A rollover loan is a loan which is renewed when it is not repaid in full within the predefined loan term. Therefore, if the remaining loan term is less than twelve months, the question arises whether such a loan should be classified as current (i.e. no renewal is assumed) or non-current (i.e. renewal is assumed).
The answer depends on the conditions of the right to renew. When the right to renew is subject to compliance with covenants, those need to be met at the end of the reporting period. Compliance at the end of the reporting period is required regardless of whether the lender tests compliance at this or only at a later date.
But what does that mean in practice? Some rollover loans will be reclassified from current to non-current liabilities. Let’s illustrate this with the following example:
- Existing rollover loan with a term of three months.
- Automatic renewal every quarter if certain covenants are met at the end of the quarter.
- Covenants are met at the end of the reporting period (31 December 2020).
- Rollover facility has a remaining term of four years, i.e. automatic and consecutive renewals are available until 31 December 2024.
How is this rollover loan classified at 31 December 2020? In this example, there is no unconditional right to defer settlement and, hence, the liability is classified as current under the existing requirements. Applying the new requirements, the loan is generally classified as non-current, because the covenants are met as of the reporting date and settlement can be deferred until 31 December 2024 by way of consecutive renewals.