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IFRS: Classification of loans with covenants

Louise Kelly Louise Kelly

Our ‘IFRS Viewpoint’ series provides insights from our global IFRS team on applying IFRSs in challenging situations. Each issue will focus on an area where the Standards have proved difficult to apply or lack guidance. This issue considers how the existence of covenants can impact the presentation of debt on the balance sheet.

Loan agreements often include covenants that, if breached by the borrower, permit the lender to demand repayment before the loan’s normal maturity date. In response to a borrower’s request, lenders may decide to voluntarily waive some or all of the rights they acquire as a result of a breach. This IFRS Viewpoint provides guidance on the classification of long-term loans payable as either current or non-current when covenants are present.

Classification of a long-term loan payable as either a current or non-current liability is based on the existing rights of the borrower and lender (the ‘condition of the loan’) at the reporting date:

  • when a borrower has the right to defer settlement for at least 12 months beyond the reporting date, a loan is classified as non-current;
  • the anticipated outcome of future covenant tests (based on financial conditions existing after the end of the current reporting period) does not influence the classification of a loan at the reporting date; and
  • when assessing the impact of waivers, it is important to consider both the timing of the waiver and how it affects the rights of the parties at the reporting date.

Our more detailed comments below assume that a breach of a borrowing covenant entitles the lender to require repayment on demand.