Demand loans under IFRS 9

​Under IFRS 9, “Financial Instruments”, demand loans are subject to specific accounting treatments, particularly in relation to their classification, measurement, and impairment. Here’s a general overview:

1. Classification and Measurement: IFRS 9 classifies financial assets based on the entity’s business model for managing the assets and the asset’s contractual cash flow characteristics. Demand loans are typically classified as either ‘amortized cost’ or ‘fair value through other comprehensive income (FVOCI)’ depending on these criteria.

• If the loan is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding, it is measured at amortized cost.

• If it meets the SPPI criterion but is held in a business model that both collects contractual cash flows and sells financial assets, it is measured at FVOCI.

2. Impairment: IFRS 9 introduced a new impairment model based on expected credit losses (ECL), which requires entities to recognize an allowance for either 12-month or lifetime ECL, depending on whether there has been a significant increase in credit risk since initial recognition.

• For demand loans, entities must continuously assess whether credit risk on the financial asset has increased significantly since initial recognition. If it has, then the entity recognizes lifetime ECL; otherwise, it recognizes 12-month ECL.

• The ECL is a forward-looking estimate that includes information about past events, current conditions, and forecasts of future economic conditions.

3. Interest Revenue Recognition: Interest income is calculated using the effective interest method and is recognized in profit or loss.

4. Presentation and Disclosure: IFRS 9 also mandates specific disclosures for financial instruments to enable users of financial statements to understand the significance of financial instruments to an entity’s financial position and performance, as well as the nature and extent of risks arising from those financial instruments.

This is a simplified explanation, and the actual application of IFRS 9 to demand loans can be complex, depending on the specifics of the loan and the business model of the entity holding the loan. It’s advisable to consult the actual IFRS 9 standard or financial professionals for detailed guidance.