Hong Kong Interpretation 5 (Revised) Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause

The Questions and Answers (Q&As) below were developed by the Financial Reporting Standards Committee (FRSC) of the Hong Kong Institute of Certified Public Accountants (the HKICPA) and are for general guidance only. The HKICPA, FRSC and their staff do not accept any responsibility or liability in respect of the Q&As and any consequences that may arise from any person acting or refraining from action as a result of any materials in the Q&As. Members of the HKICPA and other users of these Q&As should also read the original text of Hong Kong Interpretation 5 (Revised) Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause, as found in the HKICPA Members’ Handbook for further reference and seek professional advice where necessary when applying the guidance contained in these Q&As.

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These Q&As were originally published in November 2010 on issuance of HK Interpretation 5 and subsequently updated in November 2020 as a consequence of HK Interpretation 5 (Revised) issued in October 2020.  

Summary of HK Interpretation 5 (Revised) Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause 

1. HK Interpretation 5 Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause (HK Int 5) was issued in November 2010. 
2. HK Int 5 (Revised) was revised in October 2020 as a consequence of the Amendments to HKAS 1 Classification of Liabilities as Current or Non-current issued in August 2020 (2020 Amendments). The 2020 Amendments specify that an entity’s right to defer settlement as described in paragraph 69(d) of HKAS 1 Presentation of Financial Statements must exist at the end of the reporting period and deleted the word ‘unconditional’ from the classification principle in that paragraph.
3. In December 2022, the Institute issued Amendments to HKAS 1 Non-current Liabilities with Covenants (2022 Amendments) to deal with the classification of long-term loan arrangements with covenants and defer the effective date of the 2020 Amendments to align with the effective date of the 2022 Amendments. Both amendments are to be applied as a package and are effective for annual reporting periods beginning on or after 1 January 2024, with early adoption permitted. HK Int 5 (Revised) has been updated to incorporate the references to these amendments, but its conclusions are not impacted by these amendments.
4. "Term loans" are loans which are repayable on a specific date or in instalments over a period of time, usually in excess of one year. Loan facility agreements for such loans will set out the basic terms, such as the scheduled repayment date(s), interest rates and additional charges for early repayment, and may also include specific clauses which define default events which would give the lender the right to accelerate the repayment terms if those events occur.
5. In addition to defining events of default and the consequences of their occurrence, some term loan agreements include an overriding repayment on demand clause, which gives the lender the right to demand repayment at any time at their sole discretion and irrespective of whether a default event has occurred.
6. The purpose of HK Int 5 (Revised) is to set out the conclusions of the FRSC on the question of whether a term loan which is subject to a repayment on demand clause should be classified by the borrower as current or non-current in accordance with the criteria for classification of liabilities as set out in paragraph 69 of HKAS 1.
7. The Conclusion reached by the FRSC on this issue is that the classification of a term loan as a current or non-current liability in accordance with paragraph 69(d) of HKAS 1 shall be determined by reference to the existence of the borrower’s right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period. On this basis, loans subject to loan agreements which include a clause which gives the lender the unconditional right to call the loan at any time shall be classified by the borrower as current in its statement of financial position (balance sheet). In this regard, the probability of the lender choosing to exercise its rights to demand repayment within the next twelve months after the reporting period is not relevant.