How to classify debt due on demand
/What is Debt Due on Demand?
Debt that is due on demand is a lending arrangement in which the lender can require repayment at any time, though usually a short notice period is required. Debt may also become due on demand if the borrower breaches a lending covenant, such as reporting a substandard current ratio; in this situation, the lender can choose to designate existing debt as being due on demand.
Classification of a Debt Due on Demand
If a loan agreement contains a clause stating that the lender can demand payment at any time, then you should classify the debt as a current liability. This is the case even if there is no expectation that the lender will demand payment within the current year. The reason for this treatment is that, from a legal perspective, the lender could still call the loan at any time, even if there is a low probability of the lender doing so. This requirement is mandated by the accounting standards in Generally Accepted Accounting Principles.
Disclosure of a Debt Due on Demand
Whenever a business is obligated to pay for debts due on demand, it should disclose the nature of these arrangements in the footnotes that accompany its financial statements. This is needed to provide financial statement users with a complete picture of the obligations to which the organization is subjected.
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FAQs
Should Debt Due on Demand be Disclosed Separately?
Debt due on demand should be disclosed separately in the notes to the financial statements if it is material to the financial position or liquidity of the entity. Clear disclosure helps users understand the timing and uncertainty of potential cash outflows. It also highlights risks associated with immediate repayment obligations, which may affect credit assessments and investor decisions.
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