2020 has been a challenging year for everyone. There have been many things to consider, and debt covenants should definitely be on your priority list. Have you experienced significant financial impacts that could result in covenant breaches? If so, it's time to act now.
Debt covenants are clauses in the loan agreement with which the borrower guarantees to comply. Typical examples are
When a company breaches a covenant on or before the reporting date, the respective liability will normally become repayable on demand. If this is the case, the liability will need to be presented as current on the balance sheet even if it is a long-term liability.
Yes, if the lender agrees by a certain date to provide a grace period ending at least twelve months after the reporting date, the liability continues to be classified as non-current. Please note that the timing of the lender’s agreement is key (see next question).
The answer depends on the applicable accounting framework:
No. It is necessary that the lender cannot require repayment of the liability for at least twelve months from the reporting date.
Covenant breaches need to be considered as part of management’s assessment of the going concern assumption as they may have a severe impact on liquidity. In addition, the impact on the company’s disclosures should be assessed.
More information on accounting consequences under the current challenging circumstances can be found in our FAQ: Accounting implications of COVID-19 (PDF)