paragraph69(d) of HKAS 1 shall be determined by reference to the rights and obligations of the lender and theborrower, as contractually agreed between the two parties and in force as of the reporting date. Inthis regard, the probability of the lender choosing to exercise its rights within the next twelve monthsafter the reporting date is not relevant.
11.The classification of a term loan in accordance with paragraph 69(d) of HKAS 1 shall depend onwhether or not the borrower has an unconditional right to defer payment for at least twelve monthsafter the reporting period. Consequently, amounts repayable under a loan agreement which includesa clause that gives the lender the unconditional right to call the loan at any time shall be classified bythe borrower as current in its statement of financial position. This is because the borrower undersuch an agreement does not have an unconditional right to defer settlement of the liability for at leasttwelve months after the reporting period.
12.Similarly, in the contractual maturity analysis disclosed by the borrower in accordance withparagraph 39(a) of HKFRS 7, amounts repayable under a loan agreement that includes a clausethat gives the lender the unconditional right to call the loan at any time shall be classified in theearliest time bracket, in accordance with the guidance in paragraph B11C(a) of HKFRS 7.Disclosures
13.In accordance with paragraph 39(c) of HKFRS 7, the borrower shall describe how it manages theliquidity risk inherent in the financial liabilities included in the contractual maturity analysis asrequired under paragraph 39(a) of HKFRS 7. This would include the liquidity risk that arises whenthe lender has the right to demand repayment of a term loan at any time.
14.In addition, in accordance with paragraph 34(a) of HKFRS 7, the borrower shall also disclosesummary quantitative data on its exposure to liquidity risk based on the information providedinternally to management, when this information is prepared on a different basis from that disclosedunder paragraph 39(a) of HKFRS 7. This would typically occur in the case of term loans which arecallable by the lender, where management does not expect the lender to exercise its rights todemand repayment. In such cases, the internal information on liquidity risk would generally be basedon expected repayment dates with reference to the schedule of repayments set out in the term loanagreements. Such expected cash flow information should be disclosed in accordance withparagraph 34(a) of HKFRS 7, in addition to the contractual maturity analysis based on the earliestpossible date that the borrower could be required to repay, which is disclosed under paragraph 39(a)
of HKFRS 7.Effective date
15.This Interpretation is a clarification of an existing standard and shall have immediate effect.Presentation of Financial Statements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause© CopyrightHK-Int 5Transition
16.Where the initial application of this Interpretation constitutes a change in accounting policy, it shouldbe accounted for retrospectively in accordance with HKAS 8 Accounting Policies, Changes inAccounting Estimates and Errors.Consistency with IFRSs
17.HKAS 1 and HKFRS 7 are adopted from IAS 1, Presentation of Financial Statements, and IFRS 7,Financial Instruments: Disclosures, respectively.
18.Prior to the issuance of this Interpretation, the HKICPA submitted an agenda request to the IFRSInterpretations Committee (“the Committee”) concerning the issue set out in paragraph 8 of thisInterpretation. The Committee discussed this issue at its meeting on 3 September 2010 and notedthat paragraph 69(d) of IAS 1 requires that a liability must be classified as a current liability if the entitydoes not have the unconditional right at the reporting date to defer settlement for at least twelvemonths after the reporting period. The Committee confirmed its view in the agenda decision whichwas published in the November 2010 edition of IFRIC Update and which is available on the IASB’sofficial website (www.ifrs.org/Updates/Updates.htm). Consequently, the HKICPA considers that theConclusions set out in this Interpretation are consistent with IFRSs.