A 5-year loan becomes “short term” under Ind AS 1 the moment the bank has a present right to demand repayment within 12 months, regardless of EMI schedule or original tenure. The key test is not what management intends, but whether the company has a real, substantive right to defer settlement beyond 12 months at the reporting date.
The Ind AS 1 twist
The wording was amended in 2025 through the Companies (Indian Accounting Standards) Second Amendment Rules, 2025, notified by MCA on 19 August 2025 and effective for periods beginning on or after 1 April 2025. The core change is from “unconditional right to defer settlement” to “right to defer settlement” plus new guidance in paras 72A–72B etc.
Pre‑amendment text – para 69(d)
Earlier Ind AS 1, paragraph 69(d), read (key portion):
“it does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73).”
All other liabilities were classified as non‑current, and there was no explicit “72A–72B” style elaboration on what “unconditional” meant in the context of covenants.
Post‑amendment text – para 69(d)
After the 2025 amendment, para 69(d) is aligned with IAS 1 and now essentially reads (key portion):
“it does not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period (right to defer settlement).”
New paragraph 72A then clarifies that this right to defer settlement for at least twelve months “must have substance and… must exist at the end of the reporting period,” with 72B–75 explaining how covenants and on‑demand provisions affect this assessment.
Why ratios suddenly misbehave
Once a long-term loan gets classified as current, the balance sheet optics change dramatically. Current liabilities shoot up, current ratio and working capital tighten, and debt repayment profiles start looking far riskier to lenders, investors and rating agencies.
This is why managements suddenly become “document readers” at year-end, scanning sanction terms, covenants and recall clauses like thriller novels—because one covenant or recall right can flip the classification overnight. Even if nobody expects the bank to actually recall the loan, expectation does not matter; only the legal position at the reporting date does.
The real rule in simple words
Under the earlier wording, Ind AS 1 spoke of an “unconditional right” to defer settlement beyond 12 months for a liability to be non-current. Amendments have now refined this to a “right to defer settlement that exists at the reporting date and has substance,” but the core idea remains the same for most common bank loans.
Even though the EMI schedule is for 5 years, Ind AS 1 doesn’t care about schedules. It just says that if the bank can demand repayment within 12 months, classify it as current.
Practically, for loan classification as non-current:
- The company must have a real right, as per the contract, to keep the loan outstanding for at least 12 months after the reporting date.
- If a covenant breach or a demand/recall clause makes the loan repayable on demand, it becomes current unless the bank has granted a valid waiver or grace period by the reporting date covering the next 12 months.
What finance teams should actually do
Before finalising financials, companies should:
- Re-read sanction letters, facility agreements and renewal terms, focusing on “on demand”, “recall”, “material adverse change” and covenant breach clauses.
- Check whether any covenant tests up to the reporting date are breached and whether waivers or revised terms exist in writing by that date.
If the right to defer repayment for 12 months is weak, conditional, or effectively overridden by a recall right, the safer (and often mandatory) position is to classify the borrowing as current. One seemingly innocuous line in the loan document can completely change the mood—and presentation—of your balance sheet.
FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)
Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.