An amortizing loan has scheduled periodic payments that are applied to both principal and interest. For example, a commercial mortgage or a lease liability accounted for under ASC 842 are amortizing loans. The loan is initially measured on a present value basis. An amortization schedule is used to determine how much of each payment is applied to interest and principal each period. The payment is first applied to interest, and the remainder reduces the principal balance. Common examples of these types of financings are mortgages and lease liabilities.

Since the overall liability is measured on a present-value basis, the amount of the liability that should be reported as a current liability should be measured on the same basis. This amount is determined by applying the loan’s effective interest rate to the total contractual payments that are due in the next 12 months (or operating cycle, whichever is longer).

As an alternative, a reporting entity may classify the total undiscounted contractual payments that are due in the next 12 months (or operating cycle, whichever is longer) as current, until the last year of the borrowing. In the last year of the borrowing, the carrying amount of the liability must be used as current because the total undiscounted payments will exceed the carrying value of the liability. Another acceptable alternative is to classify the portion of the total payments that are due in the next 12 months (or operating cycle if longer) that are attributed to principal payments in the loan amortization schedule.

A reporting entity should elect one of these methods and apply it consistently.