A significant deterioration in companies’ operating results and financial positions as a consequence of the COVID-19 coronavirus outbreak may cause breaches of debt covenants in 2020. These could render the related debt repayable on demand before the contractual maturity date, leading to current rather than non-current classification at the reporting date. The company could renegotiate a waiver for the breached covenant(s) and defer the early repayment. The question arises if this debt is classified as current or non-current in the financial statements?

When a company breaches a provision of a long term loan arrangement on or before the reporting date such that the liability becomes repayable on demand, it classifies the liability as current. However, if by the reporting date the company obtains from the lender an agreement to provide a grace period ending at least 12 months after the reporting date, then the liability is classified as non-current.

Under Dutch GAAP it would also be permitted to classify the liability as non-current if the lender agrees with the company, after the reporting date but before the date of preparation of the financial statements, not to demand repayment within 12 months after the reporting date. This option thus directly impact the liquidity and solvency ratio of the company as per the reporting date. The use of this option needs to be disclosed.

If a breach of a debt covenant occurs or is probable within 12 months after the reporting date this would not affect the classification of the liability at the reporting date (non-adjusting event).

If covenants have been breached or closely approached during the financial year or after the balance sheet date but before the date of preparation, disclosures are required on the main conditions and provisions.

To assess whether debt subject to covenant clauses needs to be classified as current or non-current at the reporting date, management may need to do the following.

• Review covenant clauses in loan agreements and assess whether a breach has occurred or is likely to occur at the reporting date.
• Assess whether it is necessary to obtain a waiver or grace period from the lender if a breach has occurred. 
• Provide the relevant disclosures required under Dutch GAAP.

Please contact Fred Versteeg for any further query.