Financial Bank Covenant(s)
By Shivanni Narain, Senior Manager, Assurance Services
As the world continues to be impacted by the coronavirus, there remains a great degree of uncertainty for businesses. While some have been able to adapt and maintain operations, others continue to struggle. These businesses may find themselves out of compliance with their financial bank covenants, a violation that can impact financial statements.
With respect to bank covenants, companies should keep in mind the following considerations relating to financial reporting:
- Period covered by the bank waiver – should be at least one year from the balance sheet date, even for interim or quarterly financial statements.
- Future compliance – ability of the company to cure the default within 12 months, even if the covenants are revised or changed.
- Cross default – consideration of any other loans that could be impacted due to the debt covenant violation.
While the rules and accounting for bank covenant violations remain unchanged, many businesses may now be faced with default issues due to the impacts of COVID. As a reminder, the above items should be considered in determining which loan(s), if any, may need to be reclassified (i.e., long-term versus current, etc.). Additionally, management should consider these items for any indication of liquidity or going concerns.
On a final note, it is important to be aware that, although the impact on the balance sheet is the same for public and private companies, the details disclosed in the financial statement footnote could vary.
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