PracticeAuditBusiness risks breaching covenants

Business risks breaching covenants

A host of companies will inadvertently find themselves in breach of their banking covenants due to international financial reporting standards, unless they communicate any changes to their banks quickly.

Link: IFRS update – a management briefing

The changeover to IFRS will affect several of the key financial measures used by banks when setting covenants, and could mean many companies are technically in breach, even if the underlying financial position of the company remains unchanged.

Bank covenants are part of a contractual loan agreement entered into by a borrower with a bank to keep the business within specified financial ratio limits. Performance indicators, such as earnings before interest, tax and depreciation, debt, and assets & liabilities, could be affected by IFRS.

Companies in doubt should speak to their banks as soon as possible, according to PricewaterhouseCoopers business recovery partner Brian Lochead. ‘The earlier you communicate, the easier the renegotiations will be,’ he said.

Lochead argued that, if companies delay, they could end up with a situation where companies are trying to do the same when banks are already under pressure.

This may lead the banks to question the covenants they have with some companies, he added.

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