Current Liabilities – Based on Operating Cycle

Operating Cycle is defined in Schedule III of the Companies Act, 2013, as follows:

"Operating Cycle is the time between the acquisition of an asset for processing and its realisation in Cash and Cash Equivalents. Where the normal operating cycle cannot be identified, it is assumed to have a duration of 12 months."

• Meaning: Operating Cycle is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents.
• Default Duration: If the operating cycle can't be identified, it is assumed to be 12 months.
• Example: If the cycle is 13 months (e.g., raw materials 3M + production 4M + inventory 2M + receivables 4M), the entire 13M is considered the operating cycle.
• Current Liabilities: A liability is treated as current if it is due for settlement within the operating cycle or within 12 months, whichever is longer.
• No Right to Defer: If the company cannot unconditionally defer settlement for 12 months from the balance sheet date, the liability is also classified as current.